Focusing on the Role of Sovereign Funds in the UAE and the Arab World and Analyzing their Role in the Economy and During Crises

Focusing on the Role of Sovereign Funds in the UAE and the Arab World and Analyzing their Role in the Economy and During Crises

Introduction

A sovereign funds or sovereign wealth funds refers to the amount of wealth invested by a state in particular financial assets (Setser & Ziemba, 2009). Basically, the money originates from the budgetary surpluses, where the respective nations prefer to invest the money rather than keeping it idle or rechanneling it back to the economy. The specific reasons for creating a sovereign wealth fund are not always universal across countries. Various countries do it for various reasons depending on their respective needs. For instance, the United Arab Emirates works to ensure the security of its surplus sales from oil exports, such that any economic crisis that arises in the country is expeditiously taken care of. The country boasts of one of the most enormous sovereign wealth funds programs not only in MENA but also in the entire world.

Despite the enormous investments, Dubai, in the UAE, feels the need to improve the ranking of the sovereign funds. This is for the sole purpose of offering an effective platform to help manage natural resources and revenue. Therefore, this research intends to look at the best practices that can aid in better management of the funds, such that they increase and consequently rise in terms of ranking. Besides, it also intends to compare Dubai’s sovereign fund and that from other countries in MENA that have also had this practice for a long.

Circumstantially, financial markets considered stable for their financial systems are also considered to have developed strong monetary policies, and therefore they may not be susceptible to risky tendencies. Moreover, such markets have an edge in competition because they receive implicit (or explicit) bailouts through governmental social assistance or sovereign wealth funds (Kéchichian, 2010). On the other hand, financial markets with weak financial systems may have a weak competitive ability. Thus they may opt for greater risk-taking. Notably, sovereign wealth funds with stronger market dominance have increased interest rates, enticing customers to engage in risk-taking, leading to a higher variable interest rate. While Oxford Analytica. (2020) suggest a probable non-linear relationship between finance market competition and sustainability, Alhashel (2015), argues that competition and monopoly can coexist and lead to resistance or fragility at the same time.

Through the output shaft, monetary policy impacts the money and capital markets. This includes financial and credit accumulation, interest rates, equity markets, and currency value. Due to the monetary policy changes, the finance market’ structures are affected, and they cope by adapting to the changes.

Fundamentally, a sovereign wealth fund adopted by UAE concerning distribution policy tendencies contributes to and results in its competitive ability and financial flexibility. A strong distribution policy is the backbone of a country’s economic system because it might contribute to a strong or weak economy. Financial performance is interlinked to a country’s financial flexibility tendencies and the competitiveness of financial institutions. A country’s economic system is as strong as the monetary policies adopted by its banking industry. It influences asset and money markets, which incorporate a country’s money transmission mechanism. In other words, the relationship between monetary policies, bank risk, and competitive ability is realized through exchange rates, asset prices, market interest rates, credit aggregation, and monetary aggregation. Increasing debts inspire this study on the Indian banking system and decreasing economic status. The study seeks to determine the relationship between monetary policies, bank risk-taking tendencies, and their competitive ability to offer a solution to the economic ills.

It is imperative to consider commonalities in deciding the best approaches to use as either structural or non-structural approaches in considering sovereign wealth funds as competition in the capital market is very high. The financial sector must decide on suitable objectives to align with either of the approaches. Therefore, the finance investment sector must conform to the market structures having diverse measures with special regard to high financial performance. This is likely to result in a balanced financial system with favorable competition conditions.

Background and Rationale

The sovereign wealth fund in Dubai comes in the form of the Investment Corporation of Dubai (ICD) and was formed in the year 2006. Its primary purpose was to help manage the property of the government of Dubai and ensure the well-being of all investments and commercial companies in its jurisdiction. After its formation, the government pumped its stake to the various corporations and by 2019, ICD had assets worth US$305 billion and revenue of $62 billion. Despite the high amount of sovereign funds, there is a need to increase the ranking of the Dubai funds through the adoption of the most feasible investment methods.

The study will thus be conducted based on the premise that financial flexibility, distribution policies, and financial performance within a financial market are necessary for determining the prospects of sovereign wealth funds. Therefore, the sovereign wealth funds operation activities have to be viewed regarding legal, political, and economic considerations in the UAE and other countries to ensure acceptable practices within the financial market systems. In this view, the findings and conclusions that shall be deducted when the study is conducted will be of the essence in impacting the financial practices in the UAE and the Arab WorldWorld.

