Friday, January 16, 2009

Reversal of Fortune

As recently as June 2008 the Council of Foreign Relations was reporting Persian Gulf Nations' Bulging Coffers Bring 'Wrenching Transformation'. Since that time of course oil prices have collapsed, and so too have the value of assets in sovereign wealth funds.

The council this month issued a new report by Brad Setzer and Rachel Ziemba, entitled GCC Sovereign Funds: Reversal of Fortune. They estimate the Abu Dhabi Investment Authority lost 40 percent of its value over the course of 2008.

Thanks to Gulf News for drawing the paper to my attention. Setzer and Ziemba do not do a comparable analysis for Dubai, and Gulf News makes no reference to what is said about Dubai. What Setzer and Ziemba say is,
Dubai’s financial difficulties are by now well known: Dubai’s external debts exceed its external assets. With roughly $20 billion of its roughly $80 billion in foreign debt coming due in 2009, Dubai will likely require a significant loan from Abu Dhabi—particularly as it can no longer finance its current account deficit by borrowing from the rest of the world.
Dubai in particular currently faces a financing squeeze. Its government and ruling family-sponsored firms have $80 billion in debts. Investment vehicles like Istithmar Global and DIC have invested abroad—but their external investments are illiquid and likely have suffered significant losses recently.31 Furthermore, these vehicles were funded from the proceeds of Dubai’s other investments, including the domestic property market, where prices are falling. There is little doubt that “Dubai Inc”—defined as entities owned by the government and ruling family—has more external liabilities than external assets, and far more short-term external debts than liquid external assets. Moreover, Dubai has relied on a roughly $20 billion annual increase in its external debt to cover an ongoing current account deficit: it consequently needs more financing than implied by the amount of its maturing external debt.



Anonymous Dubai Entrepreneur said...

It's an interesting read, though I don't see it offering any groundbreaking new information. I particularly liked this:

An important risk management lesson is already clear: if
your export revenue stream is correlated with global growth, not all of your wealth should be invested in assets that are also likely to be highly correlated with global growth. For funds with a stabilization mission, the value of an asset in bad times matters far more than its value in good times.

How can you invest in things that don't correlate with global growth? The whole world was in growth mode. Maybe I'm just a bit thick?

10:31 PM  
Anonymous Anonymous said...

it sounds like a complicated way of saying 1-'dont put all your eggs in one basket' and 2-'its good to have assets with low likelyhood of growth but also low likelyhood of loss'

maybe something like a gold reserve is in order, but I imagine UAE already has that in place

what else fits this category ? low gain + low risk, something boring, stable...

11:26 PM  
Blogger Tawfik Diab said...

I think the reference is to bonds, t-bills and other safe bets.

1:45 PM  
Anonymous Benjamin Graham said...

Also certain "recession-proof" industries such as energy or healthcare.

2:30 AM  

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