UAE federation launches first sovereign wealth fund

16 November 2007

Investment Authority's profits will be reinvested in the federal budget.

The UAE government has created its first federal sovereign wealth fund to invest surplus revenues from the country’s budget. However, it is still unclear how much money the fund, to be called the Emirates Investment Authority (EIA), will be able to draw on. Profits made by the fund will be reinvested into the UAE’s federal budget.

However, questions have been raised over how the fund will raise the money it needs to make investments, given that the federal government generally runs a balanced budget. Any surpluses have traditionally been controlled by the sovereign wealth funds of the individual emirates.

The UAE federal budget is rather small compared with the overall consolidated fiscal position of the country and it tends to be close to balance from year to year,” says Tristan Cooper, senior sovereign analyst at ratings agency Moody’s Investors Service.

“Unless significant amounts of extra revenue are injected into the federal budget by individual emirates, or assets are transferred from existing funds such as the Abu Dhabi Investment Authority, it is difficult to see how the Emirates Investment Authority will build up substantial amounts of cash for investment over the short to medium term.”

The creation of the fund could point towards greater co-operation between the emirates. It will soon begin a process of drawing up an investment strategy for its assets.

According to investment bank Merrill Lynch, sovereign wealth funds are expected to grow by $1.2trillion a year for the next five years, in terms of the value of assets held. As sovereign wealth funds hunt for global assets, more are beginning to invest in commodities. This is part of a strategy to diversify their investments and as a hedge against the falling value of the dollar.

Bankers say they are seeing increasing flows of Middle Eastern and Asian investment into commodities indices. Until recently, the investment strategy of most Middle East sovereign wealth funds was to concentrate on low-risk instruments such as bonds. However, they are moving towards private equity-style deals, real estate and hedge funds.

Commodity investments are already thought to account for a significant proportion of profits for some sovereign wealth funds, including the Abu Dhabi Investment Authority, which is the world’s biggest fund, with $875bn in reserves.

The growing power of sovereign wealth funds has created pressure from the Group of Seven industrialised nations to make them more accountable and transparent in their actions. In particular, the G7 is keen to ensure that investment decisions are seen to be taken on financial grounds rather than being motivated by political considerations.

Table: Gulf sovereign wealth funds

CountryFundAssets ($bn)Year established
UAEAbu Dhabi Investment Authority8751976
Saudi ArabiaVarious government agencies300na
KuwaitKuwait Investment Authority701953
QatarQatar Investment Authority402000
IranOil Stabilisation Fund131999
UAEDubai International Capital72004
Source: MEED, Morgan Stanley

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