SWF Watch: Libya Joins the Party

UPDATE: May 20 2008.

Last friday (May 16) Libyan officials quoted in the Wall Street Journal suggested that they were cutting trade in US dollars, preferring instead the Euro or yen (shades of Iran!). The article didn't disclose whether oil transactions were shifting away from dollars, or whether other sectors were involved. They also suggested that Libya's investment fund (estimated at around $50 billion) was halting investments in the US. This doesn't really seem like a surprise - the Libyans have been unhappy about U.S. law allowing American victims of state-sponsored terrorism to seize Libyan assets in the U.S. and as the assets of companies doing business with Tripoli, which some analysts have suggested could be a framework for legislation dealing with other delisted state sponsors of terrorism.

But I'm not sure that Libya ever started investing much in the U.S. at least not equity stakes. If they did, their timing might have been off. The decision to start investing more in higher-yielding assets as the post below tries to parse, came at a tricky time last fall and Libya's investment strategy has never been made clear. While initial statements suggested Libya might choose its foreign investments with an eye to Libyan economic development - that is, investing in companies (especially U.S. ones) that might invest in Libya, there really haven't been any noticeable stakes.

And ties have been cooling for some time. Libyan officials suggested back in February that they were wary of investing in the US given the investment review process. Shokri Ghanem on the U.S.: It's a very active market, but it is full of politics and unpleasant actions. In Europe, politics is not very much interfering in trade.'' Also, Libya is among those countries chasing investments opportunities in Asia.

Yet just because Libya hasn't had many high profile investments in the U.S., doesn't mean that they don't hold dollars. Most of Libya's savings (foreign exchange reserves reached almost $82 billion in February) are stockpiled in foreign banks. Total deposits with banks reporting to the Bank of International Settlements neared $80 billion in late 2007. While the BIS doesn't break down currency composition by country, analysts suggest that many of those deposits are in dollars, albeit offshore. The following post (most of which was written in October 2007 and reflects the data available then) profiles Libya's foreign investments. In October, Libyan authorities confirmed that they had created a new investment vehicle, bringing together several pre-exisiting investments and reserve funds. However since then little information has been forthcoming about its investment strategy or holdings, implying that Libyan authorities may have been on holding. Any significant asset reallocation, could have an effect on Libya's demand for dollar assets.

(End UPDATE) Via the FT, details on Libya's new investment fund, the Libyan Investment Authority (LIA) are emerging. The fund, which will report to Libya's president, has begun to manage $40 billion of the country's oil revenues. At the outset, its ED, Mohamed Layas (formerly of the Libyan foreign bank) claims the fund will focus on portfolio investment, though it plans property holdings and possibly private equity.

Such private equity ventures could take the more aggressive GCC funds as its model - taking direct stakes - it already launched a joint venture with QIA earlier this year - or it could follow ADIA and KIA who tend to invest in alternatives funds. For now though Libya is investing through external (likely UK and US) asset managers. LIA's asset allocation could end up looking something like that of KIA, or the university endowments that are increasingly serving as a model for Sovereign wealth funds (SWFs).

In any case, the net result may be a move away from dollars (see below) and a shift from very short-term fixed income and cash to equities and possibly alternatives. That being said - Libya could maintain a high dollar share but shift from cash to equities.

In its most recent Article IV consultation report, The IMF noted that LIA consolidates six pre-existing extra budgetary funds financed by its oil revenues: Oil Reserve Fund (ORF), the Long-Term Investment Portfolio, the Libya Africa Investment Fund (LAIF), the SEDF, the Libya Financial Investment Company, and the Oil Investment Company. It suggests that the fund be tied more closely to the budget process, to avoid increasing fiscal spending at too fast or uncertain a pace. It also warns that the fund's willingness to invest domestically might prompt inflationary pressures.

Like many oil exporters, Libya built up its official foreign assets as oil boomed - mostly in very conservative investments managed by the central bank. The foreign assets of the central bank were about $73 billion by the end of August 2007.

Most of its savings were in very liquid assets - short term deposits primarily. Sanctions do have an effect. With the exception of the first quarter of 2006 when reserves fell - (perhaps Lockerbie compensation) Libyan reserve growth has closely tracked its deposits with banks reporting to the Bank of International settlements (BIS). NOTE: the following reserve figures are not adjusted for valuation gains. These could include some claims on the U.S. banking system also. UPDATE October 25 2007 - Libya's net deposits with BIS banks grew much less in Q2 than in Q1 or any of the preceding quarters since 2004. This could indicate a shift to different assets, perhaps purchases by LIA.

Data: Central Bank of Libya, Bank of International Settlements, EIA - my calculations

To my knowledge, Libya never disclosed the currency composition of its reserves - but the dollar likely dominated. The U.S. data reflects very low holdings of U.S. claims by African oil exporters (Algeria Libya, Nigeria, Angola and Gabon) i (see work I have done with Brad Setser or his explanation of the TIC data's eccentricities). Since Libya may have significant dollar holdings, these may be offshore or in EU banks - a trend the BIS noted for all OPEC members in mid-2006.

Layas' other comments may provide more clues on the investment approach. He seemed to indicate a form of quid pro quo in which companies receiving investments from LIA might also gain access to Libyan markets or perhaps it is the other way around.

"If we buy shares in a construction company abroad, for example, the other benefit is that we will generate business for them in Libya, where we have a huge development plan," he said.

This sounds a lot like the state capitalism Martin Wolf was talking about yesterday. Or perhaps a Libyan version of reciprocity. How will U.S. and EU citizens feel about Libyan investment less than a decade after sanctions were first imposed. After all it was only last year that Libya was removed from the U.S. list of state terror sponsors.

Earlier in October, Libya's foreign minister mentioned its plan desire to invest in U.S. markets and to negotiate an investment treaty with the U.S.

"The first agreement we seek with the U.S. is to maintain and encourage investments between both countries and to enter the American stock markets as well as the American markets in general," Mohammed Abdel-Rahman Shalgam told pan-Arab daily Asharq al-Awsat. ... Shalgam also said his country will give priority to U.S. companies which seek investments in Libya's oil fields.

Last I heard, Libya was reportedly still in negotiations with the EU on a cooperation agreement. It is the only one of the EU's Mediterranean neighbours yet to conclude one - the release of the Bulgarian nurses removed one hurdle. Libya has negotiated agreements with some EU member states

Layas shrugged off concerns about protectionist responses from target countries. (see here for more on this developing debate) " Dollars 40bn-Dollars 50bn is nothing. Even if we reach Dollars 100bn, it is a small figure in the global economy," he said. However restricting themselves to portfolio investment may relieve some of the pressure.

LIA's level of transparency remains to be seen - though they have begun by disclosing the size and types of assets, if not the details.

Going forward, the fund may receive most of Libya's oil revenues (a flow of less than $20 billion per year or about half of what Norway transfers). If Libya succeeds in almost doubling its oil output from 1.6-1.7mbd (exports are 1.3mbd) to about 3mbd by 2012 (or is it 2015?) these saving might increase. This goal requires more exploration, technology transfer and likely cooperation with IOCs, perhaps like the joint investment with ENI announced earlier this week.

Although it has a large population and relatively small oil output Libya has been more conservative than some oil exporters in scaling up domestic spending. its population to oil ratio is about that of Oman (my rough calculation). About half of its oil revenues being saved rather than spent. Qaddafi has invited in experts like Michael Porter to advise on diversifying its overwhlemingly oil dependant economy. All the more reason it would set up a fund to seek higher returns and diversify its sources of income rather than standing by while its gulf counterparts splash their petrodollars around.