West’s loss is East’s gain
As politically motivated restrictions on investments by oil-rich countries intensify in the West, the sovereign wealth funds (SWFs) of the Gulf countries could opt to invest in Asia and other emerging markets despite attractive valuations in the slowing US and European markets. At this year’s World Economic Forum in Davos, the United Arab Emirates and a few other countries sought to allay Western fears by stressing that the funds were strictly commercial and not political threats. Sultan Ahmad bin Sulayem, Chairman of the Dubai World holding company, warned that Gulf funds could stop investing in developed markets if their motives were continuously questioned. “There is the policy of these government fund managers to go where they are welcome. If [rich nations] say ‘we don’t want your money’, fine. We will invest in China and India. They all want investment.”
Dubai International Financial Centre (DIFC) Governor Omar bin Sulaiman also voiced a similar opinion in November. “If you need foreign direct investment [FDI], you need to be welcoming, not scaring investors off. Talk about the SWFs is creating a lot of sensitivity, even for private investors. They are already looking elsewhere to hedge their positions.”Reflecting this sentiment - which also indicates the economic, not political, leanings of Gulf SWFs - Dubai International Capital (DIC) purchased a “substantial” stake in Sony in November, which reports estimate to be worth between 500 million and one billion US dollars. So far, the DIC is estimated to have invested about 2 billion US dollars in Asia. Explaining Western governments’ concerns that major shifts in international finance could involve power politics, Eckart Woertz of the Gulf Research Centre in Dubai said. “They are particularly worried about
the possibility of the SWFs buying up Western assets, putting them at the disposal of potentially ‘unfriendly’ regimes.”
The SWFs have existed for a long time, but attracted attention recently because they have grown bigger than the world of hedge funds and other private institutional investors. They are owned by governments of countries that have substantial current account surpluses and are used to acquire assets abroad that have potential for better returns than shares and bonds. The US, in particular, feels that large amounts of its securities in the hands of those who are not necessarily allies is “financially imprudent,” as a sell-off by such nations could lead to falling bond prices and rising interest rates, thus hurting its economy. Such attitudes have encouraged South-South economic cooperation through mechanisms aimed at diversifying trade and investment.
Part of the Western worries stem from the future enormity of the funds. The SWFs, which held about 500 billion US dollars worth of assets in 1990, and manage about 2.5 trillion US dollars currently - are likely to grow annually by 1.2 trillion US dollars over the next five years, and are expected to reach about 27 trillion US dollars by 2022.
Given that increasing oil prices will help Gulf SWFs make more acquisitions abroad in the future, Woertz advises that they “should remind Western governments that access to markets is not a one-way street.” If the West fails to heed such advice, the East has more gains to look forward to in the future. — IPS