from Follow the Money

Open secrets

November 3, 2008

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The 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.

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