Wednesday, January 23, 2008

Saudi Arabia Plans Its First Sovereign Wealth Fund (Update2)

By Will McSheehy

Jan. 23 (Bloomberg) -- Saudi Arabia, the world's biggest oil producer, plans to start its first sovereign wealth fund with about $6 billion, channeling surplus crude-oil revenue into investments in foreign companies.

``The Ministry of Finance is looking into a new fund,'' Muhammad al-Jasser, vice governor of the Saudi Arabian Monetary Agency, said today in an interview at the World Economic Forum in Davos, Switzerland. ``It will probably mostly invest in equities.''

Fueled by record oil prices and rising currency reserves, sovereign fund assets of $3 trillion may rise fourfold to $12 trillion by 2015, equal to the capitalization of the Standard & Poor's 500 Index, according to Morgan Stanley estimates. Assets will climb to $28 trillion by 2022, more than double the size of the U.S. economy, the New York-based securities firm predicts.

Gulf investors almost doubled overseas acquisitions to $64 billion last year oil rose above $90 a barrel, helping the region's governments earn more than $1.3 billion a day from crude sales, data compiled by Bloomberg show.

Citigroup Inc. got a $7.5 billion cash infusion from Abu Dhabi's sovereign wealth fund in November before securing another $14.5 billion this month from investors including the governments of Kuwait, Singapore and Saudi billionaire Prince Alwaleed bin Talal. Merrill Lynch & Co. said Jan. 16 that Kuwait's sovereign fund is among investors who committed a combined $6.6 billion as it replenished capital eroded by subprime-mortgage losses.


While smaller neighbors such as Abu Dhabi and Kuwait have set aside surpluses in sovereign wealth funds for decades, Saudi Arabia has spent billions paying off debt and building roads, power and water desalination plants for its 27 million people. Government debt will fall to 267 billion riyals ($71 billion) at the end of 2008, or 19 percent of gross domestic product, from 28 percent last year, the Ministry of Finance said in December.

``Domestic debt was 100 percent of GDP in 1999,'' Caroline Grady, an economist for Deutsche Bank AG, said in a phone interview from London. ``The Saudis will generate a capital surplus of $150 billion this year, up from $115 billion in 2007, and will have to find ways to put that money to work.''

Finance ministers and central bankers from the Group of Seven industrialized nations in October called for rules to guide international investments of government-run funds, seeking to head off a protectionist reaction to their perceived lack of transparency.

Fear of Corruption

U.S. Securities and Exchange Commission Chairman Christopher Cox said in December that the growth of state-run investment funds may lead to an increase in political corruption because governments might abuse the funds' leverage over markets and companies.

Saudi Arabia will make a modest start to its sovereign wealth pool, which may be managed by the Ministry of Finance's Public Investment Fund, because of concern that too much money will trigger a backlash, according to al-Jasser.

``There's too much populist bias now against emerging market sovereign wealth funds,'' he said.

The Saudi monetary agency, known as SAMA, is the nation's central bank and manages the kingdom's currency reserves. The Public Investment Fund provides loans to ventures that will develop the Saudi economy, according to its Web site.

Oil rose to a record $100.09 a barrel on Jan. 3 and sells for almost 60 percent more than a year ago.

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