The Sovereign Funds in the Gulf Area - Essay Example

The Sovereign Funds in the Gulf Area and How They Are Affected By Different International Circumstances The protection of the business opportunities and the stabilisation of the economies are viewed to be the prime concerns for any country. In this regard, Sovereign Wealth Funds (SWFs) have been viewed to play decisive role in performing the aforementioned functions efficiently. However, different international circumstances have affected the SWFs operating in the Gulf area that included mismanagement of investment opportunities and the occurrence of the worldwide financial crisis in addition. With this concern, this research study intends to determine the extent of the coverage of SWFs in the Gulf region and the way they are affected by different international circumstances, issues or concerns. As per the findings obtained, it has been apparently observed that the occurrence of worldwide financial crisis during the period from 2008 to 2009 largely affected the SWFs operating in the Gulf region. Table of Contents Abstract 2 Introduction/Background 4 Literature Review 5 A Brief Overview of Sovereign Wealth Funds (SWFs) 5 Sovereign Wealth Funds (SWFs) in the Gulf Area 5 International Circumstances that Affect Sovereign Wealth Funds (SWFs) in the Gulf Area 6 Research Objectives and Research Questions 7 Research Design 8 Data Collection and Analysis 9 Data Collection 9 Analysis 10 Conclusion 15 References 17 Appendix 20 Questionnaire 20 Introduction/Background It is strongly believed that over the few preceding years, SWFs have played an imperative role in offering capital globally, making significant improvements in traditional investment approaches. These improvements can be measured in the form of raising direct investments, augmenting the exposure of the SWFs in selective emerging business markets and diversifying their respective portfolio across diverse industries (Ali & Al-Aswad, 2012). Although the numbers as well as the size of the SWFs have risen dramatically in this present day context, as an instrument of maximising investment returns, this research study would provide a brief idea about how these SWFs provide benefits in the Gulf area and gets affected by varied international circumstances. It is worth mentioning that this particular research study will reflect about how the SWFs have imposed extensive impact on maximising the investment returns in the Gulf area and how these fund were in turn influenced by any sort of international situation. This research study has been taken into concern in order to assess the imperative roles that have been played by the SWFs towards making the Gulf area richer in various comprising employment and greater financial liquidity among others. It would be vital to mention in this similar concern that this research study would be backed up by critically analysing various literature studies concerning the above stated research title and framing appropriate research objectives along with questions. In addition, various other important contents that encompass research design, data collection as well as analysis and finally, a conclusion would be incorporated in this research study. Literature Review A Brief Overview of Sovereign Wealth Funds (SWFs) According to the report published by European Investment Bank (2012), SWFs are fundamentally regarded as state-run investment funds constituting varied sorts of financial assets that include stocks, bonds, private equities and real estates among others. As per the observation made by Truman (2011), these funds (i.e. SWFs) impose considerable impact on the international business markets due to its focus on attaining certain vital objectives. In this similar context, the report published by European Investment Bank (2012) identified one of these objectives to be stabilising as well as protecting economies from experiencing excess level of volatility in exports or revenues. The other objectives comprise raising savings for future generations and strengthening the arms of government investments, resulting in greater social advancements and forming diversification in the nations (European Investment Bank, 2012). Sovereign Wealth Funds (SWFs) in the Gulf Area After acquiring a brief idea about the notion of SWFs, the report published by KPMG (2013) presented that these funds, in the Gulf area, are incessantly evolving, due to which, capital flows and the economy of this area are mounting at a rapid rate. In this similar concern, Raphaeli & Gersten (2008) identified that SWFs in the Gulf area emphasise two major objectives that entail procurement of real estates as well as fixed assets and acquisition of shares belonging to financial as well as industrial firms that are of high quality. Based on the report published by European Investment Bank (2012), the potential SWFs operating in the Gulf region currently are Mubadala, Qatar Holding, Oman Investment Fund (OIF) and InvestAD. The other chief SWFs operating in the Gulf area are recognised as Int’l Petroleum Investment Co, Kuwait Investment Authority (KIA), Abu Dhabi Investment Authority (ADIA) and Qatar Investment Authority (QIA) among others (European Investment