Identifier
Created
Classification
Origin
07KUWAIT1422
2007-09-20 09:17:00
CONFIDENTIAL
Embassy Kuwait
Cable title:
TREASURY DAS SAEED DISCUSSES SOVEREIGN WEALTH
how-toVZCZCXRO2977 PP RUEHDE RUEHDIR DE RUEHKU #1422/01 2630917 ZNY CCCCC ZZH P 200917Z SEP 07 FM AMEMBASSY KUWAIT TO RUEHC/SECSTATE WASHDC PRIORITY 9983 INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001422
SIPDIS
SIPDIS
STATE FOR NEA/ARP, EB; TREASURY FOR SAEED, KAPROTH
E.O. 12958: DECL: 09/19/2017
TAGS: EFIN ECON PREL KU
SUBJECT: TREASURY DAS SAEED DISCUSSES SOVEREIGN WEALTH
FUNDS WITH GOK
REF: KUWAIT 1308
Classified By: Acting DCM Tim Lenderking for reasons 1.4 (b) and (d)
C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001422
SIPDIS
SIPDIS
STATE FOR NEA/ARP, EB; TREASURY FOR SAEED, KAPROTH
E.O. 12958: DECL: 09/19/2017
TAGS: EFIN ECON PREL KU
SUBJECT: TREASURY DAS SAEED DISCUSSES SOVEREIGN WEALTH
FUNDS WITH GOK
REF: KUWAIT 1308
Classified By: Acting DCM Tim Lenderking for reasons 1.4 (b) and (d)
1. (C) Summary: On September 17, a U.S. Treasury delegation
led by Middle East DAS Ahmed Saeed and International Monetary
Policy Director Robert Kaproth met with the Kuwait Investment
Authority (KIA),the Central Bank of Kuwait (CBK),the
Finance Ministry, and the Public Institution for Social
Security (PIFSS) to encourage continued Kuwaiti investment in
the U.S. and to promote the development of best practices for
the management of Sovereign Wealth Funds (SWFs). Saeed and
Kaproth referred to Treasury Assistant Secretary Clay
Lowery's June 21 speech at the San Francisco Fed, in which he
suggested that SWFs could collaboratively develop a set of
best practices for governance, risk management,
accountability, and transparency through the IMF. Saeed and
Kaproth argued that this could serve to help new SWFs to
develop sound strategies and practices, reduce systemic risk,
and lower the risk of a protectionist backlash against SWF
investment. Overall, the Kuwaitis' reception to Treasury's
message was positive to the extent that they are willing to
engage in further dialogue on the subject, but we will still
need to overcome some skepticism, especially on the part of
the Managing Director of KIA. The Kuwaitis recognize some
potential benefits for Kuwait but need some time to consider
the proposal before making any commitment. Although it seems
unlikely that the GOK will take a lead role in bringing other
SWFs onboard, the Kuwaitis may be willing to sign on as an
early follower. End Summary.
--------------
Why so much sudden interest in SWFs?
--------------
2. (SBU) On September 17, a U.S. Treasury delegation led by
Middle East DAS Ahmed Saeed and International Monetary Policy
Director Robert Kaproth met with the Kuwait Investment
Authority (KIA),the Central Bank of Kuwait (CBK),the
Finance Ministry, and the Public Institution for Social
Security (PIFSS) to encourage continued Kuwaiti investment in
the U.S. and to promote the development of best practices for
the management of Sovereign Wealth Funds (SWFs). Saeed
emphasized that the U.S. remains open to foreign investment,
pointing to the President's May 10 statement on open
investment and trade, the passage of the Foreign Investment
and National Security Act of 2007, and G7 official
communiqus endorsing open investment. Saeed noted, however,
that SWFs were coming under increasing scrutiny and possibly
contributing to protectionist fears in the OECD countries, as
evidenced by recent reporting in the financial and popular
press. He said he saw three reasons why these funds, some of
which have existed for over thirty years, were suddenly
attracting so much attention. First, the assets under
management of SWFs have grown from tens of billions of
dollars into trillions of dollars. Second, a number of new
SWFs have emerged in recent years, approximately 17 since
2000. Third, the lack of transparency in some of these funds
leads to fears that they could be used to pursue political or
strategic objectives rather than purely financial ones.
