Gulf Sovereign Wealth Funds: A Positive for the West

With the Public Investment Fund of Saudi Arabia’s involvement in one of the largest special-purpose acquisition company (SPAC) deals of 2021, Churchill Capital IV Corp’s acquisition of Lucid Motors, attention has been brought to Gulf Cooperation Council (GCC) Sovereign Wealth Funds (SWFs). These funds have become crucial institutional investors that contribute to the health of their own and Western economies. Regrettably, the magnitude of their role has been underestimated due to the politics of protectionism.

A SWF is an investment fund that is owned or influenced by a sovereign state. When a nation incurs a surplus, a SWF would obtain its capital through a variety of channels, including stabilization funds, central banks, public pension funds, government enterprises, and foreign currency operations. According to a report by the European Investment Bank (EIB), common objectives of SWFs consist of benefiting future generations by increasing savings, stabilizing the economy against volatility in revenues or exports, funding social and economic development, and perhaps most relevant given the current climate, providing capital injections during crises. Moreover, as per PricewaterhouseCoopers, additional advantages of SWFs include: insulation against inflation, increased transparency, reduced government borrowing costs, and limited exchange rate appreciation. 

Prior to the 2008 financial crisis, GCC SWFs were in the process of changing their investment strategy, from investing in foreign deposits or securities to pursuing long-term plans through foreign direct investments (FDIs). Based on EIB’s report, the number of annual FDIs by SWFs surged by 540% from 15 in 2006 to 96 in 2009. Despite this shift, SWFs remained focused on investing in developed economies, predominantly in the West. Known as the “White Knights” who rescued banks during the subprime mortgage crisis, GCC SWFs gained traction in the news in 2008, when they bailed out some of the largest players in the financial services industry, including Citigroup, Morgan Stanley, and UBS. Soon after, these investments brought forth huge returns – the Abu Dhabi International Petroleum Investment Company doubled their money on a £2 billion investment in Barclays while other Gulf SWFs reported performance of the same caliber. Clearly, an economic mutualism was observed between the West and the Gulf in 2008.

As one of the largest capital market investors, Gulf SWFs owned 40% of all SWF assets in 2019. SWFs have allowed GCC countries to diversify their economies by efficiently employing resources drawn from their oil revenues through investments in a variety of sectors, most notably, financial services, energy, infrastructure, and real estate. Based on Fitch Ratings’ 2020 report, Kuwait, Qatar, and Abu Dhabi’s SWFs have “underpinned the resilience” of their sovereign ratings in spite of the COVID-19 pandemic and low oil prices. Furthermore, support of fiscal deficits from U.A.E SWF buffers can last decades after 2021. 

 Concerns about Gulf SWFs in Europe and North America, which mainly started during the 2008 mortgage crisis, have been about difference in political systems between the regions. Gulf SWFs’ leadership have reiterated the only motive of maximizing risk-adjusted returns. The International Monetary Fund concluded that “there is no clear evidence that SWF investments have been motivated by narrow political objectives.” In fact, according to a study by Nuno Fernandes, professor of Financial Management at IESE Business School, the real danger stems from the governments who “play up fear of SWFs” through protectionism. Following a SWF investment, the value of a firm typically increases and important operating performance enhancements occur. From an economic point of view, Europe and the U.S. can only benefit from Gulf SWFs. These foreign funds have not only supported their own economies during the 2008 crisis, but also Western economies. As stated previously, bailing out heavyweight banks like Citigroup, Morgan Stanley, UBS, and Merrill Lynch through $40 billion worth of investments proved crucial in fending off the U.S. financial system meltdown in the global market. 

Today, Gulf SWFs are continuing to support their home economies as well as the global market during the COVID-19 pandemic. Saudi Arabia’s Public Investment Fund has been reaping the rewards of purchasing heavily discounted blue-chip equities in Europe and the U.S. Middle Eastern SWFs placed a large bet on the U.S. by directly investing $14.724 billion in 2020, a 127.26% increase from $6.479 billion in 2019. Recently the U.A.E SWF Mubadala invested $1.1 billion in health and life science projects in the U.K. Their statement indicated that “these funds will provide stable investment into the next generation of life science companies in the U.K.” The Gulf SWFs’ stabilization of their own and global markets in the midst of the current COVID-19 crisis is consistent with the aforementioned findings from studies ranging from 2007 to 2012, which state that they benefit western society. 

The impressive pattern of Gulf SWFs aiding their own and Western economies during the 2008 financial crisis has persisted during the pandemic, without any political intervention. Given all the benefits offered by Gulf SWFs to the world, the COVID-19 pandemic has set the perfect circumstances for the U.S. to start its own SWF, as confirmed by Bloomberg LP columnist Nir Kaissar. Issues this move would address include reducing the four to one ratio of government fund distribution between Wall Street and Main Street and greater returns than investing in the Troubled Asset Relief Program (TARP), which only resulted in a 1% return per year. The U.S. has spent enough on bailouts to create a SWF, and could even have generated one through debt, with interest rates having been near zero. The success of Gulf SWFs demonstrates an efficient solution for countries to develop their own markets and contribute to the economic growth on a global scale, with little evidence to support concerns about political climate. The U.S. can use such funds to efficiently provide injections during crises that will benefit future generations while developing both its own and other economies.