Page 59 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

44 PART I Background and Context

prices put surpluses at risk and reduced fresh liquidity dramati-
cally. Economic growth (though expected to remain significantly
higher than that in developed markets and world averages) has
slowed substantially. While the root causes of the current crisis may
not be linked to the Gulf, its effects have certainly reached the GCC
region.
Another way in which the financial crisis affected the region
was in the form of overseas investment losses. In early 2009, a work-
ing paper published by the Council on Foreign Relations offered esti-
mates of investment losses incurred by major GCC wealth funds in
the year 2008. 35 The paper estimated losses as deep as 41 percent for
the Qatar Investment Authority and 36 percent for the Kuwait
Investment Authority, with Saudi sovereign wealth losses estimated
at a more modest 12 percent. While the paper may be estimating
larger losses than were actually incurred (it seems to assume greater
exposure to risky alternative investments than others would expect),
it is certainly reasonable to assume that Gulf investors faced the
same pressures on their overseas investments as other global
investors.
The experiences of the current financial crisis and global reces-
sion have, in a number of ways, accelerated key trends that are
already underway in the evolution of Gulf capital and its role in
global markets. Heavy investment losses have prompted GCC-
based investors to increase the sophistication of their investment
strategies and structures, and the crisis has also made world-class
principal investment talent more readily available for recruitment
by Gulf institutions. Slow growth outlooks and struggling capital
markets in the OECD world, while creating some bargains in devel-
oped markets, have also encouraged Gulf investors to increase their
focus on domestic, regional, and emerging-market investments.
These markets are seen as pockets of reasonably high growth in the
years ahead. Furthermore, the financial crisis highlighted the risks
associated with excessive debt, highly leveraged investments, and
debt-collateralized instruments. As a result, many observers—both
in the GCC region and beyond—have looked more closely at
Shariah-compliant (Islamic) investments as a more stable alterna-
tive. The GCC’s growing affinity for Islamic finance and invest-
ments has been a steady long-term trend that has continued through
the current crisis.
In formulating policy responses to the crisis and the recession,
Gulf decision makers have been working with a unique set of