SWF managers face growing pressure from politicians and the public to prove they're investing national reserves wisely
Running sovereign wealth funds in the Gulf has become an awkward business in the era of cheap oil, as their managers face growing pressure from politicians and the public to prove they're investing national reserves wisely.
When oil prices were high, the Gulf funds - which include some of the largest in the world - came under little public scrutiny. Government coffers were awash with energy revenues and the financial futures of the Gulf Arab states seemed secure.
But with Brent crude now at little more than half last June's level, the countries may be entering their toughest fiscal times since the 1990s, and this has changed the political climate.
Governments want to make sure they're getting maximum returns from their funds. The public, facing the prospect of slower growth in social welfare spending, is more sensitive to the idea that some national resources might be wasted.
With most of the funds publicly disclosing little information about their accounts, lawmakers in some states are looking out for poor performance or even wrongdoing.
Kuwait's parliament, the most independent in the Gulf, is investigating activity at the London office of Kuwait Investment Authority. KIA manages $548 billion, according to U.S.-based Sovereign Wealth Fund Institute (SWFI), which tracks the sector.
"There was an investigation committee formed several months ago to look at cases of wrongdoing at KIA, such as selling property not at the right price or making bad investments," Faisal Shaya, head of parliament's financial committee, told Reuters.
The committee will travel to London to check how investments are being made and whether there is enough official oversight of them, Shaya said. KIA didn't respond to a request for comment.
Earlier this year Bahrain's parliament launched an investigation of state fund Mumtalakat, estimated to have about $11 billion under management.
The inquiry is looking at allegations of "administrative" violations at the fund after an audit report revealed a series of irregularities at Bahraini state companies, said member of parliament (MP) Isa al-Kooheji. Mumtalakat didn't respond to a request for comment.
It isn't clear whether the investigations will unearth any serious wrongdoing, but at the very least they could encourage funds around the Gulf to operate more cautiously and conservatively for a while.
Some potentially controversial moves, such as large acquisitions, could be put on the back burner; there may be more focus on improving returns in the short term, and an increased emphasis on cost-cutting.
"One can assume Gulf parliaments are putting pressure on the performance of such sovereign vehicles as the gravy train slows," said Michael Maduell, president of SWFI. "If oil prices remain low and investment performance is tepid/negative, I would suspect more MP investigations." While pressure may be most intense in Kuwait and Bahrain, it could also increase in Saudi Arabia and other Gulf states, he added.
Most of the sovereign funds have traditionally operated in great secrecy and Gulf governments, concerned about poor publicity, may ultimately act to protect this.
Maduell questioned how much the inquiries would unearth. "Some of it is political theatre, as ultimate power lies with the ruling families," he said.
Late last year Saudi Arabian billionaire Prince Alwaleed bin Talal, one of the kingdom's top international investors, complained the central bank wasn't earning high enough returns on its reserves to compensate for sliding oil prices.
He urged the creation of a new fund to manage the reserves, which now total about $690 billion, more actively. Officials of the Shura Council, an advisory body to the government, also discussed such a proposal.
But in December, Finance Minister Ibrahim Alassaf declared there was no need for such a change, and since then there has been little if any public discussion of the idea.
Nevertheless, governments in the region do not ignore public opinion. So if oil prices stay low for years, pressure for changes at the funds - such as more transparency - may rise.
The issue strikes a chord in Kuwait because of an uproar in the early 1990s over investments in Spanish conglomerate Grupo Torras.
From 1986 to 1992, KIA's London office poured about $5 billion into Torras, which then went into receivership. The scandal led to legal action in several countries, the conviction by a Kuwait court of two people for embezzlement, and passage of a law imposing parliamentary scrutiny of investment decisions.
Even in countries where there is no visible public pressure on sovereign wealth funds, a more circumspect mood appears to have taken hold.
A banker who works closely with Qatar Investment Authority, which manages an estimated $256 billion, said the fund had become more conservative in recent months. It was now focusing on developed assets that could generate revenue right away, rather than projects which would take a long time to come to fruition.
Abu Dhabi's Mubadala, with an estimated $66 billion, has not announced a major new investment for about eight months. Several staff at the fund said they had been told in recent months to focus on keeping down costs. QIA and Mubadala did not respond to requests for comment.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.