Spare a Thought for Libya’s $67 Billion Fund: Mark Gilbert

TRIPOLI (Capital Markets in Africa)- It’s probably too soon for the UN to lift the sanctions on the LIA, but it could make a start by letting it invest the proceeds of maturing securities.

In a tough environment for asset managers battling with declining stock markets and still ultra-low benchmark bond yields, spare a thought for Libya’s sovereign wealth fund. It also has to contend with militia attacks on its staff, competing claims about who runs the fund and United Nations sanctions that have frozen its investments for the past seven years.

The Libyan Investment Authority was created a decade ago, echoing the efforts of other oil-rich nations to build a nest-egg for future generations. The bulk of the LIA’s money, though, is subject to sanctions imposed by the UN in 2011 designed to safeguard the nation’s wealth from being pilfered.

Ali Mahmoud Hassan was appointed chief executive and chairman of the LIA in 2017. The UN notes that so-called parallel institutions have at various times claimed to represent the LIA, but Hassan has the backing of the Government of National Accord led by Prime Minister Fayez al-Sarraj, which in turn is recognized by the UN as Libya’s legitimate government.

The fund has assets of about $67 billion. That includes roughly $8.5 billion invested in some 84 companies in Europe and the U.S., including German insurer Allianz AG, U.K. telecoms company Vodafone Group Plc and Italian bank UniCredit SpA.

Dividend and interest payments from the investments, which the LIA says aren’t subject to sanctions, have been transferred via the Brussels-based settlement system run by Euroclear Plc to the fund’s accounts at Arab Banking Corp. in Bahrain. Opposition lawmakers in the Belgium parliamentearlier this year questioned whether the funds had been misused to buy weapons for Libyan militias.

In recent weeks, the LIA has ascertained that “there has been no misuse and no disappearance of money,” Hassan told me, speaking through an interpreter in an interview in London. Some of the income, which he says amounts to “a few hundred million dollars,” has been used to cover administrative and operational expenses, as well as the cost of pursuing legal actions. “But no third parties have received money,” he said.

As a result of the sanctions, returns on the investments have been miserly, amounting to about 1.5 percent to 2 percent in the past year. The sanctions that have frozen the funds limit its room for maneuver, meaning $21 billion is trapped in deposit accounts. As the portfolio’s bond holdings matured in recent years, the proceeds had to be transferred to the fund’s cash accounts.

In dollars, the interest rates on cash are negligible. In euros, the negative interest-rate policy still in force at the European Central Bank means the fund pays for the privilege of keeping money in its accounts in Belgium – and the sanctions forbid the fund from swapping currencies.

Ideally, Hassan says no more than 10 percent of the fund’s assets would be in cash. He’d favor buying U.S. Treasuries as a low-risk, liquid alternative.

The LIA is a member of the International Forum of Sovereign Wealth Funds, which represents more than 30 such funds that have agreed to abide by the so-called Santiago Principles which outline best practice for governance and risk management. Hassan acknowledges that his fund currently does poorly versus its peers in complying with those guidelines and needs to improve.

The LIA’s next step will be to appoint an independent firm to go through several years of accounts and prepare a full audit that can be presented to the UN. Hassan says he’s got a short list of proposals from accountancy firms – PwC has worked for the fund in the past – and expects to select one shortly, making an audit possible by the middle of next year.

The LIA has been involved in several high-profile lawsuits. It lost a case against Goldman Sachs & Co. in 2016 after accusing the U.S. firm of pushing the fund into derivatives trades that lost $1.2 billion. Societe Generale SA has paid more than $1.7 billion to resolve charges of bribing Libyan officials. In September, the LIA sued JPMorgan Chase & Co. in London saying the bank paid more than $6 million in bribes to win a $200 million bond deal more than a decade ago.

With Libya still politically fragmented, it’s probably too soon for the UN to lift the sanctions on the LIA. A summit in Italy earlier this year that was meant to pave the way for national elections in 2019 ended with little progress, although it did host an informal meeting between Al-Sarraj and Khalifa Haftar, the military commander who controls most of eastern Libya.

But the UN could make a start in preparing the LIA for its future independence by allowing it to freely invest the proceeds of securities as they mature. Provided it makes good on its promise to deliver fully audited accounts, the LIA should be unshackled to invest the proceeds of about $1.5 billion of bonds that will steadily get repaid in the coming years – a small but significant step toward normalizing operations at the wealth fund.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Source: Bloomberg Business News