Investor concerns over Libya’s SWF are justified
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Una Galani
LONDON — Libya’s $70 billion sovereign wealth fund was just starting to show some ambition before the country was plunged into crisis. Now investors who sit alongside the Libyan Investment Authority are understandably nervous. There’s no precedent for what will happen to the fund’s stakes in various Western entities if the regime falls, and there has never been much transparency around the institution’s inner workings.
Consider a world-class sovereign fund, for example Norway’s. A change of government in the fully democratic country almost certainly wouldn’t alter the strategy of the fund, which has over $500 billion in assets. That’s because it is managed mainly by the country’s independent central bank, which in turn mandates asset managers to make investment decisions.
But funds in autocratic regimes are more opaque and the government tends to be closely involved. Libya’s fund was only established in 2006. It is ultimately run by the country’s prime minister, according to the International Forum of Sovereign Wealth Funds, scoring a transparency rating of two on the Linaburg-Maduell Transparency Index, the same score as Saudi Arabia’s and China’s sovereign funds.
This helps explain the 7 percent drop in UniCredit shares since tensions escalated in Libya. The country owns 7.5 percent of the Italian bank. In an extreme scenario, a new Libyan regime might decide to cut ties with the West and liquidate international positions — which also includes stakes in carmaker Fiat and British publisher Pearson. The fund has $8 billion held in long-term equity investments in North Africa, Asia and Europe, according to its 2009 annual report. Alternatively, a new administration might decide to shift strategy and gradually sell stakes down.
Liquidation would not be a rational policy, however. Sovereign funds are designed to be funds of last resort and Libya has an additional $80 billion in net foreign assets held by the central bank, according to the International Monetary
Fund. The oil-dependent country badly needs to diversify its finances — hence the creation of the fund in the first place. Without an urgent need for cash, there’s no reason to believe Libya would hit the sell button. But given the escalating uncertainty, banking on a rational outcome is a gamble.