One Of The World's Biggest Sovereign Wealth Funds Is About To Become A Seller

As regular readers may recall, one of the alleged reasons for the market swoon at the end of 2015 and early 2016 was what Deutsche Bank first dubbed "quantitative tightening" but not by central banks (that would come later), but by sovereign wealth funds in general - with an emphasis on petrodollar nations who were struggling to balance their budgets at a time of plunging oil prices and were forced to sell assets - and China in particular, which faced with a tumbling Yuan was forced to sell billions in US-denominated securities to halt the sharp devaluation of the Yuan.

Now, after a period of relative stability for sovereign wealth funds, in which the indiscriminate SWF/China selling of 2015 faded into a distant memory, one of the world’s biggest buyers of trophy assets is about to become a seller again. According to Bloomberg, following the ongoing isolation by its powerful Arab neighbors, Qatar’s sovereign wealth fund is reversing a decade-long run in high-profile foreign investments to buttress its own economy.

The Qatar Investment Authority, or QIA, which has already reduced its holdings in Credit Suisse, Rosneft and Tiffany in recent months, is considering unleashing what could be a liquidation tsunami in this illiquid market, selling more of its $320 billion of assets, which includes stakes in Glencore and Barclays, and using the proceeds to bolster the domestic economy, according to Bloomberg sources.

The selling, which we previewed back in June amid an overview of Qatar"s deteriorating financial system, will probably not come as a surprise: "Sovereign wealth funds, such as the Qatar Investment Authority, are always national buffers against adverse risk events, ” said Sven Behrendt, managing director of GeoEconomica in Geneva. “Since the boycott is such a risk event for Qatar, the assets stored within QIA will need to serve as such a buffer.”

Created over a decade ago, in 2005, to handle Qatar’s vast windfall from sales of LNG of which it is the world’s biggest exporter, the QIA and other Qatari investors have amassed holdings in Hollywood, New York office space, London residential property, luxury Italian fashion and even a soccer team. The QIA ranks as the ninth largest globally, according to the Sovereign Wealth Fund Institute.

Meanwhile, Qatar"s banks have already sensed the change in the wind direction, and having pitched acquisition targets to the QIA for years "are now proposing asset sales, and have been told not to expect any major investments by the fund in the near term." The fund hasn’t formally hired financial advisers to dispose of any assets but is considering which stakes are best positioned to be offloaded, they said. The QIA declined to comment.

Quoted by Bloomberg, Rachel Pether, a senior adviser at the Sovereign Wealth Fund Institute said that "the QIA is being fiscally prudent by not actively pursuing new investments." She added that “the QIA has approximately 57 percent of its portfolio in publicly listed securities, which means there is reasonable liquidity in its portfolio if further support is required."

The QIA last year saw its biggest overhaul since 2014, grouping $100 billion of investments in local companies into a new unit and abandoning the Qatar Holding name synonymous with its highest-profile deals, people with knowledge of the matter said at the time.

After a dip in transactions in 2015 and 2016 as oil prices slumped, the fund regained its appetite for deals late last year, investing in Turkey’s biggest poultry producer, Rosneft, and U.K. gas company National Grid Plc, all within a couple of months.

All that, however ended after a Saudi-led standoff that started in June has put the small but rich (with the world"s highest GDP/capita ratio in the world) in a vice.

Confirming the start of the upcoming liquidation phase, CEO Sheikh Abdullah Bin Mohammed Bin Saud Al Thani said last month that the QIA plans to spend most of what remains of its $45 billion investment target on U.S. assets as it seeks diversification. As Bloomberg adds, the fund is also considering selling some of its extensive property portfolio, especially in the U.K. where it owns stakes in London’s Savoy Hotel, the Shard skyscraper and the Olympic Village. The QIA also wants to sell an office building in London’s Canary Wharf financial district that is leased to Credit Suisse, people familiar with the matter said last month.

In other words, already reeling from the withdrawal of Ultra high net worth buyers, the London real estate market is about to get hit by a double whammy of selling from the very top.

The QIA has injected billions of dollars into local banks to shore up liquidity after Saudi Arabia, the United Arab Emirates and Bahrain cut diplomatic ties on June 5 amid accusations of funding terrorism, prompting their lenders to withdraw funds from Qatar, people familiar with the matter said at the time. Qatar has repeatedly denied the charges.

Qatar should also look at other assets that could be used as alternative buffers to reduce some of the heat on QIA, said GeoEconomica’s Behrendt.

