Saudis to creat sovereign wealth fund

The Financial Times has two items today about the creation of a sovereign wealth fund in Saudi Arabia.

Cautious Saudis step into SWF arena

The decision to create an investment fund occurred only after months of internal debate among the kingdom’s cautious decision-makers. Some queried whether the nation really needed a fund. If so, who would manage it: would it fall under the responsibility of the finance ministry, or the central bank, which has managed the kingdom’s foreign assets? And, critically, how big would it be?

There was even speculation that more than one entity would be launched, enabling the funds to be sector specific.

There is also the issue of “blame and claim”, according to one analyst, who argues that few wanted to be blamed in the event of making the wrong investment decisions, while many would wait in the wings to claim recognition for taking the right investment decisions.

Another crucial factor that sets Saudi Arabia apart from its neighbours – and partly helps explain why the country has not previously set up a sovereign fund – is the size of the country. With some 17m Saudi citizens, and about 7m expatriate workers, the nation has a population far higher than the rest of the other five Gulf Co-operation Council states combined, with oil revenue per capita that only betters that of Oman in the GCC.

This has meant Saudi Arabia has spent more of its revenue internally and has a greater absorptive capacity than its smaller neighbours.

Saudis to launch $5.3bn sovereign fund

The kingdom has invested conservatively, with an eye on liquidity to help it through downturns in oil price cycles.

About 85 per cent of foreign exchange reserves are invested in dollar-dominated fixed-income securities.

“The proposed investment company’s strategy...would, on a general and basic level, be similar to that of a number of existing portfolio investors – for example Norway’s GPF [Government Pension Fund] or Singapore’s GIC [Government of Singapore Investment Corporation] – while taking into account the specific requirements of Saudi Arabia,” Mr Maiman said.

Analysts said the relatively small size of the sovereign fund’s initial capital reflected Riyadh’s conservatism but was also a result of the backlash sovereign wealth funds had generated as other Arab and Asian states used state investment vehicles to acquire assets in the west.