Gulf to focus on global stability

06 November 2008
Despite investing in Barclays and Credit Suisse, further bank rescues by Middle East funds are unlikely as they turn their attentions to an IMF bid to help countries suffering from the credit crisis.

Just when the Gulf’s sovereign wealth funds seemed to have had enough of investing in banks, after seeing previous investments fall in value, they have returned to the market in recent weeks.

On 31 October, the UK’s Barclays announced a £7.05bn ($11.15bn) fundraising dominated by Qatari and Abu Dhabi investors. It came just two weeks after Credit Suisse said it had raised CHF10.4bn ($8.9bn) from a small group of investors, principally Qatar Holding, part of the Qatar Investment Authority (QIA).

The motivation for both banks was the need to raise more capital to meet fresh targets set by central banks in response to the credit crunch. Other banks have been forced to turn to their governments to raise the funds required.

But rather than marking a renewed interest in financial institutions among sovereign wealth funds, observers say such deals are likely to be the exception in the future.

Helping hand

Simon Johnson, a senior fellow at the Washington-based Peterson Institute for International Economics, expects them to turn their attention to a proposed new International Monetary Fund (IMF) scheme to help countries struggling with the credit crisis.

“They will be involved in recapitalisation through public rather than private routes,” he says, suggesting they could be willing to provide $50bn for such a fund.

That would be welcomed by UK Prime Minister Gordon Brown, who began a four-day tour of Gulf states on 1 November, partly to raise contributions for the IMF fund. “The Saudis and other countries in the Gulf are very important. They are the countries with oil revenues, they are the countries that need to help,” he said during his first stop in Riyadh,

Any such investments by Gulf states would be positive for their public profiles and could help ease access to other deals in the future. The funds have been trying hard to improve their image over recent months and insist that they represent a positive force as opposed to a threat.

“Sovereign wealth funds as long-term investors have a positive influence as we are able to hold on to investments for a longer term than other [investors],” says a source at one large Gulf fund. “We add to the stability of the system.”

In a further effort to assuage concerns, 26 countries have agreed to an IMF-backed code of conduct for their sovereign wealth funds. The Santiago Principles will necessitate a change for some, including public disclosure of their investment strategies and the sources of their funding.

The working group that drew up these principles included representatives from Bahrain, Kuwait, Qatar and the UAE. “It sends a very positive signal,” says Johnson, a former chief economist at the IMF. “They co-operated a lot and were not at all difficult.

Given the involvement of Qatar and the UAE, the measures will affect the investors in Barclays and Credit Suisse. The cost of those deals to the banks also highlights the tough negotiating position the funds are taking.

Of the £7.05bn being raised by Barclays, £3bn of it will pay an annual coupon of 14 per cent to Qatar Holding and Sheikh Mansour Bin Zayed Al-Nahyan, a member of the Abu Dhabi royal family.

Meanwhile, CHF1.7bn of the money that Credit Suisse raised will pay an annual dividend of up to 11 per cent.

Previous investments in banks carried interest rates of 9-11 per cent, so Barclays is paying a relatively high price. But while expensive, it does mean it will be free from the more onerous conditions that would have come if it had accessed funds from the UK Treasury.

IMF investment

The UK government’s motivation in providing funds is to prevent a collapse of one of its banks, similar to that of Lehman Brothers in September. The risk of such failures has also made the sovereign wealth funds wary of bank deals.

Between March 2007 and April 2008 the funds invested some $45bn in banks such as Citigroup, Merrill Lynch and UBS, according to the SWF Institute, a US-based research body. However, many of them are sitting on large losses, as banks’ share prices have fallen.

The funds say they are seeking profits over years rather than months. “Anyone trying to judge the quality of the investments is doing so prematurely,” says the Gulf fund source.

Any investment in an IMF fund will be done on a rather different basis, and is likely to involve offering a line of credit to the IMF, rather than providing the money upfront. Once that has been agreed, the funds will need to look to other deals, but there are few banks left that need capitalisation.

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