“The diplomatic boycott and economic blockade of Qatar sees basically two strategies employed by the parties: the Saudi-led coalition employs a ‘wearing down’ approach, Qatar a ‘holding out’ strategy,” he said. “In the end it will be about who will have the longer staying power.”

And while the QIA liquidation was telegraphed months in advance, a bigger question is if now that SWFs are once again selling assets to shore up the domestic economy, will others follow, and specifically, will Saudi Arabia be next. As Bloomberg"s Javier Blas showed this morning, Saudi FX reserves tumbled $6.9 billion in August, and are down a whopping $48bn YTD, effectively in line with the drop over the same period in 2016, when Saudi Arabia saw $54bn in reserves flow out, on lower oil output and prices.

#SaudiArabia FX reserves fell $6.9 billion in August (Jan-Aug 2017: -$48bn, same period 2016: -$54bn) on lower #oil output #OOTT #OPEC pic.twitter.com/z50TYnQdK0

— Javier Blas (@JavierBlas2) October 3, 2017

If and when Saudi Arabia joins the QIA as a motivated seller (at any price), and as central banks withdraw as buyers of first, last or any resort, the sudden risk asset air pocket of 2015/2016 may seem like a walk in the park in retrospect.

Has Venezuela's Crisis Reached A Tipping Point?

Authored by William Burke-White and Dorothy Kronick via Knowledge@Wharton,

Venezuela’s ongoing economic and humanitarian crisis has assumed graver proportions over the past five weeks and pressure is mounting for a regime change, even as doubts persist over the likelihood of the next presidential elections, originally set for October 2018. Fresh protests broke out after President Nicolas Maduro earlier this month signed an order aimed at forming a new constituent assembly of some 500 members and rewriting the country’s constitution to reshape his powers and those of legislators.

Many Venezuelans clearly saw Maduro’s ruling as a way to snatch powers from the opposition-led National Assembly and consolidate it in a constituent assembly over which he might have a better hold. “[Maduro] tried to do this as a way to unite the country, but it was seen as an attempt to retain power and sparked the latest round of protests,” said William Burke-White, director of the Perry World House and professor at the University of Pennsylvania Law School.

Venezuela’s crisis has probably hit a tipping point and Maduro’s days in power are numbered, said Burke-White. “The path forward is Maduro will be pushed out of power, or there will be a repressive, horrible crackdown where the death tolls keep mounting,” he noted. “It may be better to be moving in that direction [towards Maduro’s ouster] than be in an ongoing political quagmire that we have been in for the last few years.”

According to Dorothy Kronick, a political science professor at the University of Pennsylvania, “The best way forward for Venezuela would be elections and having a new government in power.” She noted that 2017 is the fourth consecutive year of negative GDP growth for Venezuela; last year, its economy contracted by more than 17%. “There are devastating shortages of food and medicine, and inflation is above 300%. And there is tremendous suffering.”

Burke-White and Kronick discussed the scenarios likely to emerge in Venezuela in the foreseeable future on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Move to Consolidate Power

The recent crisis had its first flash point on March 29, when the country’s Supreme Court passed a ruling to assume the functions of the National Assembly, but strong protests forced it to subsequently backtrack. Meanwhile, protestors continued calling for elections and a regime change. Maduro, who was elected in 2013 after the death of Hugo Chavez, signed the executive order to form a new constituent assembly and rewrite the constitution on May 1. “We must modify this state, especially the rotten National Assembly that’s currently there,” he had said.

Opposition leaders are pressing for a removal of the Supreme Court justices who issued the March 29 ruling, general elections in 2017, the creation of a humanitarian channel for medicine imports and the release of all political prisoners, according to a BBC report.

Burke-White did not expect elections to happen anytime soon. He noted that Maduro had indicated that fresh elections would be held as part of the new constitution. “His [United] Socialist Party [of Venezuela] would lose those elections if they were held today,” he said. “Much of this is a move to push those elections out indefinitely.”

Maduro’s plan for the new constituent assembly is to have about half of its 500 members elected directly from among all sections of Venezuelan society, including workers, youth, women, peasants and indigenous people, according to a CNN report. The other half would be made up of delegates chosen from among businesses and workers’ collectives. Kronick noted that the provisions in the rewritten constitution would “undoubtedly … favor the government.” She also predicted that the Maduro government would try to ensure that the convention “is full of delegates that are its supporters.”

