The vital role of Sovereign Wealth Funds in the GCC's future (page 1 of 3)

Since oil prices have been volatile since the early 1970's, the GCC countries have historically used the money as a buffer against changes in commodity prices, to balance their budgets, to maintain economic stability and to create intergenerational savings.

The investments made to achieve these goals needed to be liquid and safe. The return on those investments was less relevant than preservation of principal.

Evolving role of SWFs

Over the past decade, however, the role of SWFs has been evolving. "With globalization of international markets, SWFs worldwide are taking a more proactive investment role that aims to complement their countries' socioeconomic strategies," stated Richard Shediac, a partner at Booz & Company.

For example, SWFs of countries like Malaysia and Singapore have very active roles in socioeconomic development in local and regional markets. One of the key principles for Malaysia's Khazanah Nasional Berhad is growth through investment in equities that improve the productivity and skills of the people.

These funds seek specific knowledge transfer through investments in private equities of technology and startup companies and in R&D investments and joint ventures with multinational corporations (MNCs). In Singapore, Temasek Holdings invested $3.2bn in the technology industry in 2007 in addition to other investments in life sciences and telecommunications.

Temasek invests in established and startup companies in Silicon Valley that provide the United States with high-tech products.

"In the GCC region, the UAE attempts to enhance socioeconomic development through strategic investments," explained Hatem Samman, the Director and Lead Economist at the Booz & Company Ideation Center. Dubai International Capital (DIC) invests in both established and developing primary markets, and its potential contribution to economic growth can go beyond investment returns.

For example, its anchor investments in ART Marine Holdings provide it with the opportunity to develop the boating and marina sectors in the region. Other anchor investments of the DIC are in aerospace manufacturing services, airports, and education. This provides a means to "import" aerospace technology and form international partnerships that contribute to worldwide growth. Similarly, Mubadala Development Company's 5 percent stake in Italian sports car maker Ferrari points to an increasingly strategic investment mind-set.

The Ferrari investment brings with it the potential for increased tourism in Abu Dhabi as the Ferrari theme park nears completion in Yas Island. More recently, Mubadala's $8 billion R&D partnership with General Electric provides access to commercial finance, healthcare, and clean energy technology, as well as aircraft maintenance expertise and other beneficial exchanges essential for the UAE's socioeconomic development.

Mounting calls for SWFs regulation

With the rise in their number and financial reach, there has been a mounting call for the regulations of SWFs in recipient countries—led by the United States—who are voicing concerns about the possible negative effects foreign investments can have on their markets and foreign investor's control over their strategic industries.

"The April 2007 $7.5bn investment of the ADIA in Citigroup, for example, raised concerns about how much influence such funds can wield on strategic businesses like banks, and their subsequent potential effects on the global economy," said Samman.