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Arab Oil Exporters: Coping with a New Global Oil Order


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Farouk Bastaki - Kuwait Investment Authority
ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order”

Kuwait, November 26-27, 2017

Published in: Government & Nonprofit
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Arab Oil Exporters: Coping with a New Global Oil Order

  1. 1. © TICG – A Kuwait Investment Authority, Kuwait Fund For Arab Economic Development & Oliver Wyman Joint Company NOVEMBER 2017 ARAB OIL EXPORTERS: COPING WITH A NEW GLOBAL OIL ORDER MR. FAROUK A. BASTAKI, MANAGING DIRECTOR KUWAIT INVESTMENT AUTHORITY
  2. 2. 1 Agenda Introduction to KIA 1 KIA’s role in Kuwait 2
  3. 3. 2 Agenda Introduction to KIA 1 KIA’s role in Kuwait 2
  4. 4. 3 History and objectives of KIA Overview of Kuwait Investment Authority History Objectives Note 1. Established by Law No. 47 Source: Kuwait Investment Authority • Oldest SWF in the world, originating in 1953 • Officially established in 1982 to assume the responsibility of managing the State’s assets and revenue surplus from the MoF1 • Provides Kuwait with an alternative to oil- based revenue through investment returns • Achieves a rate of return on investments that exceeds benchmarks on a 3-yr rolling average • Designs and maintains asset allocation consistent with return and risk objectives • Participates in investment sector growth and stay up-to-date with investment best practices • Promotes the private sector in Kuwait without competing in or substituting any field 1953 Today1982 Origination Official creation Current operation
  5. 5. 4 Two funds with total value exceeding USD 500 BN FUTURE GENERATION FUND INTERGENERATIONAL SAVINGS FUND TREASURER OF THE GOVERNMENT GENERAL RESERVE FUND Funds under KIA management • Treasury and liquid fund that invests strictly in the local and MENA market • Acts as a stabilization fund which funds fiscal requirements • Diversified fund that is invested strictly in international markets • Receives annually a minimum of 10% of Kuwait’s government revenue to invest • No asset can be withdrawn unless sanctioned by Law Source: Kuwait Investment Authority
  6. 6. 5 Prudent, rational investment approach Investment considerations • Review market and geopolitical situation • Consider market condition drivers, including: – Oil price – Interest rates – Geopolitics – Growth rate Market environment • Define basis for asset allocation such as: – Risk/Return trade offs – GDP growth/demographics – Thematic opportunities Basis for asset allocation • Aim towards a specific rate of return and risk profile – Rate of return of ~4-6% per annum for the next 10 years – Risk profile of ~12% Rate of return Platforms • Consider investment platform and involved stakeholders: – External Fund Managers through Kuwait – Direct dealings through London Source: Kuwait Investment Authority
  7. 7. 6 Investing in 120 countries of which 81 (68%) are emerging markets 2004 2017 Investment distribution by region Past Present Countries 37 Of which Emerging: 10 Investment allocation (2004) Since 2004, KIA has focused on diversification to increase returns and reduce risks through: – Decreasing allocation in Developed Economies – Increasing allocation in higher growth Emerging Markets Countries 120 Of which Emerging: 81 Investment allocation (2017) Source: Kuwait Investment Authority