Even so, with Maduro’s low approval ratings, Maduro is taking a big risk, according to Kronick. “His approval ratings are so low that even with electoral rules that are extremely favorable to the government, the opposition could potentially gain control of this constitutional convention,” she said. “That could be very dangerous to the government and lead to regime change.”

With growing protests, Maduro had his back against the wall, according to Burke-White. “He didn’t have many cards left,” he said. “This was a tactic that was legal within the constitutional structure — that the president can call for a new constitution — which you wouldn’t undertake if you weren’t in this moment of desperation.”

An Economy Embattled

Along with those political uncertainties, Venezuela’s economy is also in a sorry state. Oil accounts for 96% of the country’s exports, according to World Bank data, and low oil prices have taken a huge toll. Venezuela has the world’s largest proven supply of oil reserves, but much of that oil has high extraction costs, noted Burke-White. “When oil prices fall, those are the first to cease production because it is economically unviable to do so.” What makes that situation worse is the country has lost both technical talent (fired by the Chavez and Maduro governments) and investors, after foreign investments in the sector were nationalized. “They have lost a great deal of oil extraction capacity, which has both increased the cost of production and decreased the ability to keep production up,” he said. “The oil industry is no longer able to provide the economic support that Maduro needs to consolidate, or buy off, power.” Added Kronick: “Chavez had a windfall when oil prices rose, and raked in hundreds of millions of dollars, but they were not well invested and were squandered.”

In addition to low oil prices, the Maduro government’s decisions “to maintain some destructive and expensive exchange control measures, and price controls” are responsible for the food and medicine shortages, Kronick said. “Economists have been urging Maduro to introduce “common sense” reforms for years such as lifting price controls, she added, noting that “price controls create shortages.”

Pressures Closing in on Maduro

Meanwhile, Maduro could face other threats as he tries to cling to power. For one, it is critical for him to ensure the military’s support. However, as the economic misery widens, it also affects the families of members of the military, Burke-White noted. “It is much harder to maintain a military-based regime when you have to point your guns at your own people,” he said. “Maduro realizes that that’s the support base he can’t let slip, and if it does slip, it could well be the end of his regime.” Kronick noted that a popular chant during protests translates from Spanish to English as: “Soldier, listen. Join the protest, join the fight.”

Expectations run high that the Trump administration could impose sanctions on the Maduro government. Sanctions might not work well on an economy that is “already devastated,” and “very much isolated and closed from the rest of the world,” Burke-White said. However, if sanctions are targeted at specific individuals or supporters of the Maduro regime, they might work, he added. “Many of those people have bank accounts and condominiums in Miami, and getting them to feel some of the pain a little bit more might work.” However, targeted sanctions against Maduro’s supporters “could raise exit costs for members of the regime” said Kronick. “If they were to leave power, they won’t be able to go to Miami and enjoy their post-government life, and that could actually make regime change more unlikely.”

The U.S. does not seem to have sufficient “diplomatic capacity” to engage with Venezuela, given the understaffed State Department, said Burke-White. But he did note Thomas A. Shannon, Jr., undersecretary for political affairs, is well versed with the region’s problems. In February, Donald Trump and Mike Pence met with Lilian Tintori, the wife of jailed Venezuelan opposition leader Leopoldo López. “The Trump administration is much more willing to be much more openly critical of Venezuela than the Obama administration was,” he added.

U.S. involvement in working with the Venezuelan opposition or trying to influence a regime change could backfire and strengthen Maduro’s hand, Kronick said. “Certain actions [the U.S.] might take against the government help [Maduro] to be able to more credibly say, ‘This is the imperialist U.S. that is responsible for the problems of the country.’”

Pressure could build up on Maduro also within the region. Venezuela has been an important trading and energy partner in the northern part of South America, and it has provided aid to many countries in the region in the form of oil or cash. But its current status has left it unable to drive economic growth in the region. It has socialist-leaning countries as neighbors, including Cuba, “but those countries are leaning in different directions at the moment,” said Burke-White. He expected Cuba to be more susceptible to U.S. pressure “not to be as supportive a trading, economic or even health care partner for Venezuela” as it has been in the past. Kronick said pressure could come on Maduro from regional forums such as the Organization of American States.

Indeed, some of that has begun. Burke-White noted that the Argentine foreign minister has openly criticized Maduro’s call for a new constitution. “That is unusual given that Latin American and South American states have traditionally been hesitant to criticize one another,” he said. “We’re starting to see the edges of that tacit alliance begin to crack.”