Arab Oil Exporters: Coping with a New Global Oil Order

© TICG – A Kuwait Investment Authority, Kuwait Fund For Arab Economic Development & Oliver Wyman Joint Company

NOVEMBER 2017

ARAB OIL EXPORTERS: COPING WITH A NEW GLOBAL OIL ORDER

MR. FAROUK A. BASTAKI, MANAGING DIRECTORKUWAIT INVESTMENT AUTHORITY

1

Agenda

Introduction to KIA1

KIA’s role in Kuwait2

2

Agenda



3

History and objectives of KIA

Overview of Kuwait Investment Authority

History Objectives

Note 1. Established by Law No. 47

Source: Kuwait Investment Authority

• Oldest SWF in the world, originating in 1953

• Officially established in 1982 to assume the

responsibility of managing the State’s assets

and revenue surplus from the MoF1

• Provides Kuwait with an alternative to oil-

based revenue through investment returns

• Achieves a rate of return on investments that

exceeds benchmarks on a 3-yr rolling average

• Designs and maintains asset allocation

consistent with return and risk objectives

• Participates in investment sector growth and

stay up-to-date with investment best practices

• Promotes the private sector in Kuwait without

competing in or substituting any field

1953 Today1982

Origination Officialcreation

Currentoperation

4

Two funds with total value exceeding USD 500 BN

FUTURE

GENERATION FUND

INTERGENERATIONAL

SAVINGS FUND

TREASURER OF

THE GOVERNMENT

GENERAL

RESERVE FUND

Funds under KIA management

• Treasury and liquid fund that invests strictly in the local and MENA

market

• Acts as a stabilization fund which funds fiscal requirements

• Diversified fund that is invested strictly in international markets

• Receives annually a minimum of 10% of Kuwait’s government revenue

to invest

• No asset can be withdrawn unless sanctioned by Law


5

Prudent, rational investment approach

Investment considerations

• Review market and

geopolitical situation

• Consider market condition

drivers, including:

– Oil price

– Interest rates

– Geopolitics

– Growth rate

Market environment

• Define basis for asset allocation

such as:

– Risk/Return trade offs

– GDP growth/demographics

– Thematic opportunities

Basis for asset

allocation

• Aim towards a specific rate of

return and risk profile

– Rate of return of ~4-6% per

annum for the next 10 years

– Risk profile of ~12%

Rate of return

Platforms

• Consider investment platform

and involved stakeholders:

– External Fund Managers

through Kuwait

– Direct dealings through

London


6

Investing in 120 countries of which 81 (68%) are emerging markets

2004 2017

Investment distribution by region

Past Present

Countries 37

Of which Emerging: 10

Investment allocation (2004)

Since 2004, KIA has focused on diversification to increase returns and reduce risks through:

– Decreasing allocation in Developed Economies

– Increasing allocation in higher growth Emerging Markets

Countries 120

Of which Emerging: 81

Investment allocation (2017)


7

1984 1993 2001 2004 2017

KIA investment by asset class

Asset class:Large cap equities

– Satellite– Large/Mid/Small Cap– Emerging Markets

Bonds

– BBB ≥– High Yield– Emerging Markets– TIPS– Convertibles

Real Estate– Private equity– Hedge funds– Infrastructure

Direct Investments– Active real estate– Real estate funds

Cash– Developed Markets FX– Emerging FX

Portfolios (#)

Mandates (#)

1

2

3

4

5

Note (*): Includes 6 separate European countries equity mandates, which were subsequently consolidated due to the introduction of the euro. In addition, 3 country specific bond mandates

were merged into one global bond mandate


–

–

33

19*

39

20*

45

11

133

36

Investment across five asset classes

8

Agenda



9

KIA role and implications

KIA as both a treasurer of the government and intergenerational savings fund

Treasurer of the Government Intergenerational savings fund

GENERAL RESERVE FUND

• Macro stabilizer of Kuwait’s fiscal

balance and economy

• Highly liquid buffer to act as a

shock absorber in a commodity-based

economy

• Generated income to support overall

savings account of government and future

generations on a long-term investment horizon

• Investment diversification to reduce

concentration of risk and maximize returns


FUTURE GENERATION FUND

10

Macro stabilizer of Kuwait’s fiscal balance and economy

-5.9-6.0

-2.7

5.04.7

FY2012/13A FY2015/16A FY2016/17AFY2014/15AFY2013/14A

Government fiscal balance

KD BN, including FGF transfer, A = actual

Note: KEC = Kuwait Export Crude

Source: Ministry of Finance

Oil price slump

Oil price (KEC, $/bbl, year average)

107 104 81 43 45

Treasurer of Gov’t Intergenerational fund

11

Implement economic and fiscal reforms

Government’s two-step approach to address deficit, before KIA intervention

Prongs to address deficit

16.2 17.019.3 18.9

17.718.2

21.4

+7%

2016/172015/162014/152013/142010/11 2011/12 2012/13

-9%

State Expenditure Actuals Evolution

KD BN, FY2010/11 to FY2016/17

Issue debt

USD 29 BNpeak book size

3.6xoversubscribed

USD 8 BNpeak book size- 5-yr tranche: USD 3.5 BN- 10-yr tranche: USD 4.5 BN

300+Investors across tranches778 total orders in book

Kuwait’s inaugural bond issuance statistics

Savings generated

due to reforms

Source: Ministry of Finance

Lowest spreadsAmongst GCC peers at time of issuance

Highly diverseset of investors


12

GRF finances deficit post reforms and debt

5.96.0

2.7

1.2

Reform savings

Actual deficit

FY2016/17B

7.1

FY2015/16B

6.9

0.9

FY2014/15B

3.3

0.6

Budgeted State deficits

KD BN, including FGF transfer

Source: Ministry of Finance, TSO analysis

Reform savingsKD BN

Debt (local + int’l)KD BN

GRF drawdownKD BN

0.6

–

2.7

0.9

–

6.0

1.2

2.23 + 2.44

1.23


13

FGF asset composition and regional allocation

FGF’s global and varied asset allocation

Asset Class SAA1 mid-point

%

Equities 55.0

Fixed Income 22.5

Alternatives 10.0

Real Estate 10.0

Cash 2.5

Region SAA1 mid-point

%

North America 52.0

Europe 24.0

Asia and Japan

(incl. Emerging Asia)19.0

Emerging markets

(excl. Emerging Asia)5.0

Note 1. Strategic Asset Allocation


The KIA Board has also approved a Dynamic Asset Allocation range

for each Asset Class and Region


14

KIA Assets Under Management (AUM) Evolution

KIA fund size evolution

Illustrative


Nascent fund stage Post-Gulf war

Originationof SWF

FGF inception

KIA funds have reached well above USD 500 BN through sustained transfer of

government revenue to FGF and returns from a long-term investment strategy

1950 1960 1970 1980 1990 2000 2010 20201953

Yearly transfer of 10%

of revenues to Fund Post FGF creation in 1976

19901976

Over USD 80 BN

withdrawn for the reconstruction after

Iraqi invasion

Total fund

size over

USD 500 BN

2017


Government & Nonprofit

Arab Oil Exporters: Coping with a New Global Oil Order