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.

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.

US backlash to recent investments by sovereign wealth funds

Citigroup and Merrill Lynch are viewed more negatively by the American public on the heels of investments each firm accepted from SWFs (Financial Times):

Citigroup and Merrill Lynch’s standing among US citizens has plummeted as a result of multi-billion dollar capital injections by sovereign wealth funds, according to new research that highlights simmering public opposition to investments by foreign governments.

 

Over half of the 1,000 people polled by the market research group Strategy One said they “trusted Citigroup less” after its recent decision to tap Middle Eastern and Asian sovereign funds to ease its financial constraints.

 

In Merrill’s case, 45 per cent of the respondents said their trust in the bank had fallen since hearing of investments from foreign state funds, according to the research to be published on Tuesday.

The poll draws attention to the rising protectionist sentiment among the American public, which is in part being stoked by politicians like Hillary Clinton:

The new research – carried out early this month between the two waves of foreign investments in Citigroup and Merrill – also points to an underlying current of protectionism within the US public, which could be exacerbated by the rising threat of a recession.

 

“The Citigroup figure is staggering,” said Laurence Evans, president of Strategy One, which is owned by the public relations group Edelman.

 

“There is a xenophobic element to it. The biggest concern is uncertainty: people don’t know how much influence sovereign wealth funds will have.”

Gulf response to US rate cut

Gulf central banks, whose currencies are pegged to the US dollar, have decided to follow the US Federal Reserve’s 75 basis point interest rate cut with reductions of their own (Arabian Business News):

“The Gulf will have to match the Fed cut,” said Marios Maratheftis, regional head of research at Standard Chartered Bank. “This is going to create even more liquidity in the market which means more inflationary pressures.” Inflation in four of the six Gulf Arab oil producers has overtaken official lending rates, encouraging borrowing for investment in assets such as real estate, which is the main driver of the surging cost of living across the region.

Gulf Cooperation Council (GCC) central banks say that they remain committed to the dollar peg for now, but will leave the door open for coordinated currency revaluations in the future, to tackle rising inflation.

China in no hurry to buy credit crunch bargains

China is taking a more cautious approach to making investments on the belief that the worst of the subprime crisis is still yet to come (Reuters):

Beijing’s reluctance to buy into Citigroup coincides with growing expressions of concern by Chinese officials about the seriousness of the credit crisis. “The subprime loan issue has planted a ticking timebomb in the global financial markets. It now seems the impact is much more serious than the market had previously expected. I don’t think it will be over any time soon,” Vice-Finance Minister Li Yong said at a recent forum.

Abu Dhabi announces $15 billion clean energy fund, world’s first carbon neutral city

Abu Dhabi decides to invest in the energy technologies of the future (BBC):

The government of Abu Dhabi has announced a $15bn initiative to develop clean energy technologies. The Gulf state describes the five-year initiative as “the most ambitious sustainability project ever launched by a government:”. Components will include the world’s largest hydrogen power plant. The government has also announced plans for a “sustainable city”, housing about 50,000 people, that will produce no greenhouse gases and contain no cars.

Citi, Merrill Raise $21 billion from SWFs

Citigroup announced that it will be accepting investments totaling $14.5 billion from the Government of Singapore Investment Corporation, the Kuwait Investment Authority, one of it’s largest current shareholders Prince Alwaleed bin Talal, former CEO Sandy Weill, and the New Jersey Investment Division. Merrill Lynch will raise a total of $6.6 billion from the Korean Investment Corporation, the Kuwait Investment Authority, and Mizuho Corporate Bank of Japan (Financial Times).

For Citigroup, the announcement of the capital infusion coincided with the release of a disastrous 4^th quarter earnings report and the revelation that things could get worse:

Citigroup also unnerved investors by warning of losses to come from consumer loans as it revealed a 40 per cent dividend cut, a $9.83bn fourth-quarter loss, $18bn in subprime-related credit writedowns and remaining exposure of $37bn to subprime mortgages.

Tomorrow, Merrill Lynch is expected to report a substantial loss and a possible subprime related writedown of $15 billion (Reuters):

Citigroup expects a $15 billion fourth-quarter write-down at Merrill Lynch and said CDO/subprime exposures will decline by 50 percent to 70 percent in aggregate.

