Allocating more funds to SWF would improve Saudi wealth returns

Published May 12th, 2013 - 10:12 GMT
Minister of Petroleum and Mineral Resources Ali Ibrahim al-Naimi addresses the audience during a lecture in The Center for Strategic and International Studies (CSIS) in Washington DC in this April 30, 2013 file photo. (AFP)
Minister of Petroleum and Mineral Resources Ali Ibrahim al-Naimi addresses the audience during a lecture in The Center for Strategic and International Studies (CSIS) in Washington DC in this April 30, 2013 file photo. (AFP)

The Kingdom can reduce its dependence on oil revenues by creating a strong sovereign wealth fund (SWF), according to some experts.

Although economic conditions in Saudi Arabia like money supply, foreign exchange reserves, external debt and domestic economic development are positive factors to create a sovereign wealth fund (SWF), Saudi Arabia still lags behind in this area, one of them said.

Experts acknowledged that Saudi Arabia doesn’t prefer sovereign wealth funds like some GCC states that moved toward setting up SWFs as a main source of the economy.

Speaking to Arab News, Fahad Al-Turki, head of research department, Jadwa Investments, said it was unfair to compare the SWF of the Kingdom with that of the other GCC states, especially when Saudi Arabian Monetary Agency (SAMA) manages Saudi sovereign wealth.

“The management of SWF in Saudi Arabia differs from that of other GCC countries as the majority of the Saudi sovereign wealth is managed by SAMA with foreign exchange reserves exceeding $ 650 billion,” he said.

He added: “SAMA follows a more conservative investment strategy in managing its reserves with more weight on liquidity and safety of its investment and relatively less weight on returns. From this aspect, one cannot compare the performance of a central bank with other SWFs in the GCC.”

Al-Turki confirmed that there is no doubt the SWF in the Kingdom, estimated at $ 5 billion, is relatively small to be placed in the same league as other GCC SWFs.

“We acknowledge that SAMA is following an appropriate investment strategy for a central bank, so we highlight that it also increases the opportunity cost given the size of the current sovereign wealth related to the monetary and fiscal policy needs.

Having said that, we think the establishment of the Kingdom’s official SWF in 2008, Sanabil, was a step in the right direction to improve sovereign wealth returns,” he said.

According to data from the Sovereign Wealth Fund Institute, the countries that have SWFs, whether developed or emerging states, almost all have considerable foreign exchange earnings, which is necessary for these countries to build their own SWFs. In addition, foreign exchange reserves should have an increasing trend in GDP at the time of the establishment of SWFs.

Another research into the correspondence between foreign exchange reserves and the establishment of SWFs in 241 countries shows that higher the percentage of foreign exchange reserves in GDP and higher the percentage of energy exports in the total export of goods, a country is more likely to move toward the SWF.

Al-Turki confirmed that as the Saudi economy is considerably larger than other GCC countries, allocating more financial resources to Sanabil would create another strong SWF in the region and improve Saudi sovereign wealth returns.

“This in turn would contribute to the government’s nonoil revenues and somewhat reduce the current major reliance on oil revenues. At the same time, a higher return on sovereign wealth would also build up savings for future generations,” he said.

Abdullah Al-Rashoud, CEO of BlomInvest bank, Saudi Arabia, believes that creating alternative sources of revenue remains the most important goal for SWF in all GCC countries.

However, neither a SR 20 billion nor a SR 100 billion SWF asset base is enough to decrease reliance on oil.

Al-Rashoud attributed the low performance of Saudi SWF to two reasons.

“The first reason that made us different from other GCC countries in terms of SWF is that Saudi Arabia had high public debt in comparison to GDP up until recently. Throughout the 1980s and 1990s, the nation was suffering from budget deficits due to weak crude prices and low oil production along with high public spending,” he said.

He added: “However, the government debt to GDP ratio preceded the 100 percent mark point in 1999. Paying off government debt came as a sovereign necessity as compared with launching a SWF, which may be considered somewhat of a luxury.”

According to Al-Rashoud, the Saudi government has always followed a conservative investment policy with preference to highest rated fixed income securities such as US treasury, as opposed to equity and real estate markets, which tend to offer higher returns in the long-run as seen in the policies implemented by Qatar and Abu Dhabi SWFs.

Al-Rashoud confirmed that the situation is different in the Kingdom. He believes that it might not be the best option for the Kingdom to follow the SWF strategies of other GCC countries.

“Saudi Arabia has vast large land area and population, which provide it with an economic platform capable of absorbing larger sums of investments and liquidity without creating negative impacts such as inflation, which can happen to neighboring GCC countries. That said, there remain huge economic opportunities in Saudi Arabia, which can offer returns that surpass those created overseas for a SWF. Yet it should be noted that so far, most of the Kingdom’s SWF local investments have been in subsidizing local industry and not in real investments,” he said.

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