x Abu Dhabi, UAEWednesday 17 January 2018

SWF's no tool of fiscal policy

Ka-ching! IPIC scored big for Team Abu Dhabi this week when it sold part of its stake in Barclays, the British bank.

Ka-ching! IPIC scored big for Team Abu Dhabi this week when it sold part of its stake in Barclays, the British bank. Readers may recall that at the height of the financial crisis last October, Barclays raised £7 billion (Dh42.55bn) in an effort to stay afloat without taking money from the British government, and with it all the strings that would have been attached. Instead, it ended up with two other government shareholders, Qatar (whose Qatar Investment Authority already held Barclays stock) and Abu Dhabi, through IPIC, otherwise the International Petroleum Investment Company. The deal gave Abu Dhabi a roughly 16 per cent stake in the bank, and sent Barclays' other shareholders into paroxysms over a deal they complained had been made behind their backs. The Middle-Eastern capital infusion seemed to do the trick, though. Barclays survived and, along with other big banks that avoided British government aid, has recovered quite nicely. Barclays stock has almost doubled since the investment from Abu Dhabi. IPIC's sale of 1.3 billion Barclays shares netted it a tidy £1.5bn, representing a roughly 75 per cent return in just seven months, an annualised return of about 128 per cent. It's nice to see the home team hit one out of the park every once in a while, particularly after suffering a string of gut-wrenching losses. Most of Abu Dhabi's sovereign wealth funds (SWFs) don't bother to publicise their financial scorecard, but Mubadala Development broke ranks in April to report Dh8.8bn (US$2.39bn) in write-offs due to the falling value of investments such as its stake in General Electric. That loss alone offsets IPIC's entire Barclays windfall. And there is, of course, that other big bank buy, the Abu Dhabi Investment Authority's $7.5bn investment in Citigroup, which if ADIA had to convert into shares today would yield a loss of almost 90 per cent thanks to Citi's falling share price. Fortunately for ADIA and for Abu Dhabi it doesn't have to, which means the share price will hopefully regain ground while ADIA continues to collect its 11 per cent in annual interest on the deal in the meantime. Still, the paper losses at Citi are just a taste of what analysts estimate ADIA has suffered during the global financial blowout. ADIA's war-chest, once conservatively reckoned to hold assets of almost $500bn, was most recently estimated by the Monitor Group to have shrunk to just $282bn. Monitor did not take a stab at IPIC's holdings, but last year they were estimated at $13bn, almost all of it in petroleum-related assets abroad. Oil is still fetching only about half the price it did a year ago, however. The Barclays cash will help offset those declines. The real question for IPIC's managers now, though, is what to do with their $2.5bn windfall. While the Barclays deal may have been the kind they could not refuse at the time, investing in banks lies fairly far from IPIC's remit. IPIC was established to invest abroad in oil assets, thus diversifying Abu Dhabi's exposure to domestic petroleum-related risks such as dwindling reserves, or Martians landing on the Corniche and demanding tribute in the form of light frappuccinos. There has been a growing number of calls, however, for Abu Dhabi's SWFs to invest more of their money directly here at home as a way to support the domestic economy and offset the impact of the global financial crisis. This view represents a fundamental misunderstanding of the nature and purpose of the emirate's various SWFs. Advocates of more domestic investment say the funds have a responsibility to support the domestic economy. This is untrue. There is only one fund whose mandate includes the development of Abu Dhabi's economy, Mubadala. Most of its investments are strategic investments in industries it believes will not only promote that development over the long term, but which will also earn money for its shareholder in the process. Buying domestic stocks might make sense for Mubadala, but only as part of its own treasury operations, not to promote economic development. This raises the other common fallacy over SWFs, that they are somehow not accountable and have a duty to support the local economy. Abu Dhabi's other sovereign funds may not publish financial statements, but there is little doubt that they are accountable to their shareholder, the Abu Dhabi Government. Top government officials, after all, sit on each one of their boards and oversee their key investments. The SWFs belong exclusively to the Abu Dhabi Government, and some mistakenly confuse this with being public. Wrong again. The public's claim over Abu Dhabi's SWFs is equivalent to the amount the public pays in taxes to the Government, that is, zero. Neither does the public have any claim over the oil assets whose proceeds serve as the basis for the funds. Those assets belong to the Government. And however much one may wish it otherwise, l'etat most definitely n'est pas nous. Obviously, the funds' shareholders can decide whether the funds should invest locally or not, but asking them to do so would abrogate their structure and purpose. The Abu Dhabi Fund for Development was created to promote development in poor nations around the region. The Abu Dhabi Retirement Pensions and Benefits Fund needs to fund its own liabilities, not divert funds for domestic pump priming. IPIC and its sister energy fund, Taqa, are tasked with creating global energy portfolios. In other words, all the funds are designed to preserve value and offset domestic risk. They are not tools of domestic fiscal policy. Thus, when the Abu Dhabi Government needs to fund a fiscal deficit, it can and in the past has, withdrawn funds from ADIA. It does not generally use ADIA as an instrument of domestic policy. In fact, ADIA's raison d'être, and that of its younger sister, the Abu Dhabi Investment Council, has been to offset Abu Dhabi's exposure to the risk that domestic issues, whether shortcomings in domestic economic policy or the emirate's inescapable exposure to oil prices and regional political risk, torpedo the value of its petrodollar savings. There are many economists, including those at the IMF, who have called for the UAE to boost its fiscal spending. But those who think SWFs are the tool for doing this need to think again. warnold@thenational.ae