Bank, 2012). International Circumstances that Affect Sovereign Wealth Funds (SWFs) in the Gulf Area Identifiable from a generalised point of view, the presence of a wide range of international circumstances that affect SWFs in the Gulf area can be witnessed at large. In this context, the report of The Fletcher School (2010) denoted that international circumstances, in terms of misconception regarding the concept of SWFs and their transparency prevailing amid the financial participants and existence of enlarged discriminatory restrictions towards SWFs, largely affect SWFs in the Gulf region. Apart from these, according to the report published by The Fletcher School (2010), the other international circumstances that affect SWFs in the Gulf area are the occurrence of worldwide financial downturn, absence of sophisticated as well as effective risk-management based systems and shortage of national along with international regulations among others. In addition, as per Truman (2011), apart from the above-identified international circumstances, certain other critical issues as well as concerns also affect SWFs in the Gulf region at large. These issues along with concerns can be apparently noted as mishandling of the investments by the SWFs operating in the Gulf region, turmoil position in the potentiality of the financial markets and persisting conflicts of interest between the nations with SWFs and the countries wherein these SWFs invest a substantial portion (Truman, 2011). Research Objectives and Research Questions Based on the above-discussed idea, the objectives for this particular research study are: To acquire a brief understanding about how the SWFs operating in the Gulf region To recognise the roles played by SWFs in developing the economy and the capital flows of the Gulf region To identify the factors, issues, concerns or the international circumstances that affect the SWFs operating in the Gulf area To address and mitigate the factors or the international circumstances that impose adverse impacts on the performance of the SWFs operating in the Gulf area To determine the scope and the future of SWFs operating in the Gulf region in the context of raising capital flows and maximising considerable investment returns In accordance with the above depicted research objectives, the research question for this particular study has been portrayed in the following: What is the extent of the coverage of SWFs in the Gulf region? How they are affected by the different international circumstances, issues or concerns? Research Design The research design for this particular study includes the procedure of recognising the research issue, formulating the research questions, performing literature reviews and relevant research methodology. It is worth mentioning that a quantitative approach of research methodology has been selected for this study in order to attain the above stated research objectives. Theoretically, quantitative approach is regarded as a sort of methodical research, which tends to gather measurable (often statistically) evidences for answering the framed research questions using systematic and comprehensive set of processes. The major strength of quantitative approach of research methodology is asserted to be its criticality and minimum chances of research bias in interpretation as compared to other research methodologies or approaches, which aids in attaining the determined research objectives successfully (Northeastern University, n.d.). The justification for selecting this particular research methodology is that quantitative analysis helps to minimise the risk of misinterpretation with regard to the collected data along with violation of cultural or ethical norms. Moreover, it aids in conducting a research study successfully through employing the collected data in a systematic manner, examining the research problems comprehensively through quantitative measures (Maxwell, 2012; Tracy, 2012). Based on the quantitative approach, the research design of this study has focused on collecting relevant data through time trends for the past years, i.e. from the year 2003 to the year 2013 in order to test the framed hypothesis, examining the determined research objectives. The hypothesis designed for this study is, “SWFs and international circumstances (indicated through world total output percentile) are strongly related, wherein SWFs in the Gulf region depend largely on international circumstances”. Theoretically, the perception of time trends is often utilised with the aim of defining a suitable pattern while emphasising a huge figure of valuable information. It would be vital to mention in this similar context that the research design based on time trends often aid in predicting the occurrence of the future events and most vitally, comprehending the changes that take place over time (Hall & Citrenbaum, 2009). Correspondingly, to test the hypothesis, a regression analysis will be conducted. Contextually, the dependent variable has been assumed as the SWFs and the independent variable to be the world output percentile, representing the international circumstances. The correlation persisting between these variables would certainly aid in identifying