This study examines the investment measures financial authorities and agencies can take to increase sovereign funds’ performance in the UAE, among other countries in the Arab World. It will also examine how the UAE government can raise the rating of its government funds among other funds in the Arab World. Therefore, it will put consideration on the Mena region sovereign funds and the best practices to raise the ranking of Dubai sovereign funds. The paper, therefore, applies the UAE perspective to highlight and discuss the relationship between financial flexibility, distribution policies, and financial performance.

Significance of Study

Understanding the ways of increasing the ranking of Dubai’s sovereign wealth fund is paramount in ensuring that the surplus revenues are not misused. This is because the relevant authorities will feel the responsibility, to improve the outcomes, on their shoulders. Addressing this issue would also ensure that Dubai and the UAE, in general, remain in the pole position they occupy worldwide in the endowment of sovereign wealth funds. This study is timely because it sheds light on the current situation of the property of the Dubai government amid disruptions of the oil and gas market occasioned by COVID-19 and compounded by the Russia-Ukraine conflict. In addition, understanding and adopting best practices would help amend the foundational rules that have since become obsolete due to the finance sector’s dynamism.

This research study is of great significance in the financial industry, especially considering the benefits of sovereign funds to develop a country’s economy and investment areas of sovereign funds. Findings from this study will be unequivocally used to investigate mitigating measures that financial authorities can take to increase the performance of sovereign funds during financial crisis moments.

Furthermore, these findings will be successfully used by the finance departments and financial markets of companies and governments to formulate key legislations, statutes, and regulations necessary for governing the running of the day-to-day financial investments tendencies, distribution policies, and, more particularly, financial performance. Essentially, other researchers, principally in financial organizations, will be able to use these findings for analysis and comparative studies. According to Alhashel (2015), investors in the business industries would consider these findings before investing in financial markets. Consequently, it helps them ascertain the most significant approaches towards financial flexibility, distribution policies, and, more significantly, financial performance.

The findings of these studies will enable a tacit understanding of regulating investment funds based on common grounds. Since sovereign wealth funds effectively enhance growth, especially during the financial crisis, the growth of sovereign wealth funds is necessary to keep a stable economy amid uncertain economic environments (Alhashel, 2015). In this view, sovereign wealth funds are necessary for stabilizing weaker economies while at the same time strengthening stronger economies.

Establishing the interdependence of the three fundamental elements of competition: bank risk-taking, monetary policy, and market structure is significant in developing strong economic models and financial policies to achieve sustainability within the banking system. This study will have a unique significance in light of the ongoing changes in monetary policy and the perceived upheaval of financial investments in Dubai.

Objectives of the Study

The study aims to investigate, focusing on the role of sovereign funds in the UAE and the Arab WorldWorld and analyzing their role in the economy and during crises. The specific objectives include:

1. To determine and analyze investment measures, financial authorities and agencies can increase sovereign funds’ performance in the UAE, among other countries in the Arab WorldWorld.
2. To find out the main investment areas for sovereign funds

• To investigate how the UAE government can raise the rating of its government funds among other funds in the Arab WorldWorld.

Research Questions

To answer the above deliverables, the following research questions were formulated:

1. What is the situation of sovereign wealth funds in the Arab WorldWorld?
2. What are the contributions of the sovereign wealth funds to the development of the economy and other areas?

• What is the Dubai sovereign wealth position compared to other Arab world countries?

1. Which are the key areas where sovereign wealth funds can be invested?
2. What are the investment measures that authorities can take to increase Dubai’s sovereign wealth funds?

Literature review

After the trends in sovereign wealth funds, scholars have delved into the matter to understand how the industry runs. Most of them have focused on the Middle East, where the investments are dominant due to the vast amounts of money harvested from the oil business. However, the Middle East comes second after Norway, which stands at position one in terms of SWFs (Caner and Grennes, 2010). Norway’s SWFs was established in 1969 and invested in areas such as public infrastructure after discovering oil in the North Sea. Its current fund stands at more than $1 trillion and is owned by the Norwegian government (Caner and Grennes, 2010).

