News Roundup (6 February 2008): Temasek/Tui deal; No SWF for India?; Japan looking to thwart China; Saudis to be modest

Slow news week and I’m swamped at work so not much news analysis this week. I’m working on a few substantive pieces that I hope to get up as soon as things calm down, possibly this weekend.

Temasek merger with Tui

Germany doesn’t seem to have the same issues that the US does with allowing foreign entities to own transportation infrastructure (Financial Times):

Temasek, the sovereign wealth fund, and Germany’s Tui are in talks to merge their shipping operations in a deal that could see the Singaporean group take a stake of more than 20% in the Hanover-based travel group.

India not in a good position to start SWF

Echoing some of my own thoughts on the possibility of an Indian SWF (LiveMint):

Unlike established SWF rivals, India’s reserves are not a result of high commodity prices or excess savings. The country runs a current account deficit of 2% of gross domestic product (GDP). It needs to keep a fair amount of cash on hand just to ensure that trade keeps flowing.

More important, India is still very poor and crying out for investments. Investment accounts for 33% of GDP in India, far below China’s 43%.

The government recognizes the problem. Its latest Five-year Plan includes $492 billion of infrastructure spending, but it expects the private sector to come up with two-thirds of the cash. It would make sense to use any extra unneeded foreign currency to increase the government’s share.

In the long term, the returns on even modestly well thought out domestic investments will surpass those earned by a sovereign wealth fund.

Saudi reconsidering plans for SWF

Much larger country than the other commodity-based SWFs, much more political unrest, couple that with the Western backlash to SWFs, the risks of having a SWF seem to outweigh the rewards for Saudi. Especially, when they can at any point ‘appropriate’ a larger portion of any excess reserves to members of the royal family (Business Week):

Don’t expect Saudi Arabia to be a big player in the Sovereign Wealth Fund space. That was the message from a senior Saudi financial official I encountered recently. He said Saudi Arabia was considering a modest fund of around $6 billion.

Japan wants global SWF ‘rule book’ for protection from China

China Development Bank is attempting to ‘dominate and control’ the Japanese steel industry. Any global rules or regulations on SWFs are likely to be voluntary so I don’t think Japan would get much protection from those. It will be interesting to see how this plays out (Times Online):

“We need governments everywhere to come together to make rules that would prevent the disorder caused by these funds,” Hajime Bada, president of the Japan Iron and Steel Federation said. “Some countries are using their state funds to dominate certain industries.”

Japanese steelmakers see the impending bidding war for Rio as a crisis in the making, with potentially devastating iron ore pricing power going to BHP Billiton or, worse, to an aggressive Chinese player with the financial backing of the State. Caught between what it sees as “two worst-case scenarios”, the Japanese steel industry is pinning its hopes on government intervention.

News Roundup (30 January 2008): Citigroup chief says Chinese, Russian sovereign funds are top worry; Qatar buys stake in Credit Suisse; Indian SWF?

Concerns over China, Russia SWFs

At a recent finance conference in Brussels, Citigroup chairman Win Bischoff had a very interesting exchange with a German EU parliamentarian (Martketwatch):

“It is the China and Russia syndrome of sovereign wealth funds that is most concerning,” Bischoff told a finance conference in Brussels.

 

China and Russia are the main concern in the debate over whether to regulate state-backed investments, German member of the European parliament Wolf Klinz said. He said German companies are worried that China will steal its intellectual property and fear that Russian President Vladimir Putin wants to use investments “as a political instrument.”

 

“Yes, that’s a very good point,” Bischoff said, nodding at Klinz’s remarks.

Bischoff’s comments are particularly interesting because his firm has recently had several SWF investments approved by the Committee on Foreign Investment in the United States (CFIUS). I would imagine that he is familiar with what the US government’s main concerns have been with SWF investments.

Qatar likely to buy 5% stake in Credit Suisse worth $3 billion

The deal hasn’t been finalized and the stake could be slightly higher or lower. The interesting part of this deal is that Credit Suisse is not publicly recognized as having large subprime related losses, like all the other banks that recently received SWF capital infusions (Marketwatch):

Other than a $1.9 billion writedown related to the sub-prime crisis announced in November, the bank has so far emerged comparatively unscathed from the credit crunch. Sovereign wealth funds from Abu Dhabi, China, Dubai, Singapore and Kuwait have snapped up large stakes in banks such as Citigroup, Merrill Lynch, Morgan Stanley and UBS as they wilted under the weight of huge losses related to the implosion of the U.S. sub-prime mortgage industry.

See more on what the Qatar Invesmtent Authority has planned for the future in this interview chief executive Hamid Al-Thani gave to CNBC at the World Economic Forum last week (Dealbook).

India looking into creating a SWF

Indian government officials have SWF envy (The Economic Times):

While Sovereign Wealth Funds (SWF) owned by big Asian economies invest in assets the world over, Indian policymakers too are looking at whether the country needs to float such a fund. The finance ministry is planning to set up a committee to examine the pros and cons of an Indian sovereign wealth fund.

I’m not sure how much fiscal sense a SWF makes for India. The country is far less developed (infrastructure, education, basic health care, etc) than China and other export-oriented countries with SWFs, doesn’t have an abundance of natural resources, and is a democracy which means the government would likely be held accountable for the fund’s performance. How would the Indian government react to the public backlash from an investment gone bad a la the China Investment Corp/Blackstone deal?

More than a third of India’s population lives in poverty, while in China the percentage of the population living below the poverty line has fallen into the single digits; in absolute terms this is a difference of several hundred million people. How would the Indian government react to hundreds of millions taking to the streets and protesting a government that, from their point of view, is neglecting their dire condition to bailout a foreign investment bank? I just can’t see how there wouldn’t be an immediate change of policy if this type of situation arose in any democratic country, let alone poverty stricken India.

GCC dollar peg, inflation update

Qatar is considering following in Kuwait’s footsteps and dropping the dollar peg (Financial Times):

Qatar is reviewing its currency policy and could revalue or drop the dollar peg as the booming Gulf state struggles to tame inflation while the US reduces interest rates to head off a recession. Qatari officials on Wednesday said the gas-rich emir­ate was considering revaluing its currency or linking it to a trade-weighted basket of currencies as well as other policy proposals aimed at cooling rampant inflation of up to 15 per cent.

Inflation reeking havok on GCC businesses (Arabian Business):

More than half of Gulf businesses have been badly hit by rising inflation, with costs increasing faster than they can be passed on to customers, an ArabianBusiness.com survey has revealed. With inflation rising across the GCC, and predicted to hit a 20-year high of 12% in the UAE this year, 62.5% of respondents to the poll said the price of goods was rising too fast to be passed on.