Markets Under Attack?

Gulf Investors & Economic Patriotism

12/21/15, 9:02 AM

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Exelenzia Investments Journal

FINANCIAL MARKETS UNDER ATTACK?
Gulf investors and the rise of economic patriotism

Andrea Goldstein
Senior Economist, OECD
&
Fabio Scacciavillani
Director of Macroeconomics and Statistics, Dubai International Financial Center

This paper is prepared for the Chatham House project on The Gulf Region: The Changing Face of
Global Financial Power? We thank the editors and an anonymous reviewer for most helpful comments
and suggestions. The views and the opinions expressed in this paper must be attributed solely to the
authors as they might not coincide with those of the OECD, the Dubai International Financial Center,
and/or their respective governments.

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Introduction

The massive current account surpluses accumulated by the Arabic Gulf countries in the wake of
record energy prices have spurred an intense outward investment activity carried out through a number of
vehicles, notably, but not limited to, those commonly defined as Sovereign Wealth Funds (SWFs). These
funds, which until recently attracted little attention beyond a few specialised niches of the financial
markets, have come to prominence over the past two years, in part due to a few high profile acquisitions
and in part because their sheer size has grown dramatically. In fact, the funds increasing sophistication is
shaping some noteworthy trends in global financial markets. Since the start of the sub-prime crisis in mid2007, they have provided substantial liquidity to sustain stock valuation, while behaving as stable
investors more focused on long-term results than on short-term gains.
In this paper, we first give an overview of the Arabic Gulf SWFs and then sketch the contours as
well as the motivations of their international activities. We examine three cases that have attracted
international attention and generated considerable controversy the DP World takeover of Peninsular and
Oriental Steam Navigation Company (P&O), the investments by Qatar and Dubai in European stock
exchanges and the failed acquisition of Sainsbury, the British retailer, by the Qatar Investment Authority
(QIA). Finally we link these episodes to the debate in OECD countries regarding FDI, national security
and market transparency.

An overview of the SWFs

SWFs have been in operation for some time, at least since 1956 when an investment vehicle was
created in the Gilbert Islands to manage the proceeds from the sale of phosphates.[1] The first sovereign
country to form an entity entrusted with the management of its export revenues was Kuwait. In 1960 the
General Reserve was launched, followed in 1973 by the Future Generations Fund endowed with 50% of
the General Reserve and an additional 10% of the yearly budget surplus. Finally, in 1982, the Kuwaiti
government decided to consolidate all the assets of the Ministry of Finance, as well as the General
Reserve and the Future Generations Fund, under the Kuwait Investment Authority (KIA). The experience
of Kuwait inspired others. Among high-income economies, Singapore and Norway have been pioneers in
this area, and today a number of large countries and regions (prominent among which Korea, Australia,
Russia, China, Alberta and Alaska) have accumulated sizeable assets in SWFs. Table 1 reports a list of the
major SWFs.[2] Also many developing countries, from Botswana to Chile, from Trinidad and Tobago to
Uganda have set up their sovereign investment vehicles.
Nonetheless, SWFs remain a distinctively Gulf phenomenon. The Emirate of Abu Dhabi instituted
the Abu Dhabi Investment Authority in 1976, which today holds (according to some estimates) almost US
dollar 900 billion. Oman in 1980 created the State General Stabilization Fund worth today US dollar 8
billion. Another emirate in the UAE, Dubai, controls various funds among which the most active is Dubai
International Capital founded in 2004 with assets estimated at US dollars 12 billion. Moreover, Dubai
Group (founded in 2000 and with US dollar 7 billion under management) and Isthitmar (in turn owned by
Dubai World, started in 2003 and managing US dollar 7 billion) act on behalf of the ruling family and its
associates. The Qatari government has instituted in 2005 the Qatar Investment Authority (QIA). Saudi
Arabia already has many investment vehicles focusing on domestic projects, such as Saudi Arabia
Government Investment Company (SAGIA), and the government reportedly was considering the
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constitution of a fund to consolidate and manage foreign investments, which could easily become the
largest in the world. However the latest news have cooled down these expectations as the Saudi
authorities have announced that, at least initially their fund will be endowed with only US dollar 3.4
billion. This compares to foreign assets held by Saudi Arabian sovereign entities estimated in a range
between US dollar 300 and 500 billion. Furthermore the Saudi government has expressed the intention to
open this fund to international institutional investors, a novel approach which could actually represent a
sensible way to allay the concerns raised in the West about transparency and undue influence. In essence
this Saudi fund would be more of an investment company than a SWF.