The United Arab Emirates, through the Abu Dhabi Investment Authority, comes second globally with assets worth over $500 billion. Dubai, being in the same country, has had similar fortunes but not to the level of other institutions. The Investment Corporation of Dubai (ICD) is the body that has been tasked with managing the government’s investment and has done tremendous efforts, although it has not achieved its objectives yet. According to Mork et al. (2022), one of the ways through which SWFs can increase their margins is through capital preservation. Capital preservation refers to an investment strategy where the primary goal is to prevent losses in a portfolio while still preserving the capital (Mork et al., 2022). ICD is and has been in the process of adopting this method, which can be seen as having high chances of success if parameters of the investments, such as the age of the portfolio, are taken into consideration.

Another issue that has attracted the attention of scholars is the process of making decisions related to capital allocation and adjustment of inflation. Truman (2007) states that there has not been enough transparency in all the processes involved in most SWFs. As such, the decisions made in regards to critical components of the investment are guided by political affiliations and aspirations rather than what is professionally recommended. To eliminate the inaccuracies caused by political and other forces, there is a need for capital allocation guided by discipline and need evaluation. UAE has been accused by international monetary bodies over such issues, with the accusation that the investment is not for the country’s benefit at large but some few individuals (Kéchichian, 2010).

Scholars also argue that for SWFs to increase in quantity, they must exhibit an element of diversification so as to yield risk-adjusted returns. However, they say that it is only possible if such a decision is purely made based on commercial principles (Chhaochharia and Laeven, 2008). Another challenge that has been identified among SWFs that makes them attract losses is the failure to carry out regular monitoring. The failure to institute professional monitoring and evaluation leads to the presence of the same strategies over a long period, which posts no significant progress (Chhaochharia and Laeven, 2008). Therefore, policymakers and other stakeholders need to set a definite time after which they evaluate all the existing systems to identify those that are functional and those that have turned obsolete.

Bolton et al. (2012) see the evaluation of both short-term and long-term investment and being able to predict their implications as an additional way of maintaining profitable SWFs. Having such a forecast helps determine areas that need more cash, those that need to have cash slashed, and those that do not deserve any changes. Again, these decisions have to be taken from a professional perspective and not under the influence of other forces. SWFs also have to look at the existing commitments and possible disruptions in the future to help them predict whether or not the SWFs will go up.

Another strategy is the willingness to partner with external managers and seasoned personnel who can offer exclusive guidance on matters SWFs (Lyons, 2007). This means that all secrets that mar the entire process must be put aside because SWFs are now an international concern and not just for a single country. This is especially when the investments are made outside a country.

With the emerging attention to climate change and global warming, SWFs find a new investment arena that can be used to reap more benefits. Indeed, the environment plays a significant role in promoting the well-being of citizens of a country, meaning that a bad environment will cause harmful effects on the populace. And, just as countries invest in pensions using SWFs, so can they in the climate area to enable people become more productive. Sharma (2017) sees such an investment as a sustainable one, which can yield benefits if all the principles of proper management of SWFs are employed.

Already, a significant portion of SWFs has embarked on investing in the environment, especially on climate-related projects. According to a UN survey of 34 SWFs, there has been a change in the norm from the conventional investment of surplus money. Some countries have reported an increased integration of the green agenda in their decision-making tables of SWFs. The survey indicated that 43% of 34 SWFs had already invested in climate-related matters, and they hoped to benefit from them at a later date. Halland et al. (2017) offer a piece of advice to SWFs to invest in green projects and especially in countries such as North Africa and the Middle East, where the effects of climate change are expected to hit harder.

The Sovereign Wealth Funds of Dubai

Unlike Aby Dhabi and Kuwait, Dubai established operations of sovereign wealth funds not long ago. The former has had comparably long histories of investment s through sovereign wealth funds that have contributed to and resulted in stable financial practices in the two counties (Bazoobandi, 2012). Dubai saw the need to establish a sovereign wealth fund portfolio to benefit from available investment opportunities presented by the sovereign wealth funds. In this regard, Dubai has not known for stable management of its external resources assets to allocate funds to specific investment opportunities (Bazoobandi, 2012). Compared to many other countries in the Arab WorldWorld, Dubai possesses a stable and working private ownership or sector with a fairly fragmented investment landscape.

