BIA MANAGING DIRECTOR PROPOSES DIFFERENTIATED SWF

C O N F I D E N T I A L SECTION 01 OF 03 BANDAR SERI BEGAWAN 000098 SIPDIS SIPDIS E.O. 12958: DECL: 03/19/2018 TAGS: EFIN ECON PGOV BX SUBJECT: BIA MANAGING DIRECTOR PROPOSES DIFFERENTIATED SWF TRANSPARENCY REQUIREMENTS REF: 07 BANDAR SERI BEGAWAN 229 (NOTAL) Classified By: AMBASSADOR EMIL SKODON, REASONS 1.4 (B,D) -------------- SUMMARY -------------- ¶1. (C) Brunei Investment Agency Managing Director Dr. Mohamed Amin Liew told Ambassador that BIA intended to continue a conservative international strategy that emphasizes fixed income assets and passive portfolio investments. It would avoid country-specific funds as well as direct equity stakes in areas other than commercial real estate and hotels, where it already had some interests. Dr. Amin said BIA wanted to be a "law abiding citizen" and was open to an IMF Sovereign Wealth Fund (SWF) Voluntary Code of Conduct, but opposed extensive transparency targets that would require it to make public its investment strategies. He proposed a sliding scale of transparency guidelines based on the potential threat that individual SWF's posed to the smooth functioning of global markets, as determined by: the capability for disruption that their preferred types of investments gave to them; the impact they could have with the amount of capital they controlled; and, the extent to which their track record of commercially-driven investment decisions established their intent to act responsibly. Dr. Amin was relatively positive about the U.S. economy, which he described as "big, diverse, and nimble." He expected oil prices eventually to settle into an inflation-adjusted range of USDOLS 60-70 per barrel. End Summary. ¶2. (SBU) Ambassador hosted Brunei Investment Agency (BIA) Managing Director Dr. Haji Mohamed Amin Liew bin Abdullah at a one-on-one lunch on March 13. Earlier this year the secretive and publicity-shy BIA was estimated to be the SIPDIS world's twelfth largest Sovereign Wealth Fund (SWF) by the Economist magazine, with assets of approximately USDOLS 30 billion. -------------- BIA'S CONSERVATIVE STRATEGY -------------- ¶3. (C) Dr. Amin noted that the BIA had been following a very conservative international investment strategy, focused on fixed income assets and passive portfolio investments in equities. In recent years it had moved some money into hedge funds, private equity funds, and commodity indices. Its only direct equity investments outside of Brunei were in commercial real estate and hotels. (BIA is also the reluctant owner of a hotel, theme park, golf courses, and other domestic businesses within Brunei, which it inherited from the now-defunct Amadeo Investment Company that was managed by the Sultan's brother Prince Jefri and collapsed in the late 1990's.) ¶4. (C) The Managing Director reiterated previous BIA assertions that it had little interest in expanding direct equity investments (reftel). Dr. Amin said BIA continued to adhere to an internal guideline that its combined direct and indirect portfolio investments in any one company should not exceed five percent of total equity. He contrasted BIA's strategy with that of the Abu Dhabi Investment Authority, which he described as oriented exclusively toward direct investment, and the Qatar Investment Authority, which he characterized as "very aggressive." ¶5. (C) Dr. Amin said that BIA avoided country-specific funds because it did not feel comfortable placing large bets on single markets. The typical country-specific private equity fund asked for an 8-10 year commitment of capital. A lot could happen in that span of time, and with only about 60 BANDAR SER 00000098 002 OF 003 analysts among its 200-odd employees the BIA did not have the capacity to analyze the mid-term investment prospects in individual countries. As a result, the BIA preferred to invest in funds with a global orientation and leave it to the managers of those funds to determine how best to diversify their investments across country markets. -------------- SWF TRANSPARENCY: A DIFFERENTIATED APPROACH? -------------- ¶6. (C) Ambassador reviewed USG policy on SWF's and asked Dr. Amin for his views on the proposed IMF Voluntary Code of Conduct for SWF's. Dr. Amin said he could not comment in detail because the IMF had not yet been in contact with the BIA to discuss what type of guidelines it had in mind. Generally, though, he