how the SWFs in the Gulf area are affected by dissimilar international circumstances. Data Collection and Analysis Data Collection In relation to this particular research study, secondary data has been given primitive importance. Financial data, as relevant to this study, has been obtained from varied secondary sources that include exchange ratings available through various reliable reports with the application of regression statistics tool using Microsoft Excel. Conceptually, secondary sources are primarily regarded as the data, which has already been gathered or is readily accessible from various other sources. The rationale for selecting this method of data collection is that the information available from employing secondary sources is quite reliable as compared to other methods. It is worth mentioning that the procedure of gathering secondary data by accessing various secondary sources is cheaper and obtainable in a time-efficient manner than primary sources (Sapsford & Jupp, 2006). Apart from gathering data from exchange ratings and international institution reports, structured interviews have also been conducted with five (5) finance managers belonging to large or mid-sized organisations operating in the Gulf region. This structured interview was further based on eight (8) open-ended questions those were served to these respondents and thus, valuable data could be collected (refer to appendix). It is worth mentioning that the application of the regression statistics tool using Microsoft Excel has been based on the objective of determining World Output Growth (annual percentage change) and the SWFs acquired in the Gulf region during the years 2003-2013. Analysis Based on the findings acquired from the structured interview conducted with five (5) finance managers from large or middle-sized organisations operating in the Gulf region and the regression analysis, it can be apparently observed that SWFs in the Gulf area have been largely affected by varied international circumstances. According to the respondents, SWFs are state owned funds or entities that are commonly established on the basis of privatisation proceedings, payments of governmental transfers, receipts acquiring from resource exports and balance of payments along with fiscal surpluses among others (SWF Institute, n.d.). In relation to the question asked in the interview concerning the roles that are played by SWFs in the Gulf area, maximum number of the respondents replied that SWFs are driving the economies towards a favourable direction in the Gulf area. This has been justified by the respondents stating that SWFs are viewed to be playing imperative roles in stabilising the economies of the regions belonging to Gulf area, promoting capital inflows and maximising greater investment returns. In addition, as per the observations made by the respondents, the role of SWFs is not only restricted in the arena of stabilising economies, but also in managing national wealth, strengthening foreign exchange reserves and bringing more investment prospects within the industry. With regards to the question about determining the impacts imposed by SWFs in developing the economy of the Gulf region, a major portion of the respondents answered that the accumulation of SWFs in the Gulf area is increasingly rising due to its imposition of numerous favourable results. According to the respondents, SWFs are imposing extensive favourable impacts in developing the economy of the Gulf region, pursuing various socio-economic goals. In this similar context, the respondents identified that the investments made in SWFs eventually impose considerable impacts in developing socio-economic conditions, resulting in enhancing the productivity as well as the skills of the people at large. Thus, it is widely observed that certain SWFs operating in the Gulf region are endeavouring towards adopting along with implementing strategic and effective socio-economic objectives with the purpose of developing the primary business markets and maximising higher investment returns. Based on the above discussion, the respondents identified that there lay numerous benefits, which are interlinked with the investments made in the Gulf area. These benefits can be measured in terms of stabilising economies, rising national wealth and developing socio-economic conditions among others. Apart from these benefits, certain drawbacks have also been recognised by the respondents, which can be linked with the SWFs operating in the Gulf area. In this regard, the drawbacks included constraints observed in the investment opportunities, deregulation in the financial structures, distinguished role of the market forces and impassionate governmental roles in the global economy (Hildebrand, 2008). Based on the observations made by the respondents, certain international circumstances can be identified that affected the SWFs operating in the Gulf region by a considerable extent. In this similar context, those international circumstances can be apparently noted in terms of the worldwide financial crisis, shortage of national along with international regulations and absence of sophisticated as well as effective risk management systems among others (The Fletcher School, 2010). Amongst these international circumstances, the critical issue concerning the occurrence of worldwide financial crisis and its adverse impact have been noted as largely affecting the SWFs operating within the Gulf area. The following table depicts the information relating to the aforesaid subject matters based on which, the regression statistics tool has been applied. Source: (Institutional Investor’s Sovereign Wealth Center; 2013, UNCTAD, 2013; IMF, 2012; Miracky & et. al., 2009) As can be observed, the investments made in SWFs were relatively small during the recession period of 2008-2009 as compared to other financial years. Based on the aforementioned table, it can be apparently observed that both the world output growth and SWFs acquired were hit largely during 2008-2009, which portrayed 1.5 percent change in the year 2008 to -2.2 percent change in the year 2009 and 175 billions in the year 2008 to 102 billion in the year 2009 respectively. Correspondingly, using the regression tool emphasising the above delicted data, the following results were obtained. In relation to the results obtained from the regression analysis, the values obtained for R square, F and P-values ultimately prove that the hypothesis i.e. “SWFs and international circumstances (indicated through world total output percentile) are strongly related, wherein SWFs in the Gulf region depend largely on international circumstances” gets rejected. This can be justified with reference to the fact that the result of R square, which has been obtained from the regression analysis, is 0.020 and thus, not being closer to 1, the regression line does not fit the data. This proves that the aforesaid hypothesis is not accepted. On the other hand, the value of F has been found to be 0.169, which remained greater than 0.05 and the P-values to be greater than 0.05, also proves that the above-mentioned hypothesis is not accepted. Apparently, the results obtained through hypothesis testing opposes the responses given by the interviewees, wherein the respondents strongly realised that it is quite essential to address and mitigate such adverse situations while getting affected by the SWFs operating in the Gulf region from the varied international circumstances. This might be owing to the reason that the international circumstances might affect the SWFs by limiting their powers in stabilising economies, maximising superior investment returns and developing socio-economic situations among others, which are not evident in relation with the world-output growth trends. In this similar context, it can be affirmed that offering ownership positions to the SWFs operating in the Gulf area might be one of the prime aspects for addressing and mitigating the adverse situation, which arise from varied international circumstances. However, measuring the same depending on the world output growth trends shall be quite challenging, demanding a more rigorous study based on the issue. Notably, the due emphasis should be led on studying the impact of ownership positions to the SWFs operating in the Gulf area, which are often argued to play a decisive role in lessening managerial slack as well as agency costs, resulting in the overall mitigation of the situation by a certain level. In addition, apart from this, another way of mitigating such adverse situation can be cooperating with the non-commercial objectives by channelizing varied amount of corporate resources along with technologies, which would certainly bring benefits to the Gulf area. These benefits could be measured in the form of stabilising the economies, protecting the financial interests of the regions belonging to the Gulf area and most significantly, enhancing socio-economic conditions to the extreme level (Barbary & Bortolotti, 2012). In response to the question about determining the scope and the future of SWFs operating in the Gulf area to provide benefits in terms of mounting capital flows and maximising investment returns, the respondents replied that the investments made in the SWFs would raise in future due to increasing level of globalisation and incessantly changing business market conditions. It is worth mentioning in this similar concern that SWFs are recognised as the chief actors in the worldwide financial landscape of this modern day context. According to the respondents, the scope and the future of the SWFs operating in the Gulf area tends to provide benefits in terms of mounting capital flows and maximising investment returns seems to be quite broader as these tend to mitigate certain potential challenges that arise often in the international business markets. In this similar concern, the challenges can be sustenance of intergenerational savings and persistence of price volatility in the commodities among others (Barbary & Bortolotti, 2012). Conclusion Based on the above discussion and analysis, it has been quite apparent that SWFs have been playing an imperative role in developing the economy of the regions belonging to the Gulf area. However, there exist certain international circumstances, issues or concerns that might affect the SWFs operating in the Gulf area in stabilising the economies of this