Arab investment funds have faced scrutiny over a relative lack of investment in their home region for decades, with the sovereign wealth funds of oil-rich states preferring global capital markets to more local options.
Such funds have substantial international assets – estimated at around $3tn – in a range of markets, from stocks to debt holdings and real estate, and over a range of maturities. The destinations found by this capital tend to feature transparent criteria and clearly established rules and regulations governing the investments.
For alternatives in the Arab world to fully compete, similar governance standards are needed. Reform in the region could help bring that about. In this article, Al Majalla explains how that could happen after a look at how sovereign wealth funds began and then developed in the Middle East.
Oil money on international markets
Oil-producing countries in the Gulf began establishing their sovereign wealth funds in 1953 when the Kuwaiti government decided to open an investment office in London.
Other Gulf countries followed over the next decades, including Saudi Arabia, the United Arab Emirates, Qatar, Oman, and Bahrain. The oil shock of 1974 accelerated the trend.
Back then, it was impossible to invest surplus funds in some national economies. There was limited capacity, a lack of promising investment opportunities, and an absence of transparent financial markets that could help the investing nations calculate risk, measure liquidity and properly measure the prospects for securing favourable returns.
There were lingering problems in Arab countries that were candidates for investment.
Alongside a lack of regulation and legal oversight to provide security for incoming capital, currency volatility from unstable exchange rates made it even more difficult to get a clear sense of the costs and risks involved, meaning the price of deploying capital there was unclear.