Monday, September 29, 2008

Home or Away: Where Will Sovereign Wealth Funds Invest in the Wake of the Credit Crisis?

Sources: Gulf Funds Poised to Pounce on US Assets, Financial Times; Qatar Fund Spurned Wall Street, Financial Times; Twice Shy Sovereign Funds Eye Home Markets, Reuters

There seems to be some debate as to how sovereign wealth funds (SWFs) in the Middle East will respond to the recent credit crisis. Some assert that SWFs in the Middle East, not unaffected by the credit crisis, will now turn their attention, and billions of petrodollars, to their home countries.

Although oil prices have experienced a five-fold increase since 2002, stocks in the Gulf, specifically, have plunged in recent weeks as fears of fallout from the credit crisis spreads. In addition, the UAE central bank opened up an emergency facility to prevent lending from seizing up. As a result of these spillover effects from the credit crisis and growing domestic social pressure, SWFs in the Gulf have claimed that they will now spend their money at home.

For example, a leading executive of Qatar’s SWF recently disclosed that he had rejected the chance to help recapitalize troubled Wall Street banks. However, people close to the Qatar Investment Authority suggest that it is likely to become more active in the US market when the US government’s bail-out of Wall Street is complete. Similarly, it is also reported that Arab SWFs are likely to seize upon distressed US assets after the US government bail-out plan eases the severe tensions in the financial markets. SWFs, especially in the Gulf, recognize that after a period of turmoil there will be a time when market opportunities are great, and at that point, they will likely be looking for opportunities to invest.

Discussion: If the government bail-out bill goes through, do you think that Arab SWFs will then begin to invest in the US economy? What if the bill doesn't go through? Do you think that the Gulf SWFs have a responsibility to put money into their own economies first?

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