Libya’s fledgling sovereign wealth fund (SWF) was luckily too late to invest much of the country’s vast currency reserves in the global markets before they collapsed. The prime minister and secretary of the General People’s Committee (GPC), Al-Baghdadi Al-Mahmoudi, recently confirmed to journalists that Libyan Investment Authority (LIA) investments and deposits had not been damaged in the current crisis.
Mr Mahmoudi, who is also chairman of the LIA’s advisory board, said: “We have not been harmed by what has happened in the confusion of the global financial market. No investments of the Great Jamahiriya have been affected and that is the result of wise policy which the authority has followed.”
He explained that because the LIA was only recently founded, “it has not entered any risky projects and has concentrated on low-risk investments with a good return. For this reason, we are not at all affected by recent events in world markets.”
Mr Mahmoudi’s statement followed the first meeting of the LIA board at the end of September 2008, during which the directors carried out a comprehensive review of the authority’s investment projects.
A GPC statement said the board had also studied future investment strategy and decided on procedures for using alternative currencies to the dollar, and for spreading investments across all regions of the globe.
Conservative policy
The LIA has indeed followed a conservative policy over the past 12 months or so, as its senior management has worked with experts from a number of international institutions to establish the SWF on a stable footing.
However, a number of sources, including senior Libyan financiers and LIA advisers, have told The Banker that the authority’s executive director, Mohamed Leias, and his deputy, Mustafa Zarti, were at the same time stolidly resisting governmental pressure to start investment operations.
According to these sources, the government has been pushing the LIA to put money into the international market as at present the central bank has approximately $80bn on deposit, of which more than half is under LIA control.
But apart from a number of relatively small strategic deals, Mr Leias has stuck to a steady programme of building the authority’s management and investment structures to ensure it is institutionally ready. The basic objectives of the LIA were laid out more than a year ago.
According to an official document: “The bulk of the assets under management will be invested overseas by reputable, best-in-class international managers.”
The guiding principles are “centred on long-term investment”. The authority aims to make an average 8% to 10% return on assets.
International plans
The task of developing a strategy to achieve these aims has been delegated to global financial consultancy Mercer, which was appointed earlier this year to advise on asset allocation. It was due to complete this in the third quarter of 2008, but in June an LIA source indicated unofficially that this could be delayed.
The LIA has kept its focus squarely on the international arena. It is considering opening an office in London, which could happen as early as the end of this year. Officials have also mentioned the possibility of a Moscow office. The authority also has a good working relationship with the Qatar Investment Authority.
In the past year, it has pulled in international advice from numerous quarters including the International Monetary Fund (IMF) and Ernst & Young, which advised the LIA on its governance structure. Transparency has its limits, however. London-based PR firm Financial Dynamics worked with the LIA for less than six months before discovering that it was a little too early for such a relationship.
The most important change in the LIA’s governance has been the appointment of an executive chairman, Abdulhafez Al-Zleitni, at the head of the management board. This appointment approximately coincided with Mr Zleitni’s appointment as the minister of planning, which took place soon after Libyan leader Colonel Muammar Qadhafi announced a radical decentralisation of the government last March.
It added extra strength to the management board, which is overseen by the non-executive advisory board, led by the prime minister, whose members are senior ministers and other experienced financial professionals.
Libya, which is short of qualified professionals in many areas, has many senior bank executives with international experience of some of the banks owned or part-owned by the Central Bank of Libya’s foreign arm, the Libyan Arab Foreign Bank, since the 1970s or 1980s. These include Bahrain’s Arab Banking Corporation, of which Mohamed Leias is still chairman, and London-based British Arab Commercial Bank.
During this period, these bankers were artfully negotiating Libya’s finances around the impediment of sanctions. They had to be clever to avoid having their assets frozen. One senior Libyan financier from this period says: “Despite all the problems, we know about banking. The financial sector is totally different from what most people think about Libya.”
Perhaps for this reason, the LIA’s slow and cautious approach contrasts dramatically with the radical decentralisation of government unleashed by Mr Qadhafi in March that has resulted in confusion and chaos. In this context, it seems that the remaining stable institutions, including the Central Bank of Libya and other funds such as the Economic and Social Development Fund (ESDF), have gained in status thanks to their relative independence.
Family of funds
The LIA is just one of a growing family of new or reformed financial institutions which represent Libya’s growing economic clout. The SWF, with a few exceptions, is restricted to investing Libya’s oil wealth abroad to preserve it for future generations. It has a number of sub-funds such as the afro-centric private equity vehicle Libyan African Investment Portfolio and the long-established Libyan Foreign Investment Company (Lafico), which notoriously owns stakes in Italy’s Fiat car manufacturer and Juventus football club, but has now been refocused as an international property and hotels fund. Although under the LIA’s oversight, they are independently managed.
Outside the LIA, the most powerful fund is the ESDF, which takes partnership interests in commercial projects solely within Libya. Instead of building wealth for future generations, it distributes dividends to disadvantaged families who otherwise would not benefit from the new economic growth. This social aspect of its work gives it great status. ESDF took over the ownership of both Sahara and Wahda Bank prior to their privatisations during 2007. It also has strategic shares in a number of major property, hotel and tourism investment projects within Libya, such as Gulf Finance House’s Energy City Libya.
A GPC statement at the end of September said the fund had issued 180,000 investment coupons. Each coupon is worth LD30,000 ($24,000) and entitles the bearer to an annual dividend.
At a ceremony in central Tripoli in February this year, dividend vouchers worth LD5000 were handed out to specially invited community leaders from the five provinces around the capital city. Many were old men and women in traditional dress of heavy woollen blankets or white veils. They were permitted to spend or invest the voucher on a limited range of options from the purchase or construction of a dwelling, to a car, home appliances, or capital to start a business, medical insurance or education.
Broader development
Alongside these funds, the central bank is equally important as the institution that is leading the broader development of Libya’s financial system. The programme of bank reform and privatisation established by governor Omar Bengdara has moved forwards with a frustrating slowness. It took nearly four years from first decision to the sale of minority stakes in first Sahara and then Wahda Bank to foreign investors and the programme has now reached a plateau.
Before other banks are offered to investors, or the market is fully liberalised to allow foreign banks to establish branches in Tripoli, Mr Bengdara wants to restructure and modernise the domestic commercial banks so that they are capable of competing. According to a source close to the governor, this cannot happen yet as he wants to “make sure that all their balance sheets are clear”. The source said that this could happen before the end of next year.
Other essential projects include elementary developments such as the creation of a credit rating bureau accessible to all domestic banks and the establishment of a country-wide electronic clearing system.
A Libyan banker source was confident this would be delivered by the end of the year. It is “a fantastic achievement that a cheque, which now takes two weeks or a month to clear, will not take more than two days”, he says.
The central bank consultant was equally optimistic. “It is a transition. There has been a focused plan for nearly three years. There is support for it from governor level. He is pushing for it.”