--------------
Proposal to develop SWF Best Practices
--------------
3. (SBU) Kaproth referred to Treasury Assistant Secretary
Clay Lowery's June 21 speech at the San Francisco Fed, in
which Lowery suggested that SWFs could develop
collaboratively with the IMF and World Bank a set of best
practices for governance, risk management, accountability,
and transparency through the IMF. Kaproth provided copies of
an analogous set of best practices developed by the IMF for
the management of foreign reserves. Kaproth stressed that
the U.S. was not trying to tell SWFs how to manage asset
allocation or even asking for full disclosure of specific
investments but rather promoting the development of a
non-binding set of common principles for governance and risk
management to which SWFs could voluntarily subscribe. Saeed
added that a public commitment to adhere to these best
practices could serve as a "Good Housekeeping Seal of
Approval" to differentiate high-quality, responsibly managed
funds, from riskier or more politically-motivated funds.
Kaproth said a set of SWF best practices could serve three
important purposes. First, it would help newly-established
SWFs to establish sound strategies and practices. Second, it
could help reduce systemic risk. Third, it could help to
lower the risk of a protectionist backlash against SWF
investment.
KUWAIT 00001422 002 OF 003
4. (SBU) Saeed pointed out that a range of SWFs with very
different profiles were currently being lumped into a single
category. He suggested that by endorsing a set of commonly
approved best practices, investors such as the Kuwait
Investment Authority, which has been a responsible and mostly
passive investor in the U.S. since 1953, could differentiate
themselves from less desirable investors. Kaproth noted that
SWFs demonstrate many reassuring features: they tend to be
long-term investors who can weather short-term losses, they
are not highly leveraged, and they cannot be forced by
capital requirements or investor withdrawals to liquidate
positions rapidly. He added, however, that SWFs possess some
unattractive characteristics as well. First, their lack of
transparency means that rumors or suspicions of their actions
can move markets. Second, SWFs typically lack the system of
informal checks and balances that investors, creditors, and
counterparties exert over other funds.
--------------
KIA somewhat skeptical; willing to consider
--------------
5. (C) KIA Managing Director Bader Al-Saad reacted by saying,
"What's the worry? Is it just the size? What about private
equity?" He added that after the problems with Dubai Ports
World and the sanctions imposed on Iran, "We as investors
should be more worried than you as investees." Al-Saad
pointed out that KIA already has a system of checks and
balances since the State Audit Bureau, the Parliament, and
the Government all review its decisions. He added,
"Politicians will be politicians" regardless of whether
foreign investors have signed on to a set of best practices.
Al-Saad noted that the controversy over CNOOC's bid for
Unocal had nothing to do with SWFs. He admitted that recent
media reports had been worrisome but said, "The ball's in
your court" to educate the public about the advantages of
foreign investment. Saeed responded that the USG recognizes
that it too has a responsibility, which is why it hopes to
work collaboratively with SWFs to reduce the risk of
protectionism. Kaproth added that the USG was recommending
that a parallel set of best practices be developed for
recipient countries of SWF investment within the OECD. In
the end, Al-Saad said he would think about the proposal to
collaborate with other SWFs on best practices, but he was not
convinced it would provide any benefit for Kuwait. For more
background on KIA, see reftel.
--------------
Central Bank supports further dialogue
--------------
6. (C) Central Bank Governor Shaykh Salem Al-Sabah said he
had been hearing rumblings about an SWF best practices
proposal since the spring IMF meetings, but he was initially
unclear on what was being asked for. After hearing Saeed and
Kaproth's explanation, he said he understood the objectives
and hoped to engage in further dialogue on the subject.
