Shrinking Sovereign Wealth Funds Are Ducking Davos

Davos Leaders Sum Up Oil's Plunging Price
  • Crude plunge forces commodity-rich countries to sell assets
  • Saudi Arabia reserves have dropped $100 billion since mid-2015

In the days of the commodity boom a few years ago, oil-rich nations and their petrodollar wealth were the darlings of the World Economic Forum.

A panel that included Kuwaiti, Saudi and Russian sovereign-wealth fund officials was one of the hottest tickets at Davos in January 2008, just before oil prices surged to $150 a barrel. It was a time when crude producers were accumulating billions of dollars in debt and equities, plus real estate, sports teams and other trophy assets. So influential were the fund managers that a group of bank chiefs told them behind closed doors at the Swiss resort to become more transparent, or risk antagonizing American legislators.

Now, with oil below $30 a barrel, the situation has reversed. Instead of buying U.S. Treasuries, British department stores and French soccer teams, producing countries are selling, helping depress already-spooked markets. Only a handful of wealth-fund heads are scheduled to appear at the 2016 annual forum of the rich and powerful. And not one panel is devoted to the topic.

"They are selling, they are selling a lot," said Paolo Scaroni, deputy chairman at Rothschild & Sons and a former head of Italy’s largest oil company, ENI SpA. "The selloff will continue in 2016 because oil-rich countries need to finance" their spending.

Across the Middle East, central Asia, Africa and Latin America, governments are tapping the reserves accumulated during the good times. Petrodollars are pouring out of a myriad of vehicles: sovereign wealth funds, stabilization funds, development funds and the foreign-exchange reserves sitting in central banks.

To be sure, petrodollar-stocked government funds are still an influential force in global finance, accounting for about 5 percent to 10 percent of global assets. Nor is the selling unexpected: Stabilization funds, for instance, are designed to grow during the boom years and help governments keep up spending during the lean times.

Yet the magnitude of the declines has surprised many who help commodity countries manage their wealth. Saudi Arabia, Qatar and Kuwait "are all withdrawing money," said Alberto Gallo, head of macro credit research at Royal Bank of Scotland Plc. "Petrodollars are becoming petropennies."

Gallo has a point: the gross flow of petrodollars into the global economy last year fell to as little as $200 billion, down from nearly $800 billion in 2012, according to the bank.

Market Sentiment

While wealth fund assets aren’t big enough to move markets alone, they can have an impact on market sentiment. Royal Bank of Scotland said in a note to clients this month that the selloff is potentially reducing "the demand for fixed-income assets, which was a significant portion of major oil exporting sovereign wealth funds’ growing investments over the past decade."

Producers are exacerbating the global market rout, according to David Zervos, chief market strategist at New York-based Jefferies LLC. At the current crude price, commodities countries have "entered the phase where the excess savings glut is being replaced with an excess selling glut," he said in a note to clients this week.

In Chile, the state-owned stabilization fund has seen its assets fall to $14 billion at the end of last year, from a peak of $15.5 billion in 2014. The foreign-exchange reserves of Azerbaijan have fallen to $7.3 billion, less than half the $16.5 billion of mid-2014. Nigeria hasn’t tapped its small sovereign wealth fund -- but the country has burned through the reserves controlled by the central bank. They’ve fallen to $28.7 billion, down from a peak of $48 billion in mid-2013.

Losing Money

The funds’ chiefs are under pressure. The head of the sovereign wealth fund of Kazakhstan was fired earlier this month after he told The Wall Street Journal the vehicle will run out of money in seven years as oil prices cut its revenue. Algeria, one of the world’s top natural-gas exporters, has over the last year burned through the reserves it took nearly four years to accumulate, according to data compiled by Bloomberg.

Saudi Arabia, the world’s largest oil producer, is a prime example of the swiftness and magnitude of the reversal: its foreign-exchange reserves have fallen more than $100 billion since mid-2015, to $635 billion, according to data from the Saudi Arabian Monetary Agency. The drop is larger than in 2008-2009, during the global financial crisis.

Riyadh managed most of these petrodollars as foreign exchange reserves under the control of the central bank. The kingdom has in the past suggested it may create a sovereign wealth fund similar to those in neighboring Kuwait and Qatar to manage a portion of the money. Reuters reported last week that the nation is seeking proposals from investment banks and consultants.

Saudi reserves and oil prices follow the same path
Saudi reserves and oil prices follow the same path

The retrenchment is uneven. The wealth funds of other oil countries such as Kuwait, United Arab Emirates and Qatar show little sign of shrinking, with their funds still buying assets. The sovereign wealth fund of Norway has stopped growing, but hasn’t seen a drop in assets. The fund, the world’s largest, had about 7.02 trillion kroner ($800 billion) at the end of September 2015, little changed from the beginning of the year.

Governments and managers of eight commodities-rich countries and their funds either declined to comment or didn’t reply to questions.

Few industries are more affected than asset management, whose bosses are heavily represented at Davos. A turnaround isn’t in view any time soon, said Martin Gilbert, chief executive of Aberdeen Asset Management Plc.

"What we do know though is, if the oil price remains low, we’re going to see more redemptions, I would say, from government institutions," Gilbert told investors in November. That month, Aberdeen reported $19.1 billion in net outflows in its fiscal fourth quarter as crude-exporting countries, among other investors, pulled out.

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