From the Economist Intelligence Unit ViewsWire
Rumours that the Qatar Investment Authority (QIA) may be thinking of buying a stake in Royal Bank of Scotland (RBS) pushed up the share price of the Edinburgh-based bank by 5% on the London Stock Exchange on February 25th, reflecting the intense interest accompanying any move or potential move by Gulf Arab sovereign wealth funds (SWF). QIA had already attracted notice earlier in the month with its acquisition of 1-2% of Credit Suisse, as part of a purported drive to build up a US$15bn portfolio of Western bank assets (a deal that was somewhat tarnished by the Swiss bank's subsequent disclosure of a hefty US$2.8bn loss arising from trading errors).
If indeed QIA is actively pursuing a stake in RBS, the choice of target should come as no great surprise given the pivotal role that the bank played in financing Qatar's emergence as the largest exporter of liquefied natural gas (LNG) in the world. However, much of the comment about this and similar deals has been laced with suspicion about the buyer's intentions. SWFs are accused of being opaque as regards financial reporting and investment strategy, and of pursuing political as well as commercial ends.
Barroso's beef
Shortly after the Credit Suisse deal, the European Commission (EC) approved proposals for SWFs to be requested to adopt a voluntary code of conduct requiring certain standards of corporate governance and disclosure. The EC president Jose Manuel Barroso has been open about the political dimension. “We cannot allow non-European funds to be used as an implement of geopolitical strategy,” he said on February 24th.
The IMF, for its part, has emphasised the risks to the global economy of increased financial flows through “black boxes”, as the Fund's chief economist, Simon Johnson.
The irony is that banks in both Europe and the US have not just welcomed but actively solicited investment from the likes of the Kuwait Investment Authority (KIA), which participated to the tune of US$5bn in January’s capital-raising exercise by Citgroup and Merrill Lynch, and the Abu Dhabi Investment Authority (ADIA)—the world’s biggest SWF with assets estimated at some US$800bn—which injected US$7.5bn into Citi in November. And in straitened times, politicians too have encouraged such moves by the funds that, buoyed in the Gulf Arab case by record oil revenues, have the ready cash currently so lacking during the Western credit crunch.
Buyer's market
For the SWFs, meanwhile, the investments represent an opportunity to build holdings in an industry regarded as having good long-term growth potential, at a time when shares are relatively cheap and political concerns necessarily relatively muted. Charles Schumer, an influential New York senator, epitomises the changed attitude. Mr Schumer was one of the most vocal critics, on national security grounds, of the takeover by DP World, a firm owned by the Dubai government, of five US ports through the acquisition of UK-based P&O in late 2006. However, he welcomed ADIA’s Citi investment as vital to the maintenance of New York’s role as a global financial centre.
Mr Schumer returned to form during the January round of capital-raising, expressing unease about large swathes of the US financial services industry passing into foreign hands, while President Bush himself promised a full examination of the national security implications of Borse Dubai’s acquisition of a 20% stake in the US’s Nasdaq exchange. This formed part of a complex deal for the Dubai institution to sell-on OMX, the Stockholm-based operator of the Nordic exchange to the Americans, assuming Borse Dubai’s bid for the Swedish firm was successful. The Swedish authorities were themselves suspicious when in August Borse Dubai trumped Nasdaq’s May offer for OMX—the finance minister, Mats Odell, admitted as much in a late-February interview—although subsequently their concerns have shifted to the possible “Americanisation” of OMX and consequent imposition of onerous post-Enron disclosure rules.
Passive to active
The obvious question aroused by such international hand-wringing, posed plaintively by the older SWFs, is “Why now?” Kuwait first established a fund to invest surplus oil revenues and thereby diversify the economy in 1953, while ADIA was established two decades later. In addition, both have typically been conservative portfolio investors: the US banking buys were an exception, but even in that case the stakes taken were small and acquired without corresponding executive power. An answer can be found in the burgeoning size of SWFs, stemming in the Gulf from high oil prices and in southern Asia from the sustained export boom, and in the more aggressive strategies of newer players like QIA, a range of Dubai government-affiliated vehicles such as Istithmar and Dubai International Capital (DIC), and Abu Dhabi’s Mubadala Development Company. The latter players have moved from portfolio investment to purchasing strategic stakes in or acquiring outright target companies, and are not prepared to assume the passive role of their forerunners.
However, the gathering storm of objections in the West – sometimes quite blatantly born of suspicion of the Arab world – to investment by Gulf Arab SWFs is prompting both the older and younger funds to rebalance holdings geographically, primarily towards the booming economies of southern Asia. In mid-February, DIC announced plans to plough some US$5bn into China, India and Japan over the next three years, while the chief executive officer of Istithmar, David Jackson, said a month earlier that “countries such as China, where we recently opened an office, are very welcoming to sovereign wealth funds, so more are looking to invest there”. Sheikh Hamad bin Jassim al-Thani, Qatar’s prime minister and the CEO of QIA, stated late last year that the fund was aiming to raise Asian investments to 40% of the total, while among the veterans, the KIA's chief, Bader al-Sa’ad, has also spoken frequently about the intention to increase proportionally exposure to Asia.
This does not mean that the SWFs are about to shun investment in their traditional hunting grounds in Europe and the US—as QIA's recent moves demonstrate. Moreover, Gulf investors, both government and private, admit that they will need time to understand the inner workings of the principal Asian markets. However, Western governments and regulatory authorities will need to weigh carefully their concerns about the impact of the SWFs against the risks of forfeiting the benefits that their infusions of capital can bring.
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