Table 1 The Largest Sovereign Wealth Funds in the World

Name and country

Estimated Assets

Starting year

(in $ bn)
Abu Dhabi Investment Authority, UAE

875

1976

Government Pension Fund, Norway

380

1996

GIC, Singapore

330

1981

Various entities, Saudi Arabia

300

NA

Reserve Fund for Future Generations, Kuwait

250

1953

Investment Corporation, China

200

2007

Temasek Holdings, Singapore

159

1974

Oil Reserve Fund, Libya

50

2005

Qatar Investment Authority, Qatar

50

2005

Fond de Regulation de Recettes, Algeria

43

2000

Alaska Permanent Fund Corporation, USA

38

1976

Brunei Investment Authority, Brunei

30

1983

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Others

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171

TOTAL

2,876

Total investments from oil and gas revenues

2,103

Source: Morgan Stanley

The combined wealth managed by the SWFs is expected to grow at 15% per year until 2015,
reaching US dollar 10 trillion. For many countries, especially in Arabia, this means becoming
increasingly asset-based, rather than commodity-based, economies, as the revenues from foreign assets
will exceed their commodity revenues. As an example, for the Emirate of Abu Dhabi variations in world
interest rates matter more than the oil price.

Financial markets repercussions of macroeconomic imbalances

The controversy sparked by the recent spate of acquisitions by the SWF might be seen through
different lenses. The starting point is to disentangle the specious arguments, tinged with populist
overtones, from the genuine concerns about financial markets soundness.
In developed economies, financial markets are viewed by the general public, by policy-makers, by
banks and by most economists as a place where private investors trade securities in the pursuit of profits.
Accordingly, governments participation in these markets is limited to the issuance of public debt (through
intermediaries) and occasionally the sale of state-owned companies. In essence, governments are
positioned on the sell side. Central banks carry out routinely open market operations and, more rarely,
foreign exchange interventions, but these are monetary policy tools, not intended to turn profits. It is
therefore awkward to realise that public entities are engaged in financial transactions as if they were
private entities. Is this an aberration or should it be considered a legitimate course of action, and under
what conditions?
To answer these questions and to put into a proper perspective the activities of the SWFs we
follow two intertwined lines of analysis: 1) The macroeconomics of current account surplus management
(which provides a rationale for the setting up of SWFs) and 2) the political sensitivities enthused by stateowned entities acquiring a controlling stake in privately owned large foreign companies.

The macroeconomics of current account surpluses

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A well know identity in national accounting states that a country running a current account surplus
must reinvest these proceeds abroad, thereby building up a stock of foreign assets. These investments,
according to the prevailing view (and to historical experience), are carried out primarily by the private
sector and, to a much lesser extent, by the public sector through the central bank. Crucially, central bank
reserves are maintained in low risk assets to ensure that domestic economic agents have access to foreign
currency needed for their business, travel or portfolio choices. Central banks are not supposed to engage
in active asset management.

Table 2. Energy and non-energy export shares

Energy exports (US$ bn)

Energy exports (% of total)