  8. 8. 7 1984 1993 2001 2004 2017 KIA investment by asset class Asset class: Large cap equities – Satellite – Large/Mid/Small Cap – Emerging Markets Bonds – BBB ≥ – High Yield – Emerging Markets – TIPS – Convertibles Real Estate – Private equity – Hedge funds – Infrastructure Direct Investments – Active real estate – Real estate funds Cash – Developed Markets FX – Emerging FX Portfolios (#) Mandates (#) 1 2 3 4 5 Note (*): Includes 6 separate European countries equity mandates, which were subsequently consolidated due to the introduction of the euro. In addition, 3 country specific bond mandates were merged into one global bond mandate Source: Kuwait Investment Authority – – 33 19* 39 20* 45 11 133 36 Investment across five asset classes
  9. 9. 8 Agenda Introduction to KIA 1 KIA’s role in Kuwait 2
  10. 10. 9 KIA role and implications KIA as both a treasurer of the government and intergenerational savings fund Treasurer of the Government Intergenerational savings fund GENERAL RESERVE FUND • Macro stabilizer of Kuwait’s fiscal balance and economy • Highly liquid buffer to act as a shock absorber in a commodity-based economy • Generated income to support overall savings account of government and future generations on a long-term investment horizon • Investment diversification to reduce concentration of risk and maximize returns Source: Kuwait Investment Authority FUTURE GENERATION FUND
  11. 11. 10 Macro stabilizer of Kuwait’s fiscal balance and economy -5.9-6.0 -2.7 5.04.7 FY2012/13A FY2015/16A FY2016/17AFY2014/15AFY2013/14A Government fiscal balance KD BN, including FGF transfer, A = actual Note: KEC = Kuwait Export Crude Source: Ministry of Finance Oil price slump Oil price (KEC, $/bbl, year average) 107 104 81 43 45 Treasurer of Gov’t Intergenerational fund
  12. 12. 11 Implement economic and fiscal reforms Government’s two-step approach to address deficit, before KIA intervention Prongs to address deficit 16.2 17.0 19.3 18.9 17.718.2 21.4 +7% 2016/172015/162014/152013/142010/11 2011/12 2012/13 -9% State Expenditure Actuals Evolution KD BN, FY2010/11 to FY2016/17 Issue debt USD 29 BN peak book size 3.6x oversubscribed USD 8 BN peak book size - 5-yr tranche: USD 3.5 BN - 10-yr tranche: USD 4.5 BN 300+ Investors across tranches 778 total orders in book Kuwait’s inaugural bond issuance statistics Savings generated due to reforms Source: Ministry of Finance Lowest spreads Amongst GCC peers at time of issuance Highly diverse set of investors Treasurer of Gov’t Intergenerational fund
  13. 13. 12 GRF finances deficit post reforms and debt 5.96.0 2.7 1.2 Reform savings Actual deficit FY2016/17B 7.1 FY2015/16B 6.9 0.9 FY2014/15B 3.3 0.6 Budgeted State deficits KD BN, including FGF transfer Source: Ministry of Finance, TSO analysis Reform savings KD BN Debt (local + int’l) KD BN GRF drawdown KD BN 0.6 – 2.7 0.9 – 6.0 1.2 2.23 + 2.44 1.23 Treasurer of Gov’t Intergenerational fund
  14. 14. 13 FGF asset composition and regional allocation FGF’s global and varied asset allocation Asset Class SAA1 mid-point % Equities 55.0 Fixed Income 22.5 Alternatives 10.0 Real Estate 10.0 Cash 2.5 Region SAA1 mid-point % North America 52.0 Europe 24.0 Asia and Japan (incl. Emerging Asia) 19.0 Emerging markets (excl. Emerging Asia) 5.0 Note 1. Strategic Asset Allocation Source: Kuwait Investment Authority The KIA Board has also approved a Dynamic Asset Allocation range for each Asset Class and Region Treasurer of Gov’t Intergenerational fund
  15. 15. 14 KIA Assets Under Management (AUM) Evolution KIA fund size evolution Illustrative Source: Kuwait Investment Authority Nascent fund stage Post-Gulf war Origination of SWF FGF inception KIA funds have reached well above USD 500 BN through sustained transfer of government revenue to FGF and returns from a long-term investment strategy 1950 1960 1970 1980 1990 2000 2010 20201953 Yearly transfer of 10% of revenues to Fund Post FGF creation in 1976 19901976 Over USD 80 BN withdrawn for the reconstruction after Iraqi invasion Total fund size over USD 500 BN 2017 Treasurer of Gov’t Intergenerational fund