KUWAIT INVESTMENT AUTHORITY: DOING FINE BUT

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001879

SIPDIS

E.O. 12958: DECL: 05/05/2015
TAGS: ECON EFIN EINV PINR KU
SUBJECT: KUWAIT INVESTMENT AUTHORITY: DOING FINE BUT
WATCHING U.S. MARKET EXPOSURE CLOSELY

Classified By: Ambassador Richard LeBaron for reason 1.4 (d)


1. (C) Summary: During a May 3 meeting with the Ambassador,
Kuwait Investment Authority Managing Director Bader Al-Sa'ad
said that KIA's assets had grown "substantially" over the
previous year, but noted that recently KIA's U.S. investments
had been a "drag on overall performance." He also said that
KIA was selling real estate holdings in the U.S. because of
"high taxes on capital gains and income." He said that the
annual contributions to the Kuwait Future Generations Fund,
which is managed by KIA, is not as large as is commonly
thought because of the recent massive increase in GOK
expenditures. Comment: The KIA is thought to manage amounts
between between $75 and $100 billion on behalf of the GOK but
maintains a very modest outward appearance, both physically
and in the amount of information it makes available to the
markets and its own citizens. End Summary and Comment.

KIA: History and Background
--------------


2. (C) Ambassador met with Kuwait Investment Authority
(KIA) Managing Director Bader Al-Sa'ad and Head of the
Americas Investment Department Ahmad Bastaki on May 3 in
order to learn more about KIA's investments in the U.S. and
elsewhere. KIA was founded in 1982 and is charged with
managing the investments of the GOK. The source of these
investments come from two major areas: the Future Generations
Fund (FGF),which is a 10% set-aside from government revenues
each year, and all other surpluses in the general reserves.
The two categories are managed separately and the funds are
not co-mingled. KIA does not publicly disclose its total
assets, but it is thought to control between $75 and $100
billion. It allocates these assets into investments in OECD
countries, based roughly on each country's percent of total
world GDP, according to Al-Sa'ad. The U.S. and some European
countries have received a larger share of investments than
their GDP indicates, he added.


3. (U) KIA is overseen by a Board consisting of the Finance
Minister as Chairman, the Minister of Energy, the Central
Bank Governor, a Ministry of Finance Undersecretary, and five
other Kuwaiti nationals with backgrounds in investment and
finance. The Board appoints a Managing Director to oversee
the day-to-day operations. KIA has over 300 employees in
Kuwait and also operates an office in London. The London
operation, known as the Kuwait Investment Office, actually
predates KIA's charter, having been established in 1953.
According to Al-Sa'ad, the KIO is considered by the
Government of the UK to be similar to a "financial attach"
and is accorded "special treatment" by the City of London.
Additional background on the KIA can be found at:
http://www.kia.gov.kw.

A "Good Year", But Concerns Over U.S. Economy
--------------


4. (C) Al-Sa'ad said that the past year had been good for
KIA, and that its assets grew "substantially." He expressed
concern over the performance of assets in OECD markets, in
which he said the KIA was "heavily exposed." He said that
the KIA "does not really hedge against downturning markets,"
and added that the "U.S. is really dragging" on the
performance of KIA's assets. KIA's investments in the U.S.
are mostly in equity funds managed through medium-sized
investment firms, Al-Sa'ad explained, adding that KIA uses a
variety of third party fund managers to manage its assets.
KIA used to own a good deal of property in the U.S., Al-Sa'ad
said, but was having to sell these holdings because of what
he described as "high taxes on capital gains, income and
dividends." He attributed these tax difficulties to the
absence of a Double Taxation Treaty between the U.S. and
Kuwait. KIA has a wholly owned subsidiary in the U.S.,
"Breadstreet Inc.", that manages its remaining property
holdings, Al-Sa'ad said, and still invests in real estate
through real estate investment trusts (REITs) and other
mechanisms. He said that the KIA was still actively looking
for ways that the GOK could continue to own property in the
U.S.


5. (C) Al-Sa'ad noted that the contributions from the budget
into the Future Generations Fund (FGF) were not as large in
the past year as some thought because of the rapidly
expanding GOK budget. With all of the big projects that the
GOK is planning, he explained, there was less surplus revenue
to be given to KIA. The "mega-projects" he mentioned
included the planned causeway across Kuwait Bay, the Bubiyan
Port, Failaka Island, railway projects and more. He also
said that the GOK was increasing its expenditures on
infrastructure maintenance and that this was also using up
funds that would otherwise go to the KIA.