1996

2001

2005*

1996

2001

2005*

Bahrain

3.2

3.9

8.0

67.3

70.3

79.4

Kuwait

14.9

15.0

40.5

95.5

92.4

94.6

Oman

5.9

10.5

15.9

80.3

83.3

84.9

Qatar

3.2

9.8

22.9

84.8

92.4

88.9

KSA

54.3

59.9

163.3

89.4

88.0

89.6

UAE

18.4

24.1

47.4

49.4

49.8

48.2

* Estimates

Source: Gulf Organization for Industrial Consulting

This situation obviously results from the fact that in developed economies exporters (and asset
managers) are predominantly private companies while the government sector provides public (non
tradable) goods. But in the case of GCC countries a large share of the economy is dominated by the public
sector which owns and manages the stock of natural resources, and therefore accumulates most of its
revenues.
Furthermore, economic theory tended to neglect the influence on asset prices of foreign investment
activities because traditional models assert that current account imbalances are temporary, as real
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exchange rates corrections and/or productivity adjustments reduce the competitive advantage of net
exporters. Also, the magnitude of these surpluses was deemed small compared to the stock of outstanding
financial assets, especially in developed countries. Finally, it was presumed (somewhat unrealistically)
that the bulk of these net foreign assets was held in almost riskless government securities and did not
affect much other asset prices.
From the mid 1990s these assumptions looked increasingly unrealistic, as the US continued to run
a widening current account deficit and countries such as China and Japan (together with other Asian
countries and, to a lesser extent, Germany) maintained large permanent current account surpluses.
Moreover when energy and commodity prices climbed up after the invasion of Iraq, the GCC countries
(and other commodity exporters) saw their surpluses skyrocket. These surpluses obviously are not
temporary and we should wake up to the new reality.[3] It was estimated by the Institute of International
Finance that between 2002 and 2006 the Arab Gulf countries accumulated US dollars 1.5 trillion, twice as
much as in the previous five years. As a matter of comparison this figure is equivalent to about 10% of the
domestic market capitalization of the NYSE at end 2007, more than one third of the Tokyo Stock
Exchange or of the Euronext exchanges, or of the NASDAQ and it would have been almost sufficient to
buy all the companies listed in the Deutsche Brse at end 2006. Obviously not all the windfall has been
invested abroad, but the magnitude has reached such a level that global financial markets are being
seriously affected.
However economists, policy makers, financial institutions and media have continued to view the
world through the lenses of an outdated economic theory, valid, maybe, for the 1960s but not for todays
reality, and therefore the activities of the SWFs have been often misunderstood, little analysed and widely
portrayed through specious arguments. In the next section we try to explain why SWFs, especially from
small economies, are an unavoidable consequence of economic reality and what should be the most
appropriate policies for this new environment.

The rationale for establishing SWFs

The basic question to address is why the export revenues are not re-invested mostly in domestic
projects. The answer differs greatly whether one has, say, Russia or Qatar in mind. In the former it is a
symptom of broad institutional failure, in the second it is a matter of objective constraints on development
due to the size of the domestic economy compared to the magnitude of the export revenues. To be more
specific, Russia is not a functioning market economy. The rule of law and even basic protection of
investors is, at best, patchy. Therefore despite the desperate need of capital for infrastructure,
manufacturing, raw materials extraction, etc. few viable investment opportunities exist. The private
corporate sector, i.e. companies outside the stranglehold of national or local governments, plays a
negligible economic role. As a consequence, the Russian government invests abroad those resources that
would be more desirably used to lift the living standards of the population. Qatar on the contrary is a
country of only 234,000 citizens, with a limited territory, mostly barren. Its government has indeed
launched a massive program of infrastructure building and structural transformation of the economy in
areas such as financial services, tourism, transport services, petrochemicals. As a result the size of the
economy has tripled in the 6 years to 2006 when measured in nominal US dollars. Investments represent
more than 40% of GDP and new investments planned over the next few years are estimated at about three
times current GDP. The expatriates represent already about three quarters of the resident population. Any
further acceleration in this breakneck expansion activity would run into insurmountable bottlenecks
which are already evident in terms of housing scarcity, labour and raw materials shortages, infrastructure
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deficiencies and exacerbate inflation that already exceeds 13%.

Similar arguments can be made for the UAE and to a lesser extent for the other GCC countries. In
essence these countries are compelled to invest abroad a large portion of their export revenues because the
size of their domestic economies, notwithstanding the enormous progress made so far, is limited. Stated
somewhat differently, for small countries such as Qatar, the UAE, Kuwait, but also the likes of Norway or
Singapore which have already attained a high per capita income and face objective constraints in further
expanding their domestic economies it makes sense to transfer the wealth accumulated through exports
(especially of non-renewable commodities) to future generations. A parallel motivation is diversification:
if an idiosyncratic shock hits its domestic economy the country can be at least partly shielded. Large
countries like Russia or China would be better off if they channelled their more of their export proceeds
into their domestic economies after liberalising their business environment.
Small economies face a problem of absorptive capacity of export revenues determined by the size
of their economy, their population and their territory. Large countries face a problem of absorptive
capacity determined by their institutional and legal set up which in turns results in lower productivity.

