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Gulf SWFs Urged to Play Proactive Role to Spur Growth during Crisis

Issac John / 30 May 2009

DUBAI — Gulf Sovereign Wealth Funds, or SWFs, should use their wealth during slow economic times to spur growth and maintain funding of critical strategic investments, financial experts said.

GCC sovereign funds can support local economic growth strategies through their international and domestic investments, said Richard Shediac, a partner at Booz & Company International Investments, a global management-consulting firm.

Gulf-based SWFs have an estimated $1.5 trillion worth of investments across the globe, mostly outside of their region.

“With globalisation of international markets, SWFs worldwide are taking a more proactive investment role that aims to complement their countries’ socioeconomic strategies,” said Shediac.

SWFs of countries like Malaysia and Singapore have very active roles in socio-economic development in local and regional markets, he pointed out in a research report.

Albert Momdjian, Managing Director and head of Middle East & Africa Investment Banking of Calyon, said sovereign wealth funds of Saudi Arabia should be taken as a role model by Middle East countries. Saudi SWFs have set a new trend by underwriting project finance transactions. “By underwriting huge projects, Saudi SWFs have not just been demonstrating their commitment to the domestic economy but also seeking to restore confidence in the financial system,” he said.

The Saudi example is similar to that of Norway’s SWF, which is supporting infrastructure projects in the aftermath of the global financial crisis in order to sustain the country’s economic growth. 

“International investments by SWFs can provide means of collaboration with management and an understanding of business models, operations and strategies. Investments in multinational companies, or MNCs, help bring in sought-after technologies and knowledge. In addition, GCC SWFs should spearhead local investments targeting industries that complement their international investments in order to spur economic growth,” Shediac said.

GCC SWFs also should consider the establishment of joint funds both at the regional and at the international levels to share risks and boost investment opportunities. “Regionally, benefits from joint funds include sharing of risk, and increased investment opportunities,” Shediac explained.

“Internationally, joint funds can facilitate market penetration and enhance knowledge transfer mechanisms. The China Dubai Capital, or CDC, joint fund, announced in April 2008, is a good example. The fund plans to invest in infrastructure, the oil industry, healthcare and other activities that will create synergies with the UAE’s economy, while providing China with good investment opportunities in the region.

Hatem Samman, Director and Lead Economist at the Booz & Company Ideation Center, said that in the GCC region, the UAE attempts to enhance socio-economic development through strategic investments.  “Dubai International Capital, or DIC, invests in both established and developing primary markets, and its potential contribution to economic growth can go beyond investment returns. For example, its anchor investments in ART Marine Holdings provide it with the opportunity to develop the boating and marina sectors in the region.  Other anchor investments of the DIC are in aerospace manufacturing services, airports, and education. This provides a means to “import” aerospace technology and form international partnerships that contribute to worldwide growth.”

Samman pointed out that Mubadala Development Company’s five per cent stake in Italian sports car maker Ferrari “points to an increasingly strategic investment mind-set. The Ferrari investment brings with it the potential for increased tourism in Abu Dhabi as the Ferrari theme park nears completion in Yas Island.” More recently, Mubadala’s $8 billion R&D partnership with General Electric provides access to commercial finance, healthcare, and clean energy technology, as well as aircraft maintenance expertise and other beneficial exchanges essential for the UAE’s socio-economic development.

“Singapore’s success in promoting socio-economic growth offers a positive example for the GCC SWFs. “Singapore’s Temasek Holdings successfully manage government-linked companies, as well as champion the development of industries in technology, transportation, and logistics,” added Samman.

Samman said Gulf SWFs needed to gradually undergo structural changes to improve governance and transparency. “Concerns about the impact of transparency on financial performance, for example, can be avoided by publishing reports with a time lag in order to prevent any dissemination of critical investment information.”

Although SWF assets will undoubtedly be revised in the aftermath of the world financial crisis, the outlook for SWFs is expected to be positive. With an eventual rebound in world economies, SWFs will continue to expand in size and number, he said. “More important, their role in socioeconomic development will remain significant despite any intermittent financial setbacks.” issacjohn@khaleejtimes.com

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