Keeping A Low Profile, but Answering to Parliament
-------------- --------------


6. (C) When the Ambassador noted the modesty of Al-Sa'ad's
office compared to the lavish offices of other top financial
executives in Kuwait and especially relative to the amount of
money that KIA handles, Al-Sa'ad responded that KIA is still
a government body and still needs to answer to the National
Assembly on its own internal budget. (He pointed out that he
has been waiting for a new carpet for his office for over a
year. It needs it.) He explained that the KIA is regulated
by the State Audit Bureau and has to report annually to the
National Assembly, which reviews its internal budget and the
performance of the assets under its management. Any MP is
entitled to look at KIA's budget, he said, and is entitled to
know the total amount of assets under KIA management. This
review usually takes place in June or July, he explained, and
the Kuwaiti newspapers usually publish general points and a
rough estimate of KIA's assets at that time. Al-Sa'ad would
not disclose the amount of KIA assets, but did say that the
newspaper discussions of the budget hearings would give a
rough idea.

Not Investing in the GCC, Some Investments in Kuwait
-------------- --------------


7. (C) When asked about regional investments, Al-Sa'ad said
that the KIA was not heavily invested in GCC countries, and
only had a few small holdings and interests in things
"purchased years ago." While noting that the current
economic growth throughout the GCC is "a good boom," he said
that it was really all the same area and economic climate as
Kuwait and that the KIA did not see the need to invest in the
whole GCC if it could make some investments in Kuwait. It
would be a duplicate investment, he explained, and would also
duplicate the risk and KIA's exposure in the region. The GCC
doesn't need capital, he added, and said that the KIA "does
not want to compete with private sector investment." The KIA
has some investments in Kuwait, Al-Sa'ad said, including a
20% stake in Bubiyan Bank, a newly formed Islamic bank. He
said the KIA prefers to let the private sector make these
types of investments in Kuwait, but that the bank investment
was a unique situation. The Central Bank had received almost
20 separate applications from Kuwaiti banks and financial
institutions to open an Islamic bank, he explained, so
instead of having to choose amongst them, the Central Bank
asked KIA to provide some capital to start a new bank and
then allowed the public to buy a stake. He said the KIA will
eventually sell its stake.

Funds Flows Back to Kuwait
--------------


8. (C) When asked his opinion about flows of private
capital, Al-Sa'ad said that it appeared that money was coming
back to Kuwait from being invested abroad, but he added that
he could not be sure of the mix of incoming funds. He said
that the most obvious sign that money was coming back to
Kuwait from abroad was the continued rise of the stock market
and real estate prices, despite the fact that the Central
Bank has consistently raised the interest rates and capped
bank lending over the past year.

Not Ready to Invest in Iraq
--------------


9. (C) The Ambassador encouraged Al-Sa'ad to direct KIA
assets towards Iraq to help spur economic growth. Al-Sa'ad
agreed that there would be strong opportunities for
investment in Iraq in the future. In the present, however,
Al-Sa'ad said that it was still too risky for KIA to make
investments there and that there were many questions to be
answered, including when the market there would be opened up,
how it would look and when Iraq would really join the
international economic community. He said that he thought
that Iraq could be an "anchor for the region" in terms of
economic growth and development. Comparing the GOK's method
of investing its oil surplus through the KIA with any future
oil surplus investment system in Iraq, Al-Sa'ad said that
there would be many more opportunities for viable internal
investments in Iraq than there were in Kuwait and that future
governing bodies in Iraq would not need to look abroad as
much as the GOK does for investment opportunities. He did,
however, agree that the method Kuwait uses for managing its
oil revenues may have some relevance for Iraq as it wrestles
with this difficult issue.

Bio Note
--------------


10. (C) Bader M. Al-Sa'ad was appointed as Managing Director
of the Kuwait Investment Authority in December, 2003. He has
worked in the investment and financial sector for 24 years
and is a graduate of Kuwait University with a major in
Accounting. He speaks good English.

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Visit Embassy Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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LEBARON