The Arabic investment, popularly called the Istithmar World, serves as Dubai’s major international investment enterprise (Brach & Loewe, 2010). Istithmar World has developed into a competitive enterprise with a portfolio of over fifty companies holding millions of assets, real estate sectors, industrial and consumer financial service sectors, among others. All these companies have contributed to and resulted in the stable and competitive ability of the Istithmar World. Need to note, Istithmar World is internationally recognized because of its extensive growth and financial stability in the financial market. It holds more than $3 billion of equity, having started in 2003 with a (Brach & Loewe, 2010) appropriated value of $ 12 billion.

The financial investment opportunities have developed into stale flexible financial investments that are productive and profitable in many ways. Additionally, sovereign wealth funds in Dubai have significantly developed together with other presumed sovereign funds. These are considerably strong finance market players with well-developed portfolios (Kéchichian, 2010). On the other hand, it is not yet established the contribution of these sovereign wealth funds to the development of Dubai, especially in terms of its economy. Additionally, it is not clear the strategic directions the sovereign wealth funds adhere to in terms of investments to realize stability and high financial performance in Dubai (Csurgai, 2009). However, Dubai stands as a strategic finance market compared to other areas of the Arab WorldWorld. The limited effort put in by DIC or the Istithmar to help it grow as a strong finance service industry (Bernstein et al., 2013). Volatilities in Dubai’s financial market still present the impression that the financial systems in Dubai have not prioritized a consolidated strategy to maximize the capital markets. However, certain money systems have established individual strategies to consolidate themselves, for example, the Dubai International Finance Centre-Investment arm and DIFC Investments. The two investments had presented a positive image (Bernstein et al., 2013), especially in 2007 when they acquired a slightly over 2% stake in Deutsche Bank.

The lack of a consolidated strategy in Dubai’s financial system can be attributed to the differences and sophisticated nature of ownership structures within the financial market systems (Santiso, 2008). In this view, it is difficult to establish a common ground for pulling the financial systems together, and the challenge of governing g these organizations due to differences in ownership structures. Consequently, Dubai’s place in the international financial system stands at a risk of being accused of governance and transparency issues, among other financial concerns from external groups (Balin, 2009). However, the individual financial systems are transparent and well-governed, thus increasing growth in the private sector.

Findings in this research aim to contribute to the need to consider the role of Sovereign Funds in the UAE and the Arab WorldWorld and analyze their role in the economy and During Crises. Concepts of financial systems, challenges of financial markets, and, more importantly, the investment measures that authorities can take to increase Dubai’s sovereign wealth funds will be examined.

Methods of data collection

In this research, I will combine both literature review and interviews as data collection methods. In the literature review, I will use the literary works by various scholars in the field of finance who have invested in gathering any information related to sovereign funds. Although there is no adequate literature on the sovereign funds, especially for Dubai, some scholars have published information about other countries that may have similar effects on Dubai. For instance, the investment criteria to align the wealth with modern demands, such as incorporating technology, cuts across all SWFs. The government needs to make some minimal amends that make the proposals fit for the respective jurisdiction.

One of the advantages of using a literature review is that it gives you an insight into the already existing knowledge of the material at hand. In this case, one does not have to conduct other data collection methods to understand concepts that are already published. This is a way of cutting costs and minimizing the cost of research by targeting only the specific areas where information gaps exist.

In interviews, the research subjects will be business leaders tasked with managing the funds, such as those working in social security institutions. Eligible interviewees will be only those who attest that they understand how SWFs are established and run. They may be active employees or former stakeholders who have since left to focus on other matters in the finance world. Another group to be interviewed will be the political leaders who can have an influence on the funds. This influence may include decision-making, such as deciding the amount of money that has to be put into the funds or those mandated to approve the potential areas for investment. The last group will be the general public, who I will intend to have a glimpse into their perception of the investments. They will comment on whether they think Dubai’s government does the right thing in investing in the funds and, if not, what they would propose. Information from this group will not be professional but wholly based on opinion.

I anticipate that interviewing will pose a myriad of challenges that can limit my ability to collect all the information I may need. This is owing to the confidentiality tied to financial information, whose release is always done with an abundance of caution. Besides, the authorities may have orders in place prohibiting the release of such information due to reasons better known to them. Nevertheless, I will strive to conduct interviews by all means with the people I will be able to reach.

Interviewing as a method of data collection is inherently cost-intensive. As a researcher, I will need to take care of the costs related to the entire method, which include transport, accommodation, and the acquisition of the requisite tools. This challenge may threaten the collection of all the information in case I cannot afford it. The tools and equipment needed for collecting and analyzing data through interviewing include sound recorders and transcription software.

