Reeling from huge losses on global stock markets, Gulf financiers are returning their attentions and capital to their home economies.
After having their fingers burned from exposure to troubled foreign assets, 2009 could prove a watershed year for Gulf financiers.
Investors from the region saw an eye-watering $2.5 trillion wiped off their portfolios in the four months up to January, according to estimates by the foreign minister of Kuwait. Meanwhile, foreign assets held by GCC sovereign wealth funds (SWFs) last year fell by $100bn to $1.2 trillion, say economists at the US-based Council on Foreign Relations.
Nursing battered balance sheets and concerned by the economic woes mounting in their own backyards, the government-backed investment vehicles are ditching past strategies of aggressive overseas acquisitions to shore up local markets shaken by the crisis.
Dubai International Capital (DIC) executive chairman Sameer Al Ansari has already indicated the firm will rein in spending abroad in favour of investment in the Middle East after suffering losses in the region of $3bn from the downturn. Meanwhile, Kuwait Investment Authority (KIA) last month injected $418m into Gulf Bank after the state's fourth-largest traded lender accumulated huge derivatives-trading losses.
Private investors too are seeking security in the region, stepping in with much-needed liquidity to snap up distressed assets at a time when tumbling oil prices and a freezing over of domestic credit markets has led to a widespread decline in risk appetite.
"The pressure for investors to repatriate within the current situation is due to the big need for liquidity to help beef up the capital of banks, or at least give them the kind of deposits they need to grow," says Fadi Al Said, head of equities at ING Investment Management Middle East. "These things together increase the probability of these guys coming back and looking directly to boost the economy and indirectly the market."
Bourses in the region have continued their downward spiral, with more than $50bn wiped off the market capitalisation of stock markets in January, on the back of $535bn losses last year.
UAE developer Emaar, which recorded fourth-quarter 2008 losses of $481.9m, and Saudi Arabia's Saudi Basic Industries Corporation (SABIC), whose profits for the period fell more than 95 percent from the year before, are among leading Gulf companies whose poor results have contributed to dragging Gulf markets down.
The dramatic collapse in oil prices has provided another compelling reason for funds to divert some of their wealth to regional economies in need.
Economic growth of Arab oil exporters is set to slow by almost half to 3.5 percent in 2009 as the Middle East earns about $300bn less from crude exports than last year, according to the International Monetary Fund.
With crude trading at below the budget break-even points for many Gulf oil producers, six countries in the world's biggest oil-exporting region are likely to post fiscal deficits this year. This is where the funds can provide a vital economic boost.
"Why else do you have your surpluses?" asks Al Said. "You have to channel these investments when you are faced by challenges to the financial system to at least give the economy a soft landing rather than a hard one."
There are growing signs Gulf governments are eyeing investment funds as a means to provide financial stability and economic stimulus.
While SWFs had little appetite for further bailouts of international companies in financial dire straits, according to research published last week by global consultancy firm Financial Dynamics International (FD), some funds were seeing their cash inflows diverted in the short term from their global portfolios to bolster regional markets.
KIA in December launched an investment fund on behalf of the Kuwait government worth $5.1bn, to arrest a slide on the local bourse, which fell 38 percent last year.It has already moved to reduce its exposure to global stock markets by shifting assets into short-term cash funds. KIA has disclosed it lost $30.9bn in foreign investments between March and December last year, having bought into US banks including Citigroup and Merrill Lynch before shares in both crashed and the latter filed for bankruptcy protection.
Al Ansari, of DIC, the international investment arm of state-owned Dubai Holding, said in an interview last month that conditions in the US and UK were "challenging" and it would instead focus on emerging markets such as India and the Mideast. Its estimated $10bn fund had included stakes in UK bank HSBC Holdings and US hedge fund Och-Ziff Capital Management.
The actions of other regional SWFs since the credit crisis hit has been less clear. Abu Dhabi Investment Authority lost as much as $125bn from cut asset prices, according to a report by the Council on Foreign Relations last month.
The impact of the economic turmoil on the Saudi Arabian Monetary Agency and the Qatar Investment Authority, which according to the report had $501bn and $58bn under management at the end of last year respectively, is uncertain.
But one thing that does seems sure is that the days of the big bets made by these funds abroad are over.
"Even if oil stabilises at $75 a barrel over the next five years, the pace of foreign asset accumulation in the Gulf will slow substantially," Brad Setser and Rachel Ziemba wrote in the Council on Foreign Relations report.
With fear continuing to stalk local markets, analysts say individual investors from the region can bargain hunt for assets well below their true value.
"Most of the investors and funds who had investments overseas have incurred huge losses and when they see regional markets trading almost to their bottoms they become very attractive for investment," says Shiv Prakash, technical equity investment analyst for MAC Capital Advisors. "I see fresh investments coming soon in the region and increasing by at least by mid-2009."
Prakash expects a gradual flow of funds into GCC markets over the coming months, with a particular focus on utilities, transportation and logistics, which have opportunities for growth in the long term. He advises that real estate is a sector best avoided as the market needs time to stablise.
Earlier this month, the ADCB Macquarie Infrastructure Fund (AMIF), a joint venture between Abu Dhabi Commercial Bank and Australia's Macquarie Group, announced a $188m investment, giving investors exposure to government-commissioned infrastructure projects in the UAE.
The Arab Investment and Export Credit Guarantee Corporation (Dhaman), which oversees the promotion of inter-Arab capital, strongly believes that Gulf funds should be repatriated. In its latest monthly bulletin, the Kuwait-based organisation urged investors to reduce their dependency on global markets to allow them to avert risks from the continuing downturn.
"The Gulf will not be able to take all the amounts that have been invested around the world, we would just like to see a small amount repatriated," says Ismail Botan, director of investment for Dhaman. "Only time will tell how much the markets will need to recover."For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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