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CiteThe Gulf states are thought to have built up their cash reserves in q2 and q3 – though the supporting evidence was always circumstantial (the TIC data implied that no one was buying US equities) and anecdotal.
Now there is a bit of hard evidence. We know that the Saudi Arabian Monetary Agency (SAMA) added $40.9b to its foreign deposits in q3 2008 – and only $13.6b to its foreign securities portfolio.
We also now know that the Saudis added $144.3b to SAMA’s foreign portfolio between the end of q3 2007 and the end of q3 2008. Not a bad year. A little over $50b of that went into deposits; a little over $90b went into securities. In other words, the shift toward deposits is recent phenomenon.
SAMA’s non-reserve foreign assets now total $405.2b and it manages another $63b in foreign assets for Saudi government pension funds as well as $31.7b in foreign currency reserves. That works out to close to $500b in total assets — enough to potentially make SAMA the largest sovereign fund manager in the Gulf. Rachel Ziemba and I never were convinced ADIA was nearly as large as some claimed – and both the big slide in global equities this year and the creation of new Abu Dhabi sovereign funds reduced the size of its portfolio.
Of course, looking only at the size of formal sovereign funds – and institutions like SAMA – misses the large “private” assets of some of the Gulf’s key families. Notably the region’s royal families.
Those private fortunes are coming out in the open — in part because a new generation of princes (and royal advisers) seems less adverse to advertising their wealth than the older generation.
Abu Dhabi’s Sheik Mansour bin Zayed al-Nahyan seems set to buy 16% of Barclay’s for his private portfolio (fits nicely with ManCity). Sheik Sheikh Hamad bin Jassim bin Jabor Al Thani (Qatar’s prime minister) is investing in Barclay’s through his private fund as well. And the QIA is adding to its stake too. If Qatar keeps adding to its stake in Barclays I guess it figures it will eventually make money …
One of the investors in UBS last December also is thought to be a member of one of the region’s royal families.
These large “private” investments are not without their complications — even setting aside their rather onerous terms (The British government would have invested on somewhat better financial terms, but wanted more say over the banks’ management — and pay)
I wonder how those demanding that Kuwait’s government do more to support Kuwait’s own market would react to a large investment abroad by Kuwait’s royal family? Many in the Gulf likely would argue that these funds should be spent at home. Even the UAE isn’t as cash rich as it once was. Oil is down substantially, and public and quaisi-public borrowers in the UAE have a fair amount of external debt coming due over the next year.
At the same time, it seems a bit strange, at least for me, for the British taxpayer to be providing leverage to some of the world’s richest men. But I think that is more or less what Sheik Mansour bin Zayed al-Nahyan’s get with his investment in Barclays. Remember, the G-7 has committed not to allow any systemically significant institution to fail (this is the no more Lehmans) – which means Barclays is borrowing on the strength of the HM Treasury’s balance sheet.
And Qatar’s sovereign fund gets the same deal. With its stakes in Qatar’s domestic banks, Credit Suisse and Barclay’s, the QIA is in some sense now an extremely leveraged sovereign wealth fund …
Of course, the al –Nahyan family doesn’t get that leverage to buy just anything – only to buy a large share of Barclay’s existing assets. In return for a few billion pounds, M. al-Nahyan and the Qataris gets about 30% of the upside on Barclay’s large balance sheet. The British taxpayers in turn gets a somewhat larger equity buffer to protect against the risk that they will have to pick up the tab to make Barclay’s depositors and bondholders whole if Barclay’s portfolio goes south.
At least if the al Nahyan and Qatari stake can be wiped out without creating a diplomatic incident. Count me among those who doubt that the private investment of the Minister of Presidential Affairs of a monarchy is quite the same as a truly private investment. At the same time, the Gulf monarchies can rightly argue that sometimes the US and Europe seem to want their sovereign funds to act like private investors focusing on market returns, and at other times the US and Europe seem to want their sovereign funds to act like public investors focusing on the broader stability of the international financial system.
Then again the line between private and public in the Gulf has never been all that clear.
Many private companies in the Gulf have such close ties to the state — or perhaps the palace — that they are widely considered public liabilities.
And some of the Gulf’s public money has historically been managed more like private money (no transparency, a fairly high risk appetite) than public money.
Exactly. The problem is that nobody wants to make a rule. If you want SWFs to be a private player, do not call them when you know the return is bad and you need to be rescued. If you have to qualify SWFs as public funds, then prepare to pay the price upfront.
Also the term private and public may mean different things in different context. A “public company” could mean something that is state-owned or or could mean that has diversified non-state share holders.
The other thing to mention is that the United States has a system if corporate ownership that is very different from most nations. The predominant form of corporate ownership in the world is family-based large pyramidal holdings. Next involves closed corporations owned by a very small number of institutional investors (i.e. banks).
