June 8, 2014 / 3:41 PM / 5 years ago

UPDATE 1-Saudi Arabia to discuss proposal for sovereign wealth fund

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By Angus McDowall and Yara Bayoumy

RIYADH/DUBAI, June 8 (Reuters) - Saudi Arabia’s Shura Council, an influential advisory body to the government, will discuss a proposal for the country to establish a sovereign wealth fund that would invest some of its vast oil earnings, local media reported.

The National Reserve Fund would “guarantee the financial stability of the kingdom” by investing its reserves, Saad Mareq, head of the council’s financial committee, was quoted as telling the pan-Arab Asharq al-Awsat daily on Saturday.

Details of its investment strategy were not given, but if the proposed Saudi fund is run like the sovereign wealth funds of other wealthy Gulf states such as Qatar and Abu Dhabi, it could mean a change in the way Saudi money flows through global markets.

The country’s central bank, the Saudi Arabian Monetary Agency, has long managed the country’s investment of oil surpluses abroad, focusing on low-risk assets; it is believed to have placed over half of its foreign reserves, now equivalent to about $730 billion, in conservative U.S. dollar assets such as U.S. Treasury bonds and bank accounts.

Other sovereign wealth funds in the Gulf have invested more actively in a wider range of assets including real estate and stakes in top Western companies, which involve greater risks and higher potential returns.

Asharq al-Awsat said the proposed Saudi fund would start with capital of 30 percent of budget surpluses accumulated over past years. In 2013 alone, the government posted a budget surplus of 206 billion riyals ($55 billion).

The fund would have a president with the rank of minister, the newspaper added. The Shura Council will discuss a draft law for the National Reserve Fund on Monday and Tuesday, the official Saudi Press Agency reported.

If the Shura Council approves the proposal, that would not automatically mean the legislation would be enacted. Sometimes years have passed between the council debating a proposal and it becoming law, although there has been a far swifter process in other cases.


The size of Saudi Arabia’s foreign reserves suggests the new sovereign wealth fund could become one of the largest in the world, depending on the proportion of reserves it was allocated.

At present the biggest such fund is Norway’s Government Pension Fund with $878 billion, followed by the Abu Dhabi Investment Authority with $773 billion, according to the Sovereign Wealth Fund Institute, which studies the industry.

It is not clear how the proposal as it stands will change the existing procedures under which Saudi reserves are managed by the central bank, said John Sfakianakis, chief investment strategist at MASIC, a Saudi investment company.

“They have to ask fundamental questions: who will manage it, what will be the role of the central bank, and will the investment profile change,” he said.

In the past, the kingdom has invested much of its oil wealth on domestic initiatives through a number of different state bodies - among the most prominent are the Public Investment Fund and the General Organisation for Social Insurance. Their projects include investments in local companies and providing funds for infrastructure development.

In 2009, an investment fund called Sanabil Al Saudia was set up with a mandate to invest in less conservative assets. It was granted 20 billion riyals of initial capital.

Last year, the International Monetary Fund told Saudi Arabia it was spending more than it should if it wanted to preserve oil wealth for future generations, and that its state budget could fall into deficit by 2016 if expenditure continued rising fast. ($1 = 3.7505 Saudi Riyals) (Additional reporting by David French; Editing by Andrew Torchia)

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