--------------
Finance U/S will recommend to Minister
--------------
7. (C) Under Secretary of Finance Khalifa Hamadah said the
KIA board, which includes, among others, the Minister of
Finance, the Central Bank Governor, and the Oil Minister,
would ultimately decide on whether to participate in the
collaborative development of SWF best practices. He added
that there may be legal constraints that limit the
information the KIA can disclose. Hamadah said the proposal
was a "good idea in principle" and he would recommend to the
Finance Minister that he support it within the limits set by
Kuwaiti law. Al-Hamadah asked if these efforts had anything
to do with concerns over money laundering. Kaproth clarified
that although Treasury had an active campaign underway to
combat money laundering, this effort was not related. He
added that it also had nothing to do with reducing yields on
U.S. treasuries.
--------------
Pension Fund: KIA should be able to support
--------------
8. (C) PIFSS Director General Fahed Al-Rajaan said, "America
is still the best place to invest," and "the Gulf is still
pro-American." He said that even when he invests in emerging
markets, he prefers to do so indirectly through U.S. funds.
Al-Rajaan insisted that the GCC funds were passive investors,
not politically-motivated, and interested only in financial
returns. Al-Rajaan added that KIA should have no problems
KUWAIT 00001422 003 OF 003
with showing greater transparency since it already practices
good governance.
--------------
Comment
--------------
9. (C) Overall the Kuwaiti reception to Treasury's message
seemed positive to the extent that they are willing to engage
in further dialogue on the subject. KIA Managing Director
Al-Bader seemed very resistant at the beginning of the
meeting, but at the end he indicated he would give the
proposal further consideration. The Central Bank Governor
and PIFSS DG both recognized some benefits in the proposal
and welcomed further dialogue. The Under Secretary of
Finance was most supportive, but ultimately the Finance
Minister will likely be the key decision maker on this issue,
and he was out of the country during the visit. Post will
re-engage in the next two to three weeks once the GOK has had
an opportunity to digest the concept. A personal pitch to
the Finance Minister would clearly be beneficial.
Ultimately, the GOK is not openly embracing this approach,
but it is not rejecting it either. Although it seems
unlikely that the GOK will take a lead role in bringing other
SWFs onboard, the Kuwaitis may be willing to sign on as an
early follower.
10. (U) Saeed and Kaproth were accompanied to their meetings
by Treasury Attach to Abu Dhabi Matt Epstein, Treasury
Economist Matthew Turner, Econcouns, and Econoff. DAS Saeed
cleared this message.
********************************************* *
For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s
Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************* *
MISENHEIMER
SIPDIS
SIPDIS
STATE FOR NEA/ARP, EB; TREASURY FOR SAEED, KAPROTH
E.O. 12958: DECL: 09/19/2017
TAGS: EFIN ECON PREL KU
SUBJECT: TREASURY DAS SAEED DISCUSSES SOVEREIGN WEALTH
FUNDS WITH GOK
REF: KUWAIT 1308
Classified By: Acting DCM Tim Lenderking for reasons 1.4 (b) and (d)
1. (C) Summary: On September 17, a U.S. Treasury delegation
led by Middle East DAS Ahmed Saeed and International Monetary
Policy Director Robert Kaproth met with the Kuwait Investment
Authority (KIA),the Central Bank of Kuwait (CBK),the
Finance Ministry, and the Public Institution for Social
Security (PIFSS) to encourage continued Kuwaiti investment in
the U.S. and to promote the development of best practices for
the management of Sovereign Wealth Funds (SWFs). Saeed and
Kaproth referred to Treasury Assistant Secretary Clay
Lowery's June 21 speech at the San Francisco Fed, in which he
suggested that SWFs could collaboratively develop a set of
best practices for governance, risk management,
accountability, and transparency through the IMF. Saeed and
Kaproth argued that this could serve to help new SWFs to
develop sound strategies and practices, reduce systemic risk,
and lower the risk of a protectionist backlash against SWF
investment. Overall, the Kuwaitis' reception to Treasury's
message was positive to the extent that they are willing to
engage in further dialogue on the subject, but we will still
need to overcome some skepticism, especially on the part of
the Managing Director of KIA. The Kuwaitis recognize some
potential benefits for Kuwait but need some time to consider
the proposal before making any commitment. Although it seems
unlikely that the GOK will take a lead role in bringing other
SWFs onboard, the Kuwaitis may be willing to sign on as an
early follower. End Summary.
