Analysis: Secretive Libya wealth fund vital for reconstruction

LONDON Tue Feb 22, 2011 11:30am EST

LONDON (Reuters) - Libya's secretive sovereign wealth fund could hold the key to any post-conflict reconstruction and future economic development with its $70 billion in assets including lucrative stakes in Western firms.

Given escalating unrest in Libya, a possible end to Muammar Gaddafi's 41-year rule is likely to shake the foundations of the politically driven fund, but any new government could put the cash to good use and manage the fund more efficiently.

Libyan Investment Authority, set up in 2006 to manage the country's oil revenues, has assets of around $70 billion, equivalent to nearly 75 percent of the country's economy.

It owns stakes in a clutch of European bluechips ranging from Italian bank UniCredit to British publisher Pearson.

LIA, which is roughly the same size as Qatar's sovereign wealth fund, publishes little information -- its website is still under construction -- but a rare annual report in 2009 shows how liquid the fund is.

It had more than 78 percent in "short-term financial instruments abroad" and had only $8 billion in long-term equity investments in North Africa, Asia and Europe.

"If we say it's economics that drives a lot of the Libyan anger and in the next 2-3 years there may be a democratic transition, we will see the usage of assets that have been accumulated by the current regime, including LIA," said Sven Behrendt, an SWF analyst and managing director of Geneva-based consultancy Geoeconomica.

"If you have so much money to consume, then it could be that any incoming government which wants to boost popularity might want to tap it. That's a legitimate and obvious conclusion."

Thomson Reuters data shows LIA has $1.5 billion in publicly listed equities, largely invested in banking, aerospace and defense, media and oil sectors in Europe.

LIA returned profits of $2.37 billion between 2006 and early 2009, or nearly 6 percent on initial capital of $40 billion.

This looks good in comparison with Norway's SWF, for example, which lost of 2.9 percent in 2007 and more than 23 percent in 2008 when the credit crisis hit global financial markets.

Libya's strong balance sheet, partly thanks to LIA, compares favorably with Egypt and Tunisia, where turmoil prompted changes in the governments.

According to the International Monetary Fund, Libya has net foreign assets at the central bank and LIA of $152 billion at end-2010, which represent almost 160 percent of GDP.

"Sovereign wealth is for intergenerational purposes, but in the current circumstances they may well find themselves dipping into it. It gives them a lot of firepower in the event of short-term shock to the economy," said Richard Fox, senior director at ratings agency Fitch.

Fitch cut Libya's rating to BBB from BBB+ on Monday but it is still higher than Egypt's rating of BB.

"That's why Libya is rated higher. Libya's rating is one of the extreme examples of sovereign balance sheet strength against political risk," said Fox.

Analysts said Libya was unlikely to divest its equity holdings, but even if it did, the impact would be small.

"Libya in terms of foreign reserves is astonishingly rich. In per capita terms it's more than almost anyone else. Basically they have money to burn," said Gabriel Sterne, economist at brokerage Exotix.

"(Possible divestment) is not a worry really. If they decide to sell someone else will buy, these things are pretty liquid."

RENTIERISM

LIA is a member of the International Forum of Sovereign Wealth Funds (IFSWF), which groups scores of the world's sovereign funds, including Abu Dhabi Investment Authority, that manage around $3 trillion in combined assets.

LIA could reform itself by learning from fellow IFSWF members that are "rentier" states, or those who derive a large portion of revenues with a rent of natural resources to overseas clients.

In order to run a more efficient portfolio, for example, LIA could invest in a wider range of assets and also diversify geographically. It could also invest in domestic companies to develop the non-oil sector and divest non-strategic stakes.

"Can we turn Gaddafi's political toy into a long-term oriented sovereign wealth fund which benefits future generations? It's possible," said Geoeconomica's Behrendt.

"The incoming government needs to learn how other rentier states have maintained stability. The realistic situation is that they use SWF assets to maintain political stability after Gaddafi, which will be based on the certain mode of rentierism."

(Additional reporting by Sujata Rao, Editing by Sitaraman Shankar)