Will Western SWF Protectionism Create Eastern Opportunities?

Ashby Monk

This post is coming to you live from a Boston-NYC Acela Amtrak train. I have to say, I’m happy to see that Amtrak has finally installed wireless Internet on their trains (albeit with an overly strict filter that blocks many good news sources in the developing world). In my view, this officially makes train travel on the Eastern sea board preferable to air travel. The convenience is simply unbeatable.

Anyway, enough about trains and planes; I have some interesting SWF news to report this morning. The UAE central bank governor Sultan Bin Nasser Al Suwaidi gave (what sounds like) a pretty candid speech about Abu Dhabi’s SWFs at the MENASA Forum at the Dubai International Financial Centre last night.

In his view, SWFs in the MENASA region (i.e Middle East, North Africa and South Asia), will take an increasingly passive investment approach in Western markets and redirect their active and strategic investment strategies to emerging markets and, in particular, nearby regions.

Why? In part, this redirection will be based on the desire to maintain social order, peace and stability in the region. However, Al Suwaidi also suggests that this new policy will be driven by increasingly protectionist behavior in the West:

“Another reason that makes me think that SWFs from our region might change the flow of their direct investments is that once we see the proposed regulations regarding sovereign wealth funds in the industrialized advanced economies start being implemented, more questions will be asked and more forms will become necessary to fill and more disclosure and transparency will be demanded. This behavior will signal that there is no strong need for foreign capital in the West, and that the political mood has changed…Therefore, we might see gradual tightening of the scrutiny on capital flows from SWF countries at one stage, especially funds that are destined for direct investment in certain companies…Faced with all this nonsense, SWFs will certainly come to the conclusion that it is time to change strategy. This could make SWFs avoid direct investment in certain companies, or even avoid direct investment in all companies, and become more of passive investment vehicles in the West.”

I don’t think I would call increasing transparency and disclosure requirements “nonsense”. But, whatever your views on the subject, it is clear that Al Suwaidi is pessimistic about Western markets’ willingness to accept SWF investments without some new restrictions or increased regulation.

Interestingly, Al Suwaidi doesn’t seem to be all that broken up about this. In fact, it sounds to me like he sees this as a possible boon for the MENASA region:

“…restrictions put in place in many countries, including the G7 countries, might open a window of opportunity for countries in our region or the wider area.”

This reminds me of something my dad would say: ‘There are no problems, there are only opportunities.’ And, to a certain extent, Al Suwaidi is correct in thinking this way. To be sure, Western protectionism will undoubtedly create new opportunities in other jurisdictions (including his own).

However, that doesn’t mean that these new investment opportunities will offer SWFs similar or better risk adjusted returns. The investment climates in MENASA can be challenging. Moreover, SWFs are in many instances designed to prevent Dutch disease, which presumes that the assets will not be invested domestically. If SWFs redirect their capital towards local markets, this will mute SWFs’ impact on this phenomenon.

Anyway, my opinion is that Al Suwaidi is being overly optimistic here; Western protectionism may indeed create new Eastern opportunities, but these new opportunities will have plenty of problems of their own. In particular, local or domestic investments typically require rigorously sound governance procedures to ensure that money is not wasted on politically oriented investing. And, in my view, this is a problem that could be more difficult to resolve than simply filling out some forms or increasing transparency…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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