INSIGHTS INTO OMAN'S GENERAL RESERVE FUND

UNCLAS SECTION 01 OF 02 MUSCAT 001141

SIPDIS

STATE FOR EB/IFD/OIA, NEA, NEA/ARPI
TREASURY FOR OASIA

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN EINV ECON EPET PGOV MU
SUBJECT: INSIGHTS INTO OMAN'S GENERAL RESERVE FUND


1. (U) This cable contains business proprietary
information; please protect.

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SUMMARY
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2. (SBU) A royal official working for the State General
Reserve Fund recently revealed to a private sector
investment broker rare insights into the investment habits
of the SGRF. A quarter of the SGRF's assets are in cash and
short-term equities, set aside for when the government needs
to bridge budget deficits. The other three-fourths of the
Fund are invested in an impressive array of longer-term
instruments, revealing a savvy strategy on the Fund's part.
While the Fund employs some Western-based financial
consultants, it relies on in-house expertise for much of its
work. End summary.

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Background
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3. (SBU) As with most rentier economies, decades ago the
Omani government established a "rainy day" fund for excess
deposits of windfall revenues and as a source to tap when
state revenues cannot cover budget deficits. Royal Decree
80/1 established the State General Reserve Fund (SGRF) as a
public legal entity in 1980. The powerful, inter-
ministerial Financial Affairs and Energy Resources Council
regulates the SGRF. In fact, Minister of National Economy
Ahmed Abdulnabi Macki is in day-to-day charge of both the
Council and the Ministry of Finance that administers it.
Minister Macki is also the official responsible for
announcing when the government will borrow from the SGRF to
cover budget deficits, as he did on June 13, 2005, citing
falling petroleum production and a number of ongoing
development projects.


4. (SBU) The inner workings of the SGRF and its sister
institutions in neighboring states remain far outside the
public's view. An expatriate investment broker, however,
recently shared valuable insights into Oman's SGRF based on
his recent meeting with Sayyida Rawan bint Ahmed al-Said
(protect),Director of Research at SGRF and cousin to Sultan
Qaboos.

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A Tale of Two Portfolios
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5. (SBU) The State General Reserve Fund, according to
Sayyida Rawan, receives the "overage" above the oil price
used to estimate the government's annual budget. (The exact
formula is more complex, she indicated, but did not
elaborate.) Given the historically high oil prices and the
government's conservative estimation of those prices in
formulating this year's budget (the understated $23 per
barrel, albeit with somewhat rosy production estimates),the
SGRF at present has significant sums to fit into its ever-
evolving asset allocation.


6. (SBU) According to Sayyida Rawan, the SGRF runs two
different portfolios with different time horizons. The
first, perhaps accounting for 75 percent of the undisclosed
total, is a long-term portfolio for "the benefit of future
generations." The other, accounting for the remaining 25
percent, is kept in cash and fixed-income instruments with a
maximum maturity of about 3 years, and a minimum AA credit
rating. That second portfolio is intended for the partial
relief of any budgetary shortfalls that may occur for the
Sultanate.


7. (SBU) The larger of the two portfolios is perhaps the
more interesting since it contains intermediate and long-
term fixed income portfolios, equity investments (mostly
large capitalization stocks using the MSCI global equities
index as benchmark),alternatives (private equity, hedge
funds, currency funds, et al.) and both direct and indirect
(via funds, REIT's) real estate holdings.

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Outside Advice, In-House Expertise
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8. (SBU) The SGRF's investment strategy struck the
expatriate investment broker as impressively sophisticated,
duly reflective of how conscious the SGRF is of its
responsibility to the Omani public. The SGRF uses
investment management consultants (e.g. Cambridge Associates
in Boston, and Frank Russell & Co. of Tacoma, WA) for
specialized and limited mandates and for databases. The
Fund does its own asset allocation modeling and manager
search and performance measurement. The SGRF increasingly
manages fixed-income assets for both portfolios in-house,
except for some specialty mandates. According to Sayyida
Rawan, the SGRF has managed cash instruments and bonds since
1988, so they feel they have developed sufficient in-house
expertise.

BALTIMORE