Gulf States: If Western Countries Won't Take Our Money, We'll Invest in the East

As politically motivated restrictions on investments by oil-rich countries intensify in the West, the sovereign wealth funds (SWFs) of the Gulf countries could opt to invest in Asia and other emerging markets despite attractive valuations in the slowing U.S and European markets.

At this year's World Economic Forum in Davos, the United Arab Emirates and a few other countries sought to allay Western fears by stressing that the funds were strictly commercial and not political threats.

Sultan Ahmad bin Sulayem, Chairman of the Dubai World holding company, warned that Gulf funds could stop investing in developed markets if their motives were continuously questioned. "There is the policy of these government fund managers to go where they are welcome. If [rich nations] say 'we don't want your money', fine. We will invest in China and India. They all want investment."

Dubai International Financial Centre (DIFC) Governor Omar bin Sulaiman also voiced a similar opinion in November. "If you need foreign direct investment [FDI], you need to be welcoming, not scaring investors off. Talk about the SWFs is creating a lot of sensitivity, even for private investors. They are already looking elsewhere to hedge their positions."

Sulaiman added that Borse Dubai, a government unit partly owned by the DIFC, was likely to invest in an Asian exchange. "It's only logical... It's a matter of when rather than whether we will."

Reflecting this sentiment -- which also indicates the economic, not political, leanings of Gulf SWFs -- Dubai International Capital (DIC) purchased a "substantial" stake in Sony in November, which reports estimate to be worth between 500 million and one billion U.S. dollars.

In fact, when DIC was launched in 2004, its strategy was to channel a third of its overseas investments to Asia. So far, the DIC is estimated to have invested about 2 billion U.S. dollars in Asia.

Explaining Western governments' concerns that major shifts in international finance could involve power politics, Eckart Woertz of the Gulf Research Center in Dubai told IPS, "They are particularly worried about the possibility of the SWFs buying up Western assets, putting them at the disposal of potentially 'unfriendly' regimes."

The SWFs have existed for a long time, but attracted attention recently because they have grown bigger than the world of hedge funds and other private institutional investors. They are owned by governments of countries that have substantial current account surpluses -- mainly industrializing countries in Asia and oil exporters -- and are used to acquire assets abroad that have potential for better returns than shares and bonds.

Currently, more than 20 countries have these funds. While funds from the Gulf countries are estimated at 1.6 trillion U.S. dollars, the leader is the Abu Dhabi Investment Authority (ADIA) with about 900 billion U.S. dollars. Singapore's Temasek and the official reserves of China and Russia, which are being moved from central banks to the SWFs, are big players too.

The U.S., in particular, feels that large amounts of its securities in the hands of those who are not necessarily allies is "financially imprudent," as a sell-off by such nations could lead to falling bond prices and rising interest rates, thus hurting its economy.

Such attitudes have encouraged South-South economic cooperation through mechanisms aimed at diversifying trade and investment. According to a report by the United Nations Conference on Trade and Development (UNCTAD), trade volume fuelled by cooperation among developing countries tripled to reach 2 trillion U.S. dollars between 1996 and 2006.

Further, partly as a result of the fallout of the September 11 attacks in the U.S. in 2001 and partly due to the surge in Asian economies, the East is now the Gulf's market of choice.