--------------
Why so much sudden interest in SWFs?
--------------
2. (SBU) On September 17, a U.S. Treasury delegation led by
Middle East DAS Ahmed Saeed and International Monetary Policy
Director Robert Kaproth met with the Kuwait Investment
Authority (KIA),the Central Bank of Kuwait (CBK),the
Finance Ministry, and the Public Institution for Social
Security (PIFSS) to encourage continued Kuwaiti investment in
the U.S. and to promote the development of best practices for
the management of Sovereign Wealth Funds (SWFs). Saeed
emphasized that the U.S. remains open to foreign investment,
pointing to the President's May 10 statement on open
investment and trade, the passage of the Foreign Investment
and National Security Act of 2007, and G7 official
communiqus endorsing open investment. Saeed noted, however,
that SWFs were coming under increasing scrutiny and possibly
contributing to protectionist fears in the OECD countries, as
evidenced by recent reporting in the financial and popular
press. He said he saw three reasons why these funds, some of
which have existed for over thirty years, were suddenly
attracting so much attention. First, the assets under
management of SWFs have grown from tens of billions of
dollars into trillions of dollars. Second, a number of new
SWFs have emerged in recent years, approximately 17 since
2000. Third, the lack of transparency in some of these funds
leads to fears that they could be used to pursue political or
strategic objectives rather than purely financial ones.
--------------
Proposal to develop SWF Best Practices
--------------
3. (SBU) Kaproth referred to Treasury Assistant Secretary
Clay Lowery's June 21 speech at the San Francisco Fed, in
which Lowery suggested that SWFs could develop
collaboratively with the IMF and World Bank a set of best
practices for governance, risk management, accountability,
and transparency through the IMF. Kaproth provided copies of
an analogous set of best practices developed by the IMF for
the management of foreign reserves. Kaproth stressed that
the U.S. was not trying to tell SWFs how to manage asset
allocation or even asking for full disclosure of specific
investments but rather promoting the development of a
non-binding set of common principles for governance and risk
management to which SWFs could voluntarily subscribe. Saeed
added that a public commitment to adhere to these best
practices could serve as a "Good Housekeeping Seal of
Approval" to differentiate high-quality, responsibly managed
funds, from riskier or more politically-motivated funds.
Kaproth said a set of SWF best practices could serve three
important purposes. First, it would help newly-established
SWFs to establish sound strategies and practices. Second, it
could help reduce systemic risk. Third, it could help to
lower the risk of a protectionist backlash against SWF
investment.
KUWAIT 00001422 002 OF 003
4. (SBU) Saeed pointed out that a range of SWFs with very
different profiles were currently being lumped into a single
category. He suggested that by endorsing a set of commonly
approved best practices, investors such as the Kuwait
Investment Authority, which has been a responsible and mostly
passive investor in the U.S. since 1953, could differentiate
themselves from less desirable investors. Kaproth noted that
SWFs demonstrate many reassuring features: they tend to be
long-term investors who can weather short-term losses, they
are not highly leveraged, and they cannot be forced by
capital requirements or investor withdrawals to liquidate
positions rapidly. He added, however, that SWFs possess some
unattractive characteristics as well. First, their lack of
transparency means that rumors or suspicions of their actions
can move markets. Second, SWFs typically lack the system of
informal checks and balances that investors, creditors, and
counterparties exert over other funds.
