US embassy cable - 05MUSCAT1141

UNCLAS SECTION 01 OF 02 MUSCAT 001141 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA, NEA, NEA/ARPI 
TREASURY FOR OASIA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, EPET, PGOV, MU, Economic Affairs 
SUBJECT: INSIGHTS INTO OMAN'S GENERAL RESERVE FUND 
 
1. (U)  This cable contains business proprietary 
information; please protect. 
 
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SUMMARY 
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2. (SBU) A royal official working for the State General 
Reserve Fund recently revealed to a private sector 
investment broker rare insights into the investment habits 
of the SGRF.  A quarter of the SGRF's assets are in cash and 
short-term equities, set aside for when the government needs 
to bridge budget deficits.  The other three-fourths of the 
Fund are invested in an impressive array of longer-term 
instruments, revealing a savvy strategy on the Fund's part. 
While the Fund employs some Western-based financial 
consultants, it relies on in-house expertise for much of its 
work.  End summary. 
 
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Background 
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3. (SBU) As with most rentier economies, decades ago the 
Omani government established a "rainy day" fund for excess 
deposits of windfall revenues and as a source to tap when 
state revenues cannot cover budget deficits.  Royal Decree 
80/1 established the State General Reserve Fund (SGRF) as a 
public legal entity in 1980.  The powerful, inter- 
ministerial Financial Affairs and Energy Resources Council 
regulates the SGRF.  In fact, Minister of National Economy 
Ahmed Abdulnabi Macki is in day-to-day charge of both the 
Council and the Ministry of Finance that administers it. 
Minister Macki is also the official responsible for 
announcing when the government will borrow from the SGRF to 
cover budget deficits, as he did on June 13, 2005, citing 
falling petroleum production and a number of ongoing 
development projects. 
 
4. (SBU) The inner workings of the SGRF and its sister 
institutions in neighboring states remain far outside the 
public's view.  An expatriate investment broker, however, 
recently shared valuable insights into Oman's SGRF based on 
his recent meeting with Sayyida Rawan bint Ahmed al-Said 
(protect), Director of Research at SGRF and cousin to Sultan 
Qaboos. 
 
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A Tale of Two Portfolios 
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5. (SBU) The State General Reserve Fund, according to 
Sayyida Rawan, receives the "overage" above the oil price 
used to estimate the government's annual budget.  (The exact 
formula is more complex, she indicated, but did not 
elaborate.)  Given the historically high oil prices and the 
government's conservative estimation of those prices in 
formulating this year's budget (the understated $23 per 
barrel, albeit with somewhat rosy production estimates), the 
SGRF at present has significant sums to fit into its ever- 
evolving asset allocation. 
 
6. (SBU) According to Sayyida Rawan, the SGRF runs two 
different portfolios with different time horizons.  The 
first, perhaps accounting for 75 percent of the undisclosed 
total, is a long-term portfolio for "the benefit of future 
generations."  The other, accounting for the remaining 25 
percent, is kept in cash and fixed-income instruments with a 
maximum maturity of about 3 years, and a minimum AA credit 
rating.  That second portfolio is intended for the partial 
relief of any budgetary shortfalls that may occur for the 
Sultanate. 
 
7. (SBU) The larger of the two portfolios is perhaps the 
more interesting since it contains intermediate and long- 
term fixed income portfolios, equity investments (mostly 
large capitalization stocks using the MSCI global equities 
index as benchmark), alternatives (private equity, hedge 
funds, currency funds, et al.) and both direct and indirect 
(via funds, REIT's) real estate holdings. 
 
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Outside Advice, In-House Expertise 
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8. (SBU) The SGRF's investment strategy struck the 
expatriate investment broker as impressively sophisticated, 
duly reflective of how conscious the SGRF is of its 
responsibility to the Omani public.  The SGRF uses 
investment management consultants (e.g. Cambridge Associates 
in Boston, and Frank Russell & Co. of Tacoma, WA) for 
specialized and limited mandates and for databases.  The 
Fund does its own asset allocation modeling and manager 
search and performance measurement.  The SGRF increasingly 
manages fixed-income assets for both portfolios in-house, 
except for some specialty mandates.  According to Sayyida 
Rawan, the SGRF has managed cash instruments and bonds since 
1988, so they feel they have developed sufficient in-house 
expertise. 
 
BALTIMORE