Correlation analysis: The correlation analysis will be useful in examining the relationships between the independent and dependent variables used during the research analysis. More particularly, this research will use quantitative and qualitative variables evaluated during data sampling.

Conclusion

This research comes at a very appropriate time when the world is battling a wide range of environmental issues such as global warming, pollution and ocean acidification among others. Therefore, it gives SWFs a variety of areas in which they can invest in rather than focusing on one aspect. Indeed, proper utilization of the funds in both conserving the environment and other conventional investments would be for the great good of everyone. Moreover, countries such as the United Arab Emirates that start in SWFs can chip in and support other countries in the Arab world so as to achieve common benefits and grow together.

References

Alhashel, B. (2015). Sovereign wealth funds: A literature review. Journal of Economics and Business, 78, 1-13. https://www.sciencedirect.com/science/article/pii/S0148619514000587

Balin, B. J. (2009). Sovereign wealth funds: A critical analysis. Available at SSRN 1477725. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477725

Bazoobandi, S. (2012). Political Economy of the Gulf Sovereign Wealth Funds: A Case Study of Iran, Kuwait, Saudi Arabia, and the United Arab Emirates. Routledge. https://www.taylorfrancis.com/books/mono/10.4324/9780203080887/political-economy-gulf-sovereign-wealth-funds-sara-bazoobandi

Bernstein, S., Lerner, J., & Schoar, A. (2013). The investment strategies of sovereign wealth funds. Journal of Economic Perspectives, 27(2), 219-38. https://www.aeaweb.org/articles?id=10.1257/jep.27.2.219

Bolton, P., Samama, F., & Stiglitz, J. E. (Eds.). (2012). Sovereign wealth funds and long-term investing. Columbia University Press.

Brach, J., & Loewe, M. (2010). The global financial crisis and the Arab WorldWorld: Impact, reactions, and consequences. Mediterranean Politics, 15(1), 45-71. https://www.tandfonline.com/doi/full/10.1080/13629391003644686?casa_token=2gUHupMVhLoAAAAA%3Amm8_Ek6U49RwUhTYqq9m3noMVvlHI2q

Caner, M., & Grennes, T. (2010). Sovereign wealth funds: The Norwegian experience. World Economy, 33(4), 597-614.

Csurgai, G. (2009). Sovereign Wealth Funds: Strategies of Geo-Economic Power Projections. In Globalization and the Reform of the International Banking and Monetary System (pp. 209-227). Palgrave Macmillan, London. https://link.springer.com/chapter/10.1057/9780230251069_9

Halland, H., Noël, M., Tordo, S., & Owens, J. (2017). Will sovereign wealth funds go green. World Bank Blogs.

Kéchichian, J. A. (2010). Sovereign Wealth Funds in the United Arab Emirates. In The Political Economy of Sovereign Wealth Funds (pp. 88-112). Palgrave Macmillan, London. https://link.springer.com/chapter/10.1057/9780230290648_5

Kéchichian, J. A. (2010). Sovereign Wealth Funds in the United Arab Emirates. In The Political Economy of Sovereign Wealth Funds (pp. 88-112). Palgrave Macmillan, London.

Lyons, G. (2007). State capitalism: The rise of sovereign wealth funds (Vol. 15). London: Standard Chartered.

Mork, K. A., Trønnes, H. A., & Bjerketvedt, V. S. (2022). Capital preservation and current spending with Sovereign Wealth Funds and Endowment Funds: A simulation study (No. 19222).

Oxford Analytica. (2020). The economic goals of Dubai and Abu Dhabi will diverge. Emerald Expert Briefings, (oxen-DB). https://www.emerald.com/insight/content/doi/10.1108/OXAN-DB258306/full/html

Santiso, J. (2008). Sovereign development funds: Key financial actors in the shifting wealth of nations. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1300288

Setser, B., & Ziemba, R. (2009). GCC sovereign funds. Center for Geoeconomic Studies, WP, 1, 2009. https://www.cfr.org/sites/default/files/pdf/2008/12/CGS_Working%20Paper_5.pdf

Sharma, R. (2017). Sovereign wealth funds investment in sustainable development sectors. Global Projects Center—Stanford University.

Truman, E. M. (2007). Sovereign wealth funds: the need for greater transparency and accountability (No. PB07-6). Washington, DC: Peterson Institute for International Economics.