Plundering SWFs is short-sighted

20 October 2015

Accessing sovereign wealth funds prioritises today’s spending over future needs

It is no surprise that after seeing their oil revenues slashed in 2015, GCC countries have turned to their sovereign wealth funds (SWFs) for financial support.

SWFs are preparing to transfer funds back to governments by adjusting asset portfolios away from long-term equity investments to more liquid, but lower-return assets. This is causing suffering for financial services providers and contributing to the weakness of financial markets.

For countries such as Kuwait, which have SWFs with stabilisation mandates, any withdrawals are simply the purpose of the fund – to smooth the fiscal landing when oil prices are low.

Small population, high income countries may also get away with minor withdrawals compared to the size of the funds, in the hundreds of billions of dollars.

Saudi Arabia is a more of a cause for concern. While it has set up funds to invest oil wealth in the domestic economy, the largest being the Public Investment Fund, it has lagged behind other GCC countries in creating structured stabilisation or international investment and pension funds.

This means that Saudi Arabian Monetary Agency (Sama) reserves can be accessed freely, to the tune of $74bn in the last year. At current rates, the reserves will be depleted in less than 10 years.

Drawing down SWFs is prioritising today’s needs over the future, when oil revenues could tail off due to exhausted reserves or fundamental changes in global demand for oil. GCC governments are currently prioritising investment in diversification and social infrastructure today to survive this expected shift.

The balance between necessary and discretionary spending, and the proportion of the funding that should come from SWFs is difficult. But every withdrawal now exponentially affects the size of SWFs in 30 or 50 years, when they could be truly needed.

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