High inflation over the last twelve months has resulted in higher commodity prices and robust corporate profits. Both of these have handed windfalls to some of the Middle East’s most important entities: their Sovereign Wealth Funds (SWFs).
At the same time, however, high inflation has led to rapidly rising interest rates, which have revealed numerous frailties throughout the global banking world. Put simply, counterparty risk is back. And back just at a time when the SWFs need safe places to manage a marked increase in the levels of cash they are holding.
"The sovereign wealth funds in the region have got a lot of money to invest, and they have to do something with the cash that they've got before they can deploy it,” says Kyle Boag, Managing Director and Regional Head of Global Payments Solutions, MENAT, at HSBC Bank Middle East. “Where they deploy and how they deploy is becoming an increasing challenge for them.”
In the past, their deployment of cash would have largely been with the banks in their home countries. But this is no longer an optimal solution, given the fact that the SWFs are looking to diversify away to new regions
"Sovereign wealth funds are already expanding globally, whether into Europe, North America or, Asia,” says George Greiss, Senior Vice President, Public Sector, MENAT, at HSBC Bank Middle East. “What we are seeing is that they are deploying that excess liquidity across the regions where they are looking to invest. That way, the money is already there and ready to be invested"
Broadening the geographic scope of investments is leading them to localize their cash management. "For example, Asia was always an area that they looked at but were not particularly active. Now they're starting to be much more active because they can really start to deploy their funds,” says Greiss. They continue to deploy capital into global real estate and infrastructure but have become more active in sectors such as technology and food security.
Along with this geographic diversification, SWF asset allocation and investment strategies have evolved over time. Previously they were passively invested in securities that would provide an income for pensions, or for a rainy day. Now they are active investors across the risk spectrum with a secondary mandate to help in the development of their home country as a whole. This is particularly the case with Saudi Arabia’s Public Investment Fund (PIF), whose mandate is specifically to help deliver on the government's Vision 2030 plan.
As a result of these changing objectives, the nature of the treasury function they require is also changing. "Historically we have mainly supported them with their payments” says Greiss.
"Now our discussions have pivoted towards liquidity and receivables management of assets. In particular they are looking for ways to streamline rather than opening accounts for every single entity and every single country.” For example, an SWF might be looking to use virtual accounts from a Holdco in Hong Kong for the rest of Asia where there's no issues of commingling of funds and are looking for banking partners that can help manage receiving dividends and then the repatriation of funds. One of the leading regional SWFs, for instance, recently worked with HSBC on a project to combine 140 separate bank accounts into one single channel.
This all reflects the growing complexities of SWFs as businesses. No longer just passive investment vehicles they are now active corporate giants, more like multinational conglomerates. "A lot of what they are doing is driven by need because they're just becoming so complicated," says Boag. "They are managing hundreds of accounts in different countries and different currencies, and they need help to do that. It is also being driven by a need for transparency because these investment funds are very public and they face visibility issues around what they're investing in and what they're doing. To do this, they need to be able to know where the money is and how it has been allocated."