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Research Report

Managing Arab Sovereign Wealth in Turbulent Times—and Beyond

Sven Behrendt
Bassma Kodmani
Copyright Date: Apr. 1, 2009
Pages: 56
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Table of Contents

  1. (pp. 1-2)

    The debate about the role that sovereign wealth funds (SWFs) from Arab and other emerging economies play in international financial markets has been a highly cyclical one. Only twelve months ago, the Western public questioned the deeper rationales for sovereign investments in what were perceived to be strategic assets of Western economies. Commentators argued that these investments could harm the long-term competitiveness and national security of Western economies.

    Today, the Arab world realizes that much of its sovereign wealth is exposed to the financial market crisis and that, as a result, the value of those assets in which SWFs invested...

  2. (pp. 3-8)
    Sven Behrendt

    The rise of sovereign wealth funds (SWFs)—government-controlled pools of assets designed to engage primarily in foreign investment—and the transformation of SWFs into relevant players in the global economy have been driving an intense debate for the past two years in Europe and the United States about adequate policy responses. For the European and the American publics, SWFs from developing economies have been a stark reminder of the changing balance of power within the geo-economic system favoring the East at the expense of the West. SWFs were assumed to be diluting economic competitiveness or threatening the national security of...

  3. (pp. 9-12)
    Rami G. Khouri

    The role of sovereign wealth funds (SWFs) in assuring the future well-being of the energy-rich Arab states—and their neighbors and trading partners, by extension—has been highlighted by the impact of the current global financial and economic crisis. These accumulated oil and gas income surpluses are already being used by some Arab states to offset the sharp economic declines triggered by the global crisis, as all the major income sources of the region have declined simultaneously. Oil and gas export income is down by nearly two thirds, income from funds invested abroad and at home is down by at...

  4. (pp. 13-19)
    Hazem El-Beblawi

    With the advent of the first oil price shock (1973–1974), a new term, “petrodollars,” emerged to denote the Arab financial wealth placed in the major financial markets. Now, more than three decades later, the new term “sovereign wealth funds” (SWFs) has been coined to refer to the same essential phenomenon.

    In both cases, these government-owned funds attracted much attention and were subject to heated debate in the media and elsewhere. The declared objective of the debate in 1973–1974 was to ensure the “recycling” of petrodollars to the financial markets with minimum disturbance, while today the debate has become...

  5. (pp. 20-27)
    Ibrahim A. Warde

    Sovereign wealth funds (SWFs) burst upon the global scene, seemingly out of nowhere, in late 2007 when they acquired in just a few months more than $60 billion worth of shares in major global financial institutions. In the fad-driven world of finance, SWFs were the new stars. Latecomers such as Russia and Saudi Arabia rushed to create their own SWFs—in essence redirecting part of their foreign exchange reserves into a private equity arm that would seek high returns on the international equity markets.

    Much of the debate has focused on the concerns, the fears, and the hopes of recipient...

  6. (pp. 28-32)
    Atif Kubursi

    It may be convenient to dismiss the current international financial and economic crisis as another blip in the financial markets. The seriousness, depth, and uniqueness of the crisis, however, suggest that this may not be the case. Several distinguishing features make this crisis different from many preceding difficulties, suggesting that its effects are going to be more profound and that its consequences may last longer than any of the previous minor crises in the 1980s and 1990s.1 There are also early indications that this crisis, unlike many others before it, may finally shake the present economic structures, institutions, and orthodoxy...

  7. (pp. 33-36)
    Ghazi Hidouci

    The current global financial and economic turmoil requires the Arab world to fundamentally rethink the strategic orientation of its investments with the objective of making Arab economies more resilient against the currents of the global economy. Arab states should devise a way to more rigorously diversify their investments both geographically and through different industrial sectors. They should also enhance their thinking about investment strategies that put the economic interests of the Arab region first and promote its economic development. They also need to look at how the Arab world chooses to regulate the vehicles through which these investments are realized...

  8. (pp. 37-42)
    Samir Aita

    As in old feudal societies, everyone is marked by his or her birth conditions in the financial markets of capitalism. And thus this is the case for sovereign wealth funds (SWFs). No one can choose how they were born.

    Considering SWFs first involves the question of the “nature” of public money in hard currencies—“public,” in the sense that SWFs’ resources come from the surpluses of central banks, which are state institutions, from a country’s foreign trade and transfers. This money thus belongs to the citizens of this country, and it is managed by a state-owned institution that should be...

  9. (pp. 43-48)
    Bassma Kodmani

    The image of Arab public finance as it transpires from comments in the Arab media and public debate is first and foremost one of opacity, which in turn inspires a host of vaguely formulated suspicions—punctuated with periodic revelations that tend most often to confirm several suspicions: Arab public finances suffer from imprudent or unwise management; the boundaries between public and private wealth are blurred at best; and investment decisions are often motivated by political and security considerations (money that buys the regimes foreign protection). In this regard, sovereign wealth funds (SWFs) epitomize the nontransparent and non-accountable management of public finance...