Table 3. Annual outward FDI from the GCC Countries since 1981

1981-85

1986-90

1991-95

1996-2000

2001-05

2006

2007

Bahrain

-1

25

141

661

980

Kuwait

72

451

- 275

143

7892

Oman

-0

345

115

247

Qatar

-2

14

126

379

40

349

197

376

753

-4

246

1 515

2316

Saudi Arabia

UAE

Source: UNCTAD (2007), World Investment report http://www.unctad.org/Templates/Download.asp?

docid=9156&lang=1&intItemID=3277

The Gulf countries strategy in foreign investments

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GCC member states have invested petrodollars in the West since the 1970s, generally without
attracting much attention or criticism. These investments have been sizeable: for example in 2005 the net
purchases of US mutual funds shares was US dollars 260.3 billion. In the same year the total energy
related export revenues of the GCC countries reached US dollars 297.9 billion. Even if two thirds of this
money was reinvested abroad, it would have been more than enough to sustain shares prices across the
globe. So the capital flowing from energy and more generally commodity exporter (not only from the
GCC) has contributed to reduce the volatility of the stock markets and has exerted a downward pressure
on long-term interest rates over recent years.
The international activism of Gulf investors in the second half of 2007 was due to the new
opportunities that opened up on the aftermath of the sub-prime crisis. This was a major force underlying
the resilience of M&A markets, and stock exchanges in general. But in general it did not represent a
change in the asset management strategies of the SWFs. Broadly speaking, there have been four clusters
of actors/destinations/motivations.
First, obviously, higher returns trough a diversified portfolio. For example, Kingdom Holding a
Saudi State-owned company which has been an active private-equity firm since the 1980s targets bluechip shares and luxury hotels in developed countries, as well as emerging firms in developing countries,
including in Africa. In Bahrain, Investcorp and Arcapita Bank use their private equity arms to purchase
majority shares in companies in Europe and the United States. The Dubai government, through its privateequity firms, has made some significant cross-border equity acquisitions, including the purchase of
Peninsular and Oriental Steam Navigation Company (P&O) of the United Kingdom through state-run DP
World, the worlds third-largest ports operator. Mubadala Development, a wing of the Abu Dhabi
government, bought a 7.5% stake in Carlyle Group, the big U.S. buyout firm. Mubadala, according to
Carlyle, got a 10% liquidity discount, presumably by paying cash. The investment strategy of the GCC
countries SWFs has also produced some notable effects on financial markets.

Table 4. Top acquisitions in 2007 by GCC investors

Date

Target

Acquirer

May 21

GE Plastic (USA)

SABIC (KSA)

11.6

Dec. 13

5 Dow Chem plastic divisions

Kuwait Petroleum

9.5

Nov. 15

4.9% of Citigroup

A.Dhabi Inv. Auth. (UAE)

7.5

Apr. 16

3.1% of HSBC (UK)

SAAD (KSA)

6.6

Aug. 9

OMX (Sweden)

Borse Dubai (UAE)

4.9

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Value ($ bn)

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Sep. 24

Prime West Energy Trust (Canada)

A. Dhabi Nat. Energy (UAE)

4.6

Jun. 26

Binariang GSM, PT Natrindo (Malaysia)

Saudi Telecom (KSA)

3.1

Aug. 22

50% of City Center (USA)

Dubai World (UAE)

2.8

May 28

Northrock Resources (Canada)