region. However, it is worth mentioning in this context that the results obtained from hypothesis testing opposed the affirmations of the interviewees, advocating the need for a more rigorous research based on the identified issue. Specially mentioning, in order to address this particular research question, a qualitative approach of research methodology has been taken into concern, collecting valuable data from varied secondary sources like exchange ratings and other finance news reports. Moreover, apart from these, a structured interview has also been conducted with five (5) finance managers associated with large or middle-sized organisations operating in the Gulf region. Where on one hand the primary research and quantitative appraisal system suggested that no substantial linkage existed between international circumstances and SWFs in the Gulf region, on the other, the interview responses suggested a strong linkage between the two aspects. One of the major reasons for such opposite findings can be observed in terms of the role played by qualitative factors, which were overlooked in the quantitative appraisal system to keep the analytical process precise and comprehensible. To be mentioned, based on the research findings, it was found that SWFs have been playing an imperative role in developing the regions of the Gulf area by stabilising economies and developing socio-economic conditions at large. However, certain international circumstances have also been apparently observed to affect SWGs operating in the Gulf area that encompassed the occurrence of the financial crisis and mismanagement of the investment opportunities among others, which are supposed to have a major impact on the world output growth-rate too. This further justifies the need for a broader research, taking due note of every qualitative and quantitative factors that can suggest a linkage between international circumstances and SWFs in the Gulf region with clear evidences. References Ali, A. & Al-Aswad, S., 2012. Introduction. Persian Gulf based SWFs & Financial Hubs in Bahrain, Dubai and Qatar: A Case of Competitive Branding, pp. 1-17. Barbary, V. & Bortolotti, B., 2012. SWF Investment and Political Risk. Sovereign Wealth Funds and Political Risk: New Challenges in the Regulation of Foreign Investment, pp. 307-339. European Investment Bank, 2012. Overview of Sovereign Wealth Funds. Mobilizing the potential of GCC Sovereign Wealth Funds for Mediterranean Partner Countries, pp. 1-17. Hall, W. M. & Citrenbaum, G., 2009. Intelligence Analysis: How to Think in Complex Environments: How to Think in Complex Environments. ABC-CLIO. Hildebrand, P. M., 2008. The Challenge of Sovereign Wealth Funds. Article. [Online] Available at: http://www.voxeu.org/article/challenge-sovereign-wealth-funds [Accessed May 09, 2014]. IMF, 2012. Statistical Appendix. Publications, pp. 175-220. Institutional Investor’s Sovereign Wealth Center, 2013. Sovereign Wealth Fund Investment Trends Third Quarter, 2013. Quarterly Report, pp. 1-14. KPMG, 2013. An Introduction to the Regional SWF Landscape in the Middle East. Middle East, pp. 03-21. Raphaeli, N. & Gersten, B., 2008. Sovereign Wealth Funds: Investment Vehicles for the Persian Gulf Countries. The Middle East Quarterly, Vol. XV, No. 2, pp. 45-53. Maxwell, J. A., 2012. Qualitative Research Design: An Interactive Approach: An Interactive Approach. SAGE. Miracky, W. & et. al., 2009. Aggregate Data. Sovereign Wealth Fund Investment Behaviour, pp. 1-21. Northeastern University, No Date. Qualitative Research Methods Overview. Qualitative Research Methods: A Data Collector’s Field Guide, pp. 1-12. Sapsford, R. & Jupp, V., 2006. Data Collection and Analysis. SAGE. SWF Institute, No Date. About Sovereign Wealth Funds. What is a SWF? [Online] Available at: http://www.swfinstitute.org/sovereign-wealth-fund/ [Accessed May 09, 2014]. Truman, E. M., 2011. Sovereign Wealth Funds: Threat or Salvation? Peterson Institute. Tracy, S. J., 2012. Qualitative Research Methods: Collecting Evidence, Crafting Analysis, Communicating Impact. John Wiley & Sons. The Fletcher School, 2010. Key International Issues Identified and Briefly Summarised. Key International Issues for Sovereign Wealth Funds, pp. 1-20. UNCTAD, 2013. Trade and Development Report, 2013. United Nations Conference on Trade and Development Geneva, pp. 1-140. Appendix Questionnaire 1.) What do you understand exactly by the term “Sovereign Wealth Funds” (SWFs)? 2.) Tell something about what roles does SWFs have been playing in the Gulf area? 3.) What are the impacts imposed by the SWFs in developing the economy of the Gulf region? 4.) What are the benefits and drawbacks have you observed that are associated with the SWFs operating in the Gulf area? 5.) Mention certain international circumstances that affect the SWFs operating in the Gulf region. 6.) What are the ways to address and mitigate such adverse situations while getting affected by the SWFs operating in the Gulf area from the international circumstances? 7.) What are the scope and the future of SWFs operating in the Gulf area that tends to provide benefits in terms of mounting capital flows and maximising investment returns by a considerable level? Read More