Gulf oil exporters struggle to find profitable investments
DUBAI: Gulf states awash with cash from record oil income have put the brakes on purchases of foreign assets, as the global credit crisis promises more bargains later and as the political spotlights fall on how they invest.
Economists say the battle against inflation in the worlds top oil-exporting region has reduced spending in home markets, leaving sovereign funds that invest much of the surplus oil revenue struggling to find a profitable place for their money.
“They are doing a little bit of hoarding right now while they take stock of the situation,” said John Sfakianakis, chief economist at SABB Bank, the Saudi Arabian affiliate of HSBC. “For two years they were on a buying spree. But there is an anticipation by sovereign wealth funds that financial assets will depreciate further as credit turmoil spreads in the West.”
Acquisitions outside of the region by Gulf buyers more than tripled to $89.13 billion in 2007 from a year earlier, according to the research firm Dealogic.
But purchases slowed to $19.8 billion in the first quarter, down more than 30 percent from the fourth quarter of 2007 despite some big-ticket deals that helped shore up Wall Street financial institutions.
The growing number of acquisitions by sovereign funds has raised concern among U.S. lawmakers, especially, about foreign influence and control over assets and questions as to whether investments are politically motivated. This may have made Gulf funds more cautious.
Aside from political scrutiny, many funds have also taken some losses from their investments and are treading carefully until they get a better idea of whether the credit crisis has hit its nadir.
Shares in Citigroup and Merrill Lynch have lost about 20 percent since Kuwaits sovereign fund and the Saudi billionaire, Prince Alwaleed bin Talal, both agreed in January to invest a total of at least $5 billion in the banks.
“After initial forays, theyve gotten their fingers burnt quite badly,” said Alaa al-Yousuf, chief economist at Gulf Finance House in London. “It showed that the worst was not over and they were a bit too hasty in buying into these institutions.”
The massive transfer of wealth into the region from higher oil revenues has already unleashed startling economic growth among the Gulfs core OPEC members. The economies of Gulf countries doubled in size from 2002 to 2006.
With crude prices reaching close to $117 a barrel last week, oil and natural gas revenues for Gulf countries look set to reach a new record this year, touching $435 billion after about $380 billion in 2007, according to SABB estimates.
The price of U.S. oil futures has averaged $99.60 a barrel so far this year, up from $72.36 last year.
But government spending at home has not risen at the same pace as revenues in the Gulf, as officials look to avoid increasing inflation rates that are already higher than they have been in decades. Currency pegs to the dollar have pushed central banks to cut interest rates in line with the U.S. Federal Reserve, even though the lower rates contribute to higher prices.
Migrant workers in the United Arab Emirates and Bahrain have rioted over the erosion of wages due to the declining dollar and inflation.
In Saudi Arabia, the worlds largest oil exporter, revenue from oil should grow to about $235 billion this year, up 12 percent from the $210 billion earned last year, according to SABB forecasts.
Despite the bonanza, spending in the kingdom - which is contending with inflation at a 27-year high - has been prudent, said Brad Bourland, chief economist at Jadwa Investment in Saudi Arabia.
“Saudi government spending has risen about 15 percent per year, which is much less sharply than oil revenues have risen,” Bourland said. “I dont see many examples of spending inappropriately; its well-targeted, mostly on social needs in health and education, and infrastructure.”
With Gulf investment funds holding about $1.5 trillion of foreign assets, according to Bourlands estimates, Gulf investors are struggling for other places to park surplus cash.
Many petrodollars are typically recycled into U.S. Treasury bonds, particularly by the regions central banks.
“With their currencies pegged to the dollar, central banks would tend to put money into the lowest-risk asset that currency is pegged to and that is Treasuries,” Bourland said.
But for more risk-hungry investors in the Gulf, lower interest rates have made Treasury bonds less attractive. Analysts said that better investments would be euro-denominated bonds and, if they can stomach the risk, assets in emerging markets like China.