A. Dhabi Nat. Energy (UAE)

2.0

The second set of motivations is linked to economies of scale and synergies in sectors where the
GCC companies have already a competitive advantage and play a significant role. Petrochemical
industries have invested in the Far East, especially to secure long-term contracts for their oil resources.
For example, Kuwait and the Guangdong Provincial Government in China are planning to build a refinery
and petrochemicals complex for $5 billion. A new $3.6-billion refinery and petrochemicals plant was
inaugurated in Fujian (China) by Saudi Aramco (with a 25% share) along with Chinas state-owned
Sinopec (50%) and ExxonMobil (25%). Crude oil for the plant is to be supplied by Saudi Arabia, Chinas
largest oil supplier.
Third, investments in mature sectors, such as real estate, banks and utilities to generate a steady
flow of returns. Real estate companies have invested in India, North Africa and the Middle East, home to
most of the GCC immigrants. Cross-border M&As in West Asia saw a historical increase from $0.6
billion in 2004 to $14 billion in 2005 (UNCTAD 2006, tables II.9 and II.10). Intra-regional M&As,
accounting for 65% of the total value and 30% in terms of numbers, played an important role in this
growth. One earlier pioneer was the Majid Al Futtaim Group which has exported its shopping mall
concept across the Middle East after its very considerable success in Dubai. In recent months, Tecom of
Dubai has purchased 35% of Tunisie Telecom, and Emirates Telecommunications Corporation (Etisalat)
acquired a 26% stake in Pakistans State-owned Pakistan Telecommunication Company Limited (PTCL).
Mubadala owns a 5% stake in Ferrari, the luxury automobile company, while other GCC investors also
played an important role in large-scale acquisitions in services, mainly in telecommunications and
banking, in Turkey. And Emirates has owned 43.6% of Sri Lankan since 1998 and fully manages the
airline. Many of the high profile rescue operations in the banking sector hit by the subprime crisis such as
the acquisition of 4.9% of Citicorp must be seen within this context.
Finally, the emergence of a pan-GCC market (thanks to the unified external tariff) and the
necessary allowance of foreign ownership and investment to meet WTO rules have created a level playing
field that has benefited regional firms more than their foreign competitors. For example, Etisalat from the
UAE set up a network in Saudi Arabia following the Saudi Telecommunications Company's loss of its
monopoly over mobile phone services. A smaller example would be the establishment of a branch of the
Emirates Bank Group in Riyadh, with a Saudi network due to be rolled out shortly. At the same time,
Kuwaiti and Saudi investors have rushed to buy real estate in Dubai, taking advantage of a new local
approach to freehold ownership.
But it must be underlined that these four strategies are carried out by entities collectively indicated
as SWFs, but this simplification hides a more variegated reality. The largest funds have a mandate to
transfer wealth to the next generations and therefore adopt a strategy akin to pension funds. Actually in
most cases the investment decisions are delegated to an external asset manager. Other types of funds
defined as strategic investors adopt more aggressive strategies, target opportunistic acquisitions and take
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more speculative positions. In essence their strategy is akin to those of private equity funds. A third type
are publicly funded companies that pursue ventures in specific sectors, especially the real estate or
utilities. Strictly speaking these are not SWFs, but often it is their acquisitions that sparks controversy.