--------------
KIA somewhat skeptical; willing to consider
--------------
5. (C) KIA Managing Director Bader Al-Saad reacted by saying,
"What's the worry? Is it just the size? What about private
equity?" He added that after the problems with Dubai Ports
World and the sanctions imposed on Iran, "We as investors
should be more worried than you as investees." Al-Saad
pointed out that KIA already has a system of checks and
balances since the State Audit Bureau, the Parliament, and
the Government all review its decisions. He added,
"Politicians will be politicians" regardless of whether
foreign investors have signed on to a set of best practices.
Al-Saad noted that the controversy over CNOOC's bid for
Unocal had nothing to do with SWFs. He admitted that recent
media reports had been worrisome but said, "The ball's in
your court" to educate the public about the advantages of
foreign investment. Saeed responded that the USG recognizes
that it too has a responsibility, which is why it hopes to
work collaboratively with SWFs to reduce the risk of
protectionism. Kaproth added that the USG was recommending
that a parallel set of best practices be developed for
recipient countries of SWF investment within the OECD. In
the end, Al-Saad said he would think about the proposal to
collaborate with other SWFs on best practices, but he was not
convinced it would provide any benefit for Kuwait. For more
background on KIA, see reftel.
--------------
Central Bank supports further dialogue
--------------
6. (C) Central Bank Governor Shaykh Salem Al-Sabah said he
had been hearing rumblings about an SWF best practices
proposal since the spring IMF meetings, but he was initially
unclear on what was being asked for. After hearing Saeed and
Kaproth's explanation, he said he understood the objectives
and hoped to engage in further dialogue on the subject.
--------------
Finance U/S will recommend to Minister
--------------
7. (C) Under Secretary of Finance Khalifa Hamadah said the
KIA board, which includes, among others, the Minister of
Finance, the Central Bank Governor, and the Oil Minister,
would ultimately decide on whether to participate in the
collaborative development of SWF best practices. He added
that there may be legal constraints that limit the
information the KIA can disclose. Hamadah said the proposal
was a "good idea in principle" and he would recommend to the
Finance Minister that he support it within the limits set by
Kuwaiti law. Al-Hamadah asked if these efforts had anything
to do with concerns over money laundering. Kaproth clarified
that although Treasury had an active campaign underway to
combat money laundering, this effort was not related. He
added that it also had nothing to do with reducing yields on
U.S. treasuries.
--------------
Pension Fund: KIA should be able to support
--------------
8. (C) PIFSS Director General Fahed Al-Rajaan said, "America
is still the best place to invest," and "the Gulf is still
pro-American." He said that even when he invests in emerging
markets, he prefers to do so indirectly through U.S. funds.
Al-Rajaan insisted that the GCC funds were passive investors,
not politically-motivated, and interested only in financial
returns. Al-Rajaan added that KIA should have no problems
KUWAIT 00001422 003 OF 003
with showing greater transparency since it already practices
good governance.
--------------
Comment
--------------
9. (C) Overall the Kuwaiti reception to Treasury's message
seemed positive to the extent that they are willing to engage
in further dialogue on the subject. KIA Managing Director
Al-Bader seemed very resistant at the beginning of the
meeting, but at the end he indicated he would give the
proposal further consideration. The Central Bank Governor
and PIFSS DG both recognized some benefits in the proposal
and welcomed further dialogue. The Under Secretary of
Finance was most supportive, but ultimately the Finance
Minister will likely be the key decision maker on this issue,
and he was out of the country during the visit. Post will
re-engage in the next two to three weeks once the GOK has had
an opportunity to digest the concept. A personal pitch to
the Finance Minister would clearly be beneficial.
Ultimately, the GOK is not openly embracing this approach,
but it is not rejecting it either. Although it seems
unlikely that the GOK will take a lead role in bringing other
SWFs onboard, the Kuwaitis may be willing to sign on as an
early follower.
10. (U) Saeed and Kaproth were accompanied to their meetings
by Treasury Attach to Abu Dhabi Matt Epstein, Treasury
Economist Matthew Turner, Econcouns, and Econoff. DAS Saeed
cleared this message.
********************************************* *
For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s
Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************* *
MISENHEIMER