There is only own other country that has diversified share holdings the way that the US does (i.e. UK), and there the shareholders have much, much more power in relation to management than the US does. There is a tendency for Americans to think that US forms of corporate ownership are “standard” and “ideal” whereas they actually are very unusual.
bsetser: I wonder how those demanding that Kuwait’s government do more to support Kuwait’s own market would react to a large investment abroad by Kuwait’s royal family.
Less badly than you might think. At least in China, the attitude toward people who lost money in a stock market or real estate crash is that they were stupid for putting money in the market to begin with.
People that put their money because of government assurance are considered even more stupid for actually believing what the government says. (Is it really a lie if no one believes you?)
Fatbrick — I would rather sovereign funds be managed as private money focused on returns if the funds are going to be investing in private companies. As a result, i have been very uncomfortable with whole notion that they should be part of the rescue — which is a public function and should be done with public funds. I am uncomfortable blurring the line between private and public too much; sovereign funds only make sense if they are public money that has been walled off to be managed like private money.
that said, the funds constant argument that they are a stabilizing presence in the market doesn’t help their case. Stabilization is a public function. private money sometimes is stabilizing — and sometimes is destabilizing.
Incidentally, the very public nature of some recent “private” investments by the Gulf’s ruling families calls into question their traditional aversion to transparency (which incidentally extends to the publication of balance of payments data which might reveal the size of the “private assets” of key countries, and thus the size of the portfolios of prominent families … ). ADIA’s argument that it shouldn’t be called on to perform public policy functions after taking large losses would be strengthened if the size of its losses was on the public record — not just something that gets mentioned when it is asked to do something it doesn’t want to do.
“Foreign- exchange reserves plunged to $212.3 billion in October from $239.7 billion in September, the Bank of Korea said in Seoul today”
India had similar news too.
Brad et al – The FX reserves have been dwindling fast does that mean they have been selling the treasuries ?
If so, who are the buyers at this point ? Is it still China and Saudis ?
bsetser: I would rather sovereign funds be managed as private money focused on returns if the funds are going to be investing in private companies. As a result, i have been very uncomfortable with whole notion that they should be part of the rescue — which is a public function and should be done with public funds
Why? This sort of notion of what institutions should and shouldn’t do just doesn’t make any sense to me, and it would help if you explain where this comes from.
I would understand why it would cause nervousness if you have a foreign investor make investments to major public infrastructure, but I really fail to see why is should make much of a difference if the investment is done by a Hong Kong tycoon or the Government of Hong Kong.
Also in some ways, you are already too late. In talking about the Bear-Stearns merger and the recent moritorium on forclosures, Jamie Dimon has said that one of the motivations in putting JP Morgan capital on the line was civic duty. I’m sure people will question his sincerity, but it’s a hard argument to make that he *shouldn’t* have this notions of public service, and should just make as much money as possible, however possible.
Conversely, now that the Fed has acquired AIG, it has a legal obligation to look at corporate returns. For that matter the “profit driven private” investment bank model is tend, and the model that has seemed to work is the “Federal Reserve System” which is a very complex mixture of public and private entities. A blurred mixture of public and private precisely describes the Federal Reserve Bank of New York.
Surely you don’t think that we’d live in a better world, if corporations were driven solely by profit maximization, or if government didn’t think about economic return.
bsetser: I am uncomfortable blurring the line between private and public too much.
I don’t see why. The line between private and public in colleges and universities, public utilities, and pension funds is very blurry, and all of them work well. There are reasons to be careful when you mix private and public money, but there are ways of dealing with those issues.
In any case, the I think the question of the role of the US government and private industry is going to be a very major issue over the next few years. It is not out of the question for example, that for the US to have a for-profit auto corporation is simply impossible, and that if the US wants an auto industry that they will have to basically subsidies it in the way that railroads and aerospace are subsidized by the government.
Also, I do have the very uncomfortable feeling that the reason a lot of economists don’t like mixing public and private is that it makes their economic models stop working if people and institutions have complex motivations. Once you have complex motivations, then you can no longer figure out what is going to happen by graphing utility curves or assuming profit maximization.
But forcing society into a particular structure just because it makes it easier to draw certain graphs seems like the wrong way of going about things.
Maximizing influence and maximizing profit are sometimes mutually exclusive. Could it be that the split personality of Gulf money mirrors the dual intent of it’s deployment?
Patrick — good point.
Dr. Dan — yes, it really was mostly China and Saudi Arabia. Algeria too — but on a smaller scale.
2fish — governments can and do invest with a dual purpose at home. but governments investing abroad with dual mandates worry me. the main objective of China’s government isn’t to support US economic development — or maintain US financial stability. Ditto for the Gulf. Rather than expecting foreign governments to pursue key US policy objectives, we should expect the US government to do so – even if that means not always making money.
