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Gulf SWFs are back on a roll but beware Russian ties

The Shard, London Creative Commons
The Shard skyscraper in London is owned by the Qatar Investment Authority

Buoyant oil prices are keeping Gulf treasuries full following the pandemic

The past few years may have been decidedly mixed for Gulf sovereign wealth funds (SWFs), but with a recent surge in oil prices and lockdowns ending the pressure is now easing. 

During the Covid-19 pandemic many funds found their reserves heavily depleted by governments trying to cover yawning budget deficits at a time of low oil revenues and subdued economic activity.

Bahrain withdrew almost half the assets of its Future Generations Reserve Fund (FGRF) in mid-2020 and suspended further transfers into the fund. The Kuwait government took $15bn out of its General Reserve Fund (GRF) in 2020. 

Pandemic bailouts

Such drawdowns did not hit every fund but the trend was widespread. Diego López, managing director of research firm Global SWF, estimates Gulf governments collectively withdrew $76bn from their sovereign funds during the pandemic.

Many funds also had to dig deep to help struggling portfolio companies. Some $32bn was spent by Gulf SWFs bailing out airlines and other businesses, according to Global SWF.

Among those affected were Investment Corporation of Dubai (ICD), which reported a AED15.5bn ($4.2bn) loss for 2020 compared to a AED25bn ($6.8bn) profit a year earlier. Bahrain’s Mumtalakat saw its losses rise almost tenfold in 2020 to BD527.5m ($1.4bn). 

But as the world has adjusted to the pandemic and as lockdown restrictions have eased, business activity has picked up.

Consultancy firm PwC said there was a record amount of merger and acquisition deals globally in 2021 and 2022 could be another “supercharged” year. 

Financial results from the few Gulf funds that publish them suggest they are benefitting from the improved climate.

ICD reported a net profit of AED1.4bn ($381m) for the first half of 2021, compared to a AED9.4bn ($2.5bn) loss 12 months before. Mubadala posted record income of AED122bn ($33.2bn) for 2021, up from AED72bn ($19.6bn) in 2020.

Oil bonanza

With oil prices surging, Gulf SWFs look to be in an even stronger position this year.

Governments can afford to top up funds drained during the pandemic and give others a further boost.

Bahrain has restarted payments to its FGRF and Kuwait may also try to rebuild its GRF.

Meanwhile, Saudi Arabia’s Public Investment Fund (PIF) was handed 4 percent of Saudi Aramco in February.

There is, though, a broader question for governments of what to do with the oil revenue bonanza.

Justin Alexander, director of consultancy firm Khalij Economics, says they have a few options. They can pay off debt, go on a domestic spending spree to pass on the windfall to their citizens, or they can make more long-term investments domestically or abroad. 

Most governments will probably adopt a combination of these options.

“Government spending will be above budget this year due to inflation, but so far there is no sign of any real splurge,” Alexander says. “If it comes, it will happen later in the year.”

Talk of investments has been picking up pace though, often linked to wider national interests.

Qatar’s emir Sheikh Tamim Al-Thani said during a visit to Madrid on May 16 that the Qatar Investment Authority (QIA) would invest $4.9bn in Spain, with energy projects likely to be the main focus.

Then on May 24, it was reported that Qatar had pledged to invest £10bn ($12.6bn) in the UK over the next five years, including in the technology, healthcare, infrastructure and clean energy sectors.

In a similar move, Abu Dhabi’s ADQ pledged to invest €4bn ($4.3bn) in Greece during a visit by Greek prime minister Kyriakos Mitsotakis to Abu Dhabi in May.

The previous month ADQ took stakes in several Egyptian companies, including banks and fertiliser producers, as part of a $20bn investment plan with the Sovereign Fund of Egypt. 

Such deals look motivated by diplomacy as much as by financial considerations. Politics also has an influence on the attitude funds are taking to their home markets. 

“Since the start of the pandemic we have seen a switch in the mindsets of SWFs, many of which are trying to balance their international pursuits and domestic support.

“The Gulf is no exception, with funds like ADQ providing significant local support,” López says.

Tech focus

Mumtalakat is one of the Gulf’s smaller SWFs with a portfolio estimated at $7.4bn by Standard & Poor’s, much of which is domestically focused.

It said on May 9 it was adopting a more activist investment strategy and would also target new sectors such as food security, fintech and health tech.

This fits in with a wider trend of funds placing more emphasis on private equity, venture capital and infrastructure, in terms of asset classes, and on industries such as technology and healthcare.

Recent deals that highlight that trend include the PIF taking a 5 percent stake in video games giant Nintendo, which now sits alongside Activision Blizzard and Electronic Arts in its portfolio.

The QIA, perhaps best known for its investments in Harrods and The Shard in London and the Paris Saint-Germain football club, has backed Elon Musk’s takeover bid for Twitter, with a $375m commitment via its Qatar Holding arm.

Reputational risk

However, there are still challenges ahead. Many funds will directly benefit from buoyant energy markets – the Kuwait Investment Authority (KIA) owns Kuwait Petroleum Corporation (KPC), for example – but some energy assets carry reputational risks. 

Many Gulf SWFs find themselves with Russian assets at a time when there is pressure from Western countries to distance themselves from Moscow.

The QIA, for example, owns almost 19 percent of Russia’s Rosneft, while Mubadala is thought to have some $2.3bn in joint investments with the Russian Direct Investment Fund (RDIF), although the Abu Dhabi fund has put any more Russian deals on hold.

Looking much further ahead to net zero, energy investments risk becoming stranded assets. Even in the good times, some assets look better than others.

Largest sovereign wealth fund rankings by total assets

1Norway Government Pension Fund Global$1,338,200,286,000 
2China Investment Corporation$1,222,307,000,000 
3Kuwait Investment Authority$737,938,500,000 
4Abu Dhabi Investment Authority$708,750,000,000 
5GIC Private Limited$690,000,000,000 
6Public Investment Fund$620,000,000,000 
7Hong Kong Monetary Authority Investment Portfolio$588,903,442,872 
8Temasek Holdings$484,441,000,000 
9Qatar Investment Authority$450,000,000,000 
10National Council for Social Security Fund$447,358,000,000 
   
11Investment Corporation of Dubai 
13Mubadala Investment Company 
19Abu Dhabi Developmental Holding Company 
20Emirates Investment Authority 
24Libyan Investment Authority 
39Mumtalakat Holding 
41Oman Investment Authority 
45Sovereign Fund of Egypt 
Source: SWF Institute

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