Three paradigmatic cases

It is ironic that the first high-profile operation to stir political reactions about SWFs did not involve
a SWF but DP World, the state-owned company that runs the Port of Dubai. In winter 2005-06, it tried to
acquire P&O, a British company with important operations in the USA. The opposition focused primarily
on the security consequences of having a foreign entity managing the sensitive area of access to US soil.
After CFIUS approved the deal in February 2006 (following a standard 30-day review), DPW agreed to
an additional 45-day security review. In March, following a 62-to-2 Congress vote forbidding the
acquisition, DPW agreed to spin off the American assets.
As The New York Times put it at the time in a leader on the P&O deal, it is not irrational for the
United States to resist putting port operators, perhaps the most vulnerable part of the security
infrastructure, under [the] control [of an ally whose] record in the war on terror is mixed.[4] After stoking
terrorism fear in the public mind, it was of course a paradox that the Bush administration could be
accused of being soft on security matters. In practice, these concerns were overblown as the security
arrangements in the US are not determined by the port facilities operators, but by security and law
enforcing agencies. And definitely the ports are not the most vulnerable part of the security infrastructure
as proved by the hundreds of thousands illegal aliens reaching the US via land. Not to mention the
hundreds of miles along the Western coast line guarded by only a handful of patrol troops.
Rational arguments however cannot hide the fact that concerns about security and other essential
national interests are on the rise. Many countries have taken steps to safeguard essential interests that,
while not necessarily protectionist in nature, have nevertheless generated considerable public debate.
Some European countries have shown uneasiness about international mergers in strategic sectors and
some have taken regulatory action. In the United States, the Foreign Investment and National Security Act
of 2007 (FINSA 2007) has strengthened security clearance of investment projects. China has recently
tightened procedures for cross-border M&As. Russian and Indian authorities are reassessing their
positions on foreign control of sensitive enterprises.
However, to highlight that emotional arguments often play a larger role than thoughtful analysis,
one could point at the battle for the acquisition of Sweden's stock exchange. In August 2007, Borse Dubai,
DIFXs holding company, announced plans to buy at least 25 per cent of Swedens OMX.[5] A protracted
fight started with the Nasdaq Stock Market, ending in September when the two suitors agreed to join
forces not just on an OMX bid but also in a far-reaching deal that could have broad implications for the
fast-growing and rapidly consolidating universe of financial exchanges. Borse Dubai will continue
advancing its $4 billion cash bid for OMX Group. But Nasdaq will acquire those OMX shares in a cashand-shares arrangement that will leave Borse Dubai with nearly 20% of Nasdaq, though its voting rights
will be restricted to 5%. Nasdaq also will become the principal commercial partner and a strategic
shareholder in the DIFX, which will be rebranded Nasdaq and use trading technology from Nasdaq and
OMX. Finally, Borse Dubai will acquire Nasdaq's 28% stake in the London Stock Exchange for around
$1.6 billion.
The outcry in the U.S. about whether an entity owned by the ruler of Dubai is acceptable as a
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major shareholder in a key U.S. financial exchange was limited. Although there were calls for CFIUS to
intervene, Dubai's voting rights will be restricted to 5%. On the other hand, the Swedish government is to
pass a new law to protect the country's stock market from being "Americanised". The government is
concerned the sale of OMX might undermine its competitiveness by exposing it to US corporate
governance rules. But at the end the deal went through.
Finally, the attempted takeover of the British retailer Sainsbury by the QIA serves as a reminder
that not all SWF have the skills to carry out complex financial operations. The Delta Two investment
fund, which is backed by the QIA, started negotiating the purchase in the early summer 2007 and
proposed a cash element of around US$7bn. The largest UK union Unite threw its hand up in the air over
Qatar's long-term intentions for Sainsbury's and the firm's founding family, Sainsbury, still sizeable
minority shareholders, were allegedly opposed to the sale. Once it appeared that the fall-out from the US
sub-prime mortgage crisis might make obtaining finance harder, Sainsbury's shareholders naturally sought
to reduce the proportion of debt in the deal and Qatar gradually upped its cash injection to close to $10bn,
out of the $21.6bn overall cost. The UK's Takeover Panel imposed November 8 as the final deadline to
'put up or shut up.' The Qataris eventually cited turmoil in the credit markets as the main reason for its
decision to drop out of the acquisition in November 2007. While some analysts have said the QIA has
been prudent to pull out of the deal with the cost of borrowing now rising, its obstinacy not to pay the
extra sum as it has actually lost a larger amount, over $1bn, in the last few days as the share price
retreated. The Financial Times quoted one person involved in the bid as saying that Qatars reputation as
a credible financial investor of international assets has been seriously damaged and it will be a while
before another British public company enters into exclusive negotiations with them again. We used to
think private equitys behaviour could be low but what Qatar has done is lower than a snakes belly.[6]

Final Remarks

SWFs and similar entities launched by small countries accomplish an indispensable function by
investing the current account surpluses into a well diversified asset portfolio as a means to share the
accumulated proceeds with future generations. The prominence of the SWFs activities must be seen in
the broader contest of regulatory changes in FDIs and the efforts to make financial market more
transparent. Since 2004, a spate of regulatory changes around the world, less favourable to foreign
investors, has prompted many pundits to declare an end to the era of liberalism and raise fear over the
advent of a new era of protectionism, or perhaps of strategic interventionism.

