UAE central bank issues sovereign wealth fund warning

01 September 2008

Sovereign wealth funds will avoid markets where new regulations are applied on their activities, said Sultan al-Suwaidi, Central Bank of the UAE governor, at the Japan Centre for Co-operation in the Middle East (JCCME) conference in Dubai on 28 August.

Al-Suwaidi also said that UAE inflation will moderate, hinted that the 2010 deadline for a single GCC currency may be missed and that there would be no currency revaluation or shift away from the dollar peg.

He was speaking as the IMF’s international working group on sovereign wealth funds finalises voluntary guidelines for the funds. They should be completed by October.

Referring to the sovereign wealth fund guidelines, Al-Suwaidi said wealth funds are influenced by the impact of the US’ Patriot Act, which was approved in 2004.

“At the time that the Patriot Act [was passed], American officials said this law would not impact genuine financial transfers,” he said. “The fact is that, through this law, many new questions were asked and new forms were required. The simple process of transferring money from the region was complicated and this made people move their transfers in other directions. The Patriot Act, in practical terms, acted as an impediment and block on flows of private wealth to the US and other countries that implemented similar processes.”

Al-Suwaidi said the proposed new standards for sovereign wealth funds will have a similar effect.

"I think we shall see more questions being asked and more forms having to be filled in, and more disclosure and transparency being demanded,” he said.

“Sovereign wealth funds will come to the conclusion that it is time to shift strategy. We shall see a gradual tightening of capital flows from sovereign wealth fund countries.

"They will direct their major transactions into newly-created companies in the region. Sovereign wealth funds will be looking closer to home to invest."

The UAE has several financial institutions that have invested in Western companies, including the Abu Dhabi Investment Authority, which has foreign assets estimated at $875bn, Mubadala Development Company, Dubai Investment Capital, Dubai Investment Group and Istithmar.

Al-Suwaidi said that so long as oil prices average $60-80 a barrel, “the UAE’s economy and the larger regional economy will be in good shape.”

He suggested that domestic and international factors will start to moderate inflation in the UAE.

“We feel that the many megaprojects in the UAE will mean that rents will at least stabilise,” said Al-Suwaidi. “Globally, higher food prices will attract farmers to grow more and this will neutralise inflation in food prices in the medium term.”

Al-Suwaidi said that the GCC is continuing with its plan for monetary and currency union, but hinted that the 2010 deadline for a single currency might be missed.

“Monetary union and a single currency are strategic objectives for all GCC countries,” he said. “Even if it takes a longer time to achieve, there will be no drastic deviation from its objective.”

Al-Suwaidi said delinking from the US dollar and revaluation were off the policy agenda.

“Now there is greater reason to stay with the dollar because the dollar is getting stronger,” he said. “I don’t think you will see any going away from the peg in the near future and no revaluation. It is not anticipated in this period.”

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