Despite volatility in international oil prices and delays in the implementation of economic diversification strategies, ratings agencies and the IMF agree the outlook for Kuwait is strong and stable, as it is home to substantial oil reserves and one of the world’s richest sovereign wealth funds (SWFs). Geologists calculate domestic oil fields could yield 101.5bn barrels of oil, and the Kuwait Investment Authority (KIA) has the fourth-largest amount of assets under management (AUM) in the world.
Funding Roles
The KIA is reportedly the oldest SWF in the world. Its roots trace back to the formation of the Kuwait Investment Board (KIB) by Sheikh Abdullah Al Salem Al Sabah in London in 1953, eight years before the country achieved its independence. The KIB’s mandate was to use surplus oil revenue to invest in financial assets that would promote sustainable domestic development.
In 1965 the KIB was rebranded as the Kuwait Investment Office (KIO), and in 1976 a law was passed to create the Future Generations Fund (FGF) by transferring 50% of the funds accrued to date to a new account with 10% of general government revenue to be transferred to the FGF each year beginning in FY 1976/77, as well as 10% of the net income from the General Reserve Fund (GRF). The law prohibited withdrawals from the FGF or reductions in the annual share of revenue it received.
The GRF is the main repository for Kuwait’s oil revenue, and it holds other government assets, including a stake in the Kuwait Fund for Arab Economic Development and the Kuwait Petroleum Company. In 1982 Law No. 47 established the KIA to administer the GRF and FGF, with its headquarters located in Kuwait City. The FGF serves as a nest egg for the citizens of Kuwait and their descendants. Meanwhile, the GRF has an investment function but can also be used as a pressure valve to mitigate the effects of oil price fluctuations on public balances and spending.
Investments
The London-based KIO has a long history of real estate investment in the UK through various companies. It acquired St Martin’s Property Group in 1974, which has since invested in a number of landmark schemes in London’s City and Canary Wharf, as well as in other countries, such as Turkey, Australia and Japan. In 2013 Wren House Infrastructure Management was incorporated with an initial commitment of $5bn, and it is wholly owned by the FGF. In 2016 Wren House joined a consortium with Alberta Investment Management Corporation and Ontario Teachers’ Pension Plan to buy the company that owns and operates London City Airport, and in 2017 it partnered with another Canadian pension fund investor, Borealis Infrastructure, to buy a minority stake in UK utility company Thames Water on behalf of the FGF. In 2014 the London KIO provided $1.5bn in seed capital to Cale Street Partners, a European-focused real estate venture.
The KIA has also been active in markets outside of Europe. In 2011 the KIA opened the Kuwait Investment Representative Office in Beijing. It has primarily focused on investing in public and private markets, the China Interbank Bond Market and real estate. In the US, the KIA has made a number of high-profile real estate investments in New York City and Washington, DC through Atlanta, Georgia-based Fosterlane Management Company.
Corporate Activity
Furthermore, the KIA has purchased minority stakes in international corporations. In 2018 it had a 6.8% share in Daimler, and in 2008, during the global financial crisis, it invested $2.39bn in Citigroup and $984m in Merrill Lynch. It sold its Citigroup stake in December 2009 for a $1.1bn profit, but retained its shares in Merrill Lynch when it was bought by Bank of America.
However, not all ventures have proven to be as profitable. For instance, in 2010 the KIA paid $676m for a 4.82% stake in Areva, a largely government-owned French firm specialising in uranium and nuclear energy, but by 2016 the company’s share value fell by 90%. One year later KIA was offered €83m for its stake in the company, a significant loss on its $676m investment. Despite this misstep, financiers generally find that Kuwait’s SWF has outperformed many of its regional peers. “The KIA has developed a diversified global portfolio and has invested in strategic sectors,” Rani Selwanes, head of investment banking at local investment firm NBK Capital, told OBG. “That is one of the fundamental reasons why Kuwait’s credit is so strong.”
Ratings Agencies
While some high-profile moves are published by the media, the KIA has remained opaque about its performance, leaving ratings agencies to draw their own conclusions about the scale of its AUM. Moody’s, Fitch and Standard & Poor’s (S&P) gave Kuwait ratings of “Aa2”, “AA” and “AA/A-1+”, respectively, in 2017 and 2018, with stable outlooks. While all the agencies noted that the KIA did not publicly disclose its assets, Moody’s estimated the KIA had $612bn in AUM by the end of 2016, while Fitch calculations suggested the figure was $514bn, or 453% of GDP. In 2017 S&P estimated the KIA’s AUM at 390% of GDP.
With a reported nominal GDP worth $121bn in 2017, this would indicate combined funds worth $472bn, a notable decline from the Moody’s calculation for 2016. The three ratings agencies also differed in their estimates of the proportion of assets held in the FGF, with Fitch, S&P and Moody’s suggesting rates of 78%, 75% and 66%, respectively.
Other Estimates
In its annual appraisal on Kuwait for 2017, prepared in consultation with domestic civil servants, the IMF estimated the combined value of the KIA’s funds was 470% of GDP in FY 2016/17, with the FGF valued at 333.1% of GDP, translating to $521bn of AUM in 2016. The KIA gave a rare insight into the scale of its assets in May 2017, when it refuted claims of larger losses for FY 2015/16 (ending on March 31, 2016) by saying it had incurred a loss of $1.03bn, according to local news sources. The KIA said the loss was the equivalent of 0.2% of its total assets, which would suggest a total of $515bn AUM. The SWF Institute (SWFI), which makes international comparisons, estimated the KIA’s assets were $592bn in mid-2018, up from $524bn earlier in the year.
Transparency
In 2008 the SWFI developed the Linaburg-Maduell Transparency Index, which assigns scores between one and 10 based on disclosure. While, according to the SWFI, any SWF wishing to claim its dealings are transparent should earn an eight or higher, the KIA was given a score of six. In 1982 the government issued Law No. 47, which included rules and regulations relating to transparency and disclosure about the KIA’s investments. Clause five of the law requires the KIA to present a report on AUM and performance to the Council of Ministers – comprising the Prime Minister and 15 portfolio-holders appointed by the emir – while clauses eight and nine prohibit any disclosure of this information to the wider public and detail penalties for those who release or publish such data.
The KIA authorities say that the Council of Ministers is informed at least once per year about its assets, but this leaves local media to interpret sometimes contradictory hints about the KIA’s performance from government officials. In September 2017 local media reported a speech given by Anas Al Saleh, the then-minister of finance, saying the KIA’s AUM had grown by more than 34% over five years, although no further figures were given. In March 2018 Nayef Al Hajraf, the subsequent minister of finance, revealed in a memo to members of Parliament that the net profit from the KIA’s activities for the three-year period from FY 2014/15 to the end of FY 2016/17 had reached KD24.68m ($81.8m).
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