In reality, even nowadays the vast majority of regulatory changes lessen the impediments for
foreign investors. Nonetheless, episodes such the attempt by DP World to acquire P&O drew attention to
the activities of SWFs and other state entities and to their potential consequences. One argument, popular
in Europe, stresses that after having painstakingly privatised large sector of the economy it would be
ironic if, say, airlines, utilities and banks were to fall prey to a foreign government whose purposes might
not be entirely linked to economic considerations. Russia and China appear to be stirring specific fears.
When considering the GCC countries, the attitude is more nuanced. The GCC countries have been
in accord with the US (and the West in general) and their interests are broadly aligned with those of
developed countries. But a degree of ambiguity resurfaced, especially in the US, after 9/11. Former US
Treasury Secretary Larry Summers, whose views lately are increasingly protectionist, has voiced concerns
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ranging from supposedly hidden motivations behind investment strategies, to the danger that SWFs might
move the operation of blue chips to their countries and use their political connections to force a bail out
should their investment prove disastrous. These arguments did not prevent his successor, Henry Paulson,
from flying to the UAE in an effort to convince the Abu Dhabi Investment Authority to rescue Citibank
when the bank run into trouble generated by the subprime crisis. The ensuing deal, worth 7.5 billion US
dollar, took the shape of a convertible bond with a 11% interest rate over two years, a rather favourable
term for the SWF, but hardly excessive given the liquidity crunch on international financial markets.
Analogous terms were negotiated by the Swiss authorities when they asked the Singaporean SWF and
Saudi Arabian public entities to inject funds into UBS. These examples show that, at times of crippling
liquidity worries, SWFs have acted to restore a degree of confidence on the markets.
In essence it would be pointless and counterproductive to stem capital and FDI flows because, as
the integration of international trade progresses, a natural consequence will be increasing capital flows
from countries that run a current account surplus into those that run a deficit. OECD governments are
conscious of the need to keep restrictions to a minimum, ensuring that markets will remain open to
investment by SWFs and other entities. However it will also be desirable that any institution active in
financial markets act in line with governance standards that allow markets to function efficiently. For
some SWFs very little is known beyond the name and the country from which they operate. Sometimes
even the names of key officials are confidential while their balance sheets and their assets holdings are not
disclosed. It must be pointed out that often these questionable practices are tolerated by market regulators.
For example the habit of concealing the terms or certain deals or the amount paid for stakes in listed
companies is simply unacceptable.
Furthermore a fundamental principle of reciprocity must be implemented. Countries whose
markets and companies are not fully open to foreign investors cannot expect that their SWFs be given
complete freedom to acquire the ownership or a controlling stake of companies from countries adhering to
market freedom. In a nutshell, greater disclosure of SWFs activities, sound governance, timely reporting
of deals and openness to foreign investors will assuage the fears raised by arguments of nationalistic, or
worse, paranoid tenor and minimize restriction on the operations of SWFs.

Since at the time the Gilbert Islands were a British colony, the fund could technically not be described
as sovereign. The fund today is worth about half a billion US dollars.
[1]

[2] The list is not exhaustive, as some countries do not fully disclose the assets managed by their investment vehicles.
Furthermore, in addition to SWFs some countries have launched other public entities that manage investments in specific sectors.
For example, in Qatar Barwa and Qatar Diar are operating in real estate worldwide, while Dubai Port focuses on transport
facilities and logistics.

[3] Another way to look at this phenomenon is to consider the increase in energy prices as a tax levied on consumers by a government (albeit
a foreign one). Part of this tax receipts will be spent on providing public goods or infrastructure and the rest will increase government
savings, which in turn will be invested in the private sector (domestically or abroad).

[4]

The President and the ports, The New York Times, 22 February 2006.

DIFX CEO Per Larsson was elbowed aside from the chief executive position at OM Group, the
Stockholm-based stock exchange, as it merged with HEX of Finland in 2003.
[5]

[6]

Standing of Qatar laid low following surprise exit, Financial Times, 6 November 2007.

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