State-owned funds in the Middle East and North Africa manage almost $1 trillion in assets. However, as violence erupts across the Arab world, the region's governments are dipping into this money to appease angry protestors. Saudi Arabia has handed out about $37 billion, while Oman, Bahrain, Libya and Kuwait have boosted domestic spending up to 4 percent of GDP.
The result is the sovereign wealth funds are less able to invest overseas — something which, according to Efraim Chalamish, a SWF expert and adjunct professor at New York University, negatively impacts both global markets and regional economies alike. He says pump-priming, or projects to help local unemployment could add to the debt in many of these economies, putting a strain on national balance sheets and risking sovereign credit ratings.
It's also causing concern at the international companies in which these funds invest, particularly by the Libyan Investment Authority, which has been frozen by Western powers. Libya invested dramatically over the last couple of years, mainly in Italian companies. Chalamish says most of their stakes are minority stakes, so their ability to influence the board room is limited.
The question is, until the dust settles, who will fill the gap? One new player is the Israeli government, which recently announced the establishment of a sovereign fund based on gas exploration revenues. Chalamish sees great opportunity for new funds to come into the game and introduce their financial resources. There have been a couple of new funds in Africa, such as in Nigeria, that would like to invest in Western markets.
One positive thing that may come out of the Middle Eastern democracy process is that these infamously opaque funds may become more transparent. Kuwait’s fund actually prohibits public disclosure of its assets — something the modern global investor can no longer abide.