Foreign governments should be expected to pursue their own interests, not to support US policy objectives. One such interest is returns. And I can see a case that allowing sovereigns to invest in risk assets helps them achieve that goal. But the bargain that allows this on the scale that some are contemplating should be one — in my view — that also restrains the capacity of the institutions that invest abroad for returns to pursue other goals. Why? Because governments are different — and I think their are legitimate reasons to doubt whether for example the CIC would ever invest in the US in ways that would potential shift jobs from the China to the US, even if that produced higher returns.
bsetser: The main objective of China’s government isn’t to support US economic development — or maintain US financial stability.
But neither is a private South Korean company. I can understand why you’d have qualms about a Chinese company making large investments in the United States, but what confuses me is why you’d think that a state-owned enterprise would have fewer ulterior motives than a private Chinese corporation. Yes, the theory is that a private Chinese corporation ought to be for-profit, but CEO’s and boards of directors often have ulterior motives that make have nothing to do with profit.
bsetser: Because governments are different — and I think their are legitimate reasons to doubt whether for example the CIC would ever invest in the US in ways that would potential shift jobs from the China to the US, even if that produced higher returns.
But I also doubt that Li Ka-Shing would allow Hutchison Whampoa would shift jobs to the United States in a way that would damage Hong Kong, even if that produces higher returns. For that matter, I really doubt that the Board of Supervisors of a major German corporation such as BASF or Deutsche Telekom would allow this to happen, or that a South Korean family controlled chaebol such as Samsung or Hynduai would could or would close factories in South Korea and move them to the United States simply to achieve higher returns.
I think that there is this assumption that the US corporate form or norms are or should be standard throughout the world when in fact they are not. The US corporation and it’s relationship to the state is quite unique. The belief that the corporation has no particular duty to anyone except for the shareholders is also a rather peculiar American belief that quite simply isn’t shared by most corporations in the world.
Something to think about is that we know far more about the inner workings of the Chinese Politburo and State Council than we do about the inner workings of the Lee family that controls Samsung or for that matter the internal politics of General Motors or Sony.
the ft oped makes the same point: “The Gulf deal has reduced risk for the UK government, but the bank is too big to fail, and ministers would be forced into a rescue if it became vital”
like it’s not like they’re not subject to oversight and regulation anymore… now if only we had a financial system
something, it might be said, the boe pioneered!
2fish — interesting points. i should also add that one of my concerns about the gulf is that the US and European business/ financial community gets too close to a set of fundamentally undemocratic countries whose approach to managing oil wealth has left immense sums concentrated in the hands of a few. the sense that barclays went to the gulf because the gulf didn’t care about executive pay and the british taxpayers did adds to my concerns on this front. you can of course counter that this concern is overdone, as the same countries with such highly unequal income distributions are already the key us allies in the region/ host large us bases — if you are in for a nickel, you might as well go in for dollar.
I do though think Sarah Palin’s approach of spreading the Alaskan (oil) wealth wasn’t all bad.
The problem here is that it’s not clear to me what you are really concerned about. State control? Family control? Foreign control? Income inequity? Wealth concentration? Power concentration? Opaque governance? All those are different.
Something that concerns me is power and wealth concentration since I don’t think it is healthy for too much power and wealth to be concentrated. However, getting a balance is very tricky to do, because if you squeeze out power in one area, it tends to go somewhere sense. For example, in the United States in the early 20th century, there was a concerted effort to get power out of the hands of the trust-controlled shareholders, but this had the effect of moving power to professional managers, and the relationship between boards of directors of your average American corporation and the shareholders resembles that of the Politburo and the electorate in communist countries.
Similarly large parts of the world financial system are in the hands of administrative bodies like the IMF or World Bank that are as far as we know pretty unaccountable to anyone.
Personally, I think that adding Arab princes and Chinese bureaucrats to the mix of people that “run the world” creates a healthier distribution of power since it adds diversity to the mix of the people that runs the world. If you restrict membership to “reliable democracies” you end up with people that went to the same schools, and see the world in the same way, and that makes things less democratic. If you have a group of people that agree on the fundamental issues, then democracy is pointless and a waste of time.
2fish: “If you have a group of people that agree on the fundamental issues, then democracy is pointless and a waste of time.”
that’s an excellent point, 2fish
in this case, having individuals that have a different philosophy of banking in the mix is healthy.
even if they still are all obsessed with ‘running the world’…
Brad,
At least one President would share your dicscomfort with the public/private blurring of SWF’s:
“…it is folly in one nation to look for disinterested favors from another… There can be no greater error than to expect or calculate upon real favors from nation to nation.”
- Washington’s Farewell Adress, 1796