maintained that the BIA wanted to be "a law-abiding citizen" but did not want to provide detailed public declarations about its investment strategies. If it revealed the asset classes in which it was most interested, the effect on market expectations would result in BIA having to pay higher prices for those assets, and cause it to be deluged with offers from brokers and fund managers specializing in those areas -- neither of which would be welcome developments from BIA's point of view. ¶7. (C) Dr. Amin floated the idea of a Voluntary Code of Conduct that incorporated a range of transparency requirements on a sliding scale that was dependent on the potential threat that an SWF posed to global markets. He understood the nervousness about newer SWF's that controlled a large pool of capital, focused on direct equity investments, and were controlled by governments that might be tempted to make noncommercial investment decisions for political reasons. Such SWF's posed a larger potential threat because their type of investment activity had the capability to disrupt financial markets, they had enough assets to make a significant impact on those markets, and they had not yet clarified their strategic intentions. SWF's in this category, he believed, could legitimately be asked to meet relatively stringent transparency requirements proportional to the threat they posed. ¶8. (C) On the other hand, Dr. Amin argued, other SWF's exhibited characteristics that made them less of a threat. A preference for fixed income and passive portfolio investments translated into less capability for market disruption. Those SWF's that controlled relatively smaller pools of capital could not have as great an impact on global markets. And, a track record of avoiding direct equity investments and making investment decisions solely on economic grounds indicated the lack of any intent to cause mischief. Given the lower threat that such SWF's posed, and pointing out that this low-threat profile described BIA precisely, Dr. Amin maintained that BIA and similar SWF's should only be asked to adhere to a less stringent set of transparency requirements. -------------- BIA NOT BEARISH ON THE U.S. -------------- ¶9. (C) Dr. Amin was not overly pessimistic about the U.S. economy. He observed that tax rebates had spurred consumer spending and economic recovery in 2002 and could play the same role today, even though some of this extra buying power would go to pay for higher-priced imported energy and so do little to stimulate the domestic economy. Dr. Amin also expected that eventually the Federal Reserve would bring the Federal Funds Rate down to 2 percent. (Comment: This conversation took place before the JP Morgan buyout of Bear Stearns and the 18 March cut in the Fed Funds Rate to 2.25 percent. End Comment.) He said that the most important factors in his mind were that the U.S. economy remained "big, BANDAR SER 00000098 003 OF 003 diverse, and nimble," traits that would allow it to avoid a persistent economic malaise such as that which Japan had suffered in the 1990's. Overall, Dr. Amin expected the U.S. economy to slow down throughout the first half of 2008, and said "we would just have to wait and see" what happened thereafter. ¶10. (C) Noting that he had started his career as an oil trader for Brunei Shell Petroleum, Dr. Amin said he hoped and believed that crude oil prices would eventually settle back to an inflation-adjusted level of USDOLS 60 to 70 per barrel. He thought such a price range would be optimal for both hydrocarbon producers and consumers, as it would be high enough to encourage continued exploration but low enough not to support extensive development of high-cost alternative energy sources. -------------- COMMENT -------------- ¶11. (C) The BIA Managing Director's call for an SWF Voluntary Code of Conduct that incorporates a sliding scale of transparency requirements based on potential threat levels is obviously self-serving. It is difficult to foresee SWF's from China or the Gulf going along with a differentiated set of requirements that would confer a perceived competitive advantage of lower transparency on competing investors like BIA. Dr. Amin, however, appeared quite intent on the idea, and we can expect it to be raised in any discussion that the BIA has with the IMF on the terms of a voluntary SWF Code of Conduct. END COMMENT. SKODON