Subprime Damage Report

The capital infusions that Citi and Merrill just received bring the total amount invested in banks and securities firms by outsiders (primarily SWFs) since the subprime crisis began last summer to $59.4 billion:

*In billions (USD)    Source: Bloomberg

Gulf to revalue currencies by April?

The countries of the GCC could revalue their currencies, which are currently pegged to the dollar, by April (Arabian Business News):

Gulf Arab oil producers could revalue their currencies together if the US dollar weakens further, with appreciations of 8% in the UAE dirham and Saudi riyal likely before April, Standard Chartered said on Wednesday.

 

Dollar pegs force the region to shadow US interest rates at a time when the Federal Reserve is cutting rates to contain a credt crisis and inflation is running at decade highs across the Gulf.

WSJ: Merrill and Citi Seek Foreign Capital

As subprime related losses continue to mount the two firms that are expected to be hardest hit, Merrill Lynch and Citi, are looking for additional investments from SWFs (WSJ, subscription required also Bloomberg for summary):

Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

They hope to finalize these deals before reporting worse than expected earnings next week:

Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion.

Increased US regulatory scrutiny of both banks and SWFs is likely to follow. SWFs will also face more political pressures from US government officials:

Another risk is political. Lawmakers could try to force the investors to submit to more scrutiny by the Committee on Foreign Investment in the U.S., an interagency group led by the Treasury Secretary.

Does this type of scrutiny make sense given that a large portion of the US banking industry is in effect being bailed by SWFs? Do US lawmakers even realize that a bailout has occurred? Or are they just trying to score cheap political points? Who would be picking up the tab for the banks’ subprime-related excesses if not SWFs? The answer to that last one should scare any sane government official into thinking long and hard before trying to score easy political points at the expense of “foreigners”.

China approves Blackstone domestic purchase

China said Thursday it had formally approved US private equity firm Blackstone Group’s purchase of a 20-percent stake in chemical firm China National BlueStar.

Did China Investment Corp’s $3 billion stake in Blackstone make completing this deal easier? (Yahoo!)

UK Treasury asks GCC funds to bail out Northern Rock

No buyers have been able to raise the amount needed to rescue the troubled bank, the UK government hopes the GCC might step up to the table (Arabian Business News):

Goldman Sachs has been hired by the UK Treasury to help find a private sector solution for Northern Rock. Any objections to Middle East oil money being used to save the bank have now been removed, according to UK newspaper reports.

Current bidders, including Richard Branson’s Virgin Money and investment vehicle Olivant, are struggling to raise the necessary funding for an acquisition due to the subprime lending crisis.

Russia Stabalization Fund grows to over $156 billion in 2007

Russia’s Stabilization Fund, which collects windfall oil revenue, stood at just over 3.849 trillion rubles or $156.81 billion on January 1, 2008, the Finance Ministry said. (Interfax)

China

China’s sovereign wealth fund announced that it will invest $20 billion of the at least $130 billion (from a total of about $200 billion) earmarked for domestic investments (Financial Times):

Beijing said on Monday that a unit of its new $200bn sovereign wealth fund would inject $20bn into China Development Bank in a move intended to smooth the policy lender’s transformation into a commercially-oriented institution.

Gulf Cooperation Council

The countries that make up the Gulf Cooperation Council (GCC) began a common economic market today (BBC):

The nationals of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates are now to be seen as equal, economically, whichever country they chose to live in. They will be able to work, buy houses and companies, trade shares, go to school and receive medical treatment in all six states.

The move is also intended to pave the way for a common monetary union and a single currency by 2010. However, some have noted that this deadline is likely to be missed (Arabian Business News):

Gulf central bank governors and finance ministers have said on several occasions that the deadline was unrealistic and would likely be revised. UAE central bank governor Sultan Nasser Al-Suweidi said earlier that month that the GCC was unlikely to have a single currency by 2015. The timetable for the monetary union has been in doubt since Oman said last year it would skip the 2010 deadline over concerns that spending targets could constrain economic growth. Plans received a further blow in May when Kuwait broke ranks and ditched the dinar’s peg to the US dollar, claiming the rising cost of imports in non-dollar denominations was driving up inflation.