Arabs shy to invest in US markets

[Naveed Yaseen]

By Syed Rashid Husain
WHILE the US is hit by a severe financial crisis, the oil-rich Gulf nations with surplus money appear hesitant to invest in the American market.

The current oil boom has brought in an unprecedented amount of cash into the coffers of the oil-producing Arab states. “The tripling in the price of oil from $30 a barrel in 2001 to more than $100 today represents the largest transfer of wealth in human history,” says Henry Kissinger in an article co-authored by Martin Feldstein.

The GCC members -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- together pump 16 million barrels a-day, or about 20 per cent of world supplies, and hold 45 per cent of proven global oil reserves. The GCC states are holding global investments worth $1.5 trillion run by their sovereign wealth funds (SWFs).

In a recent write-up, Henry Kissinger and Martin Feldstein assert: “Resources (of the oil producers) are being shifted from passive investments in the US and European government bonds to corporate equities and to the outright purchase of American and European businesses. As these new investments multiply, they may tempt the creditors into a growing influence over western economies.”

The writers assert: “The industrial nations must find ways to discourage the creditors from threatening to sell, or actually to sell, large quantities of US bonds, driving up long-term American interest rates to levels precipitating an economic downturn, or to target particular firms or industries by selling shares acquired by sovereign funds.”

Oil-rich Gulf states may distance themselves from the US financial markets, as long as they can in the given circumstances. The US financial crisis will make the Gulf investors wary of pumping more funds into the United States and Europe, according to Saeed al-Shaikh, chief economist of Saudi Arabia’s National Commercial Bank.

“Investment managers will be extremely cautious. I don’t think they will buy assets now but if they do, they will have to be highly selective and very cautious,” he said.

Prince Alwaleed bin Talal and his Kingdom Holdings, who had bailed out Citicorp on a couple of occasions, also doesn’t appear in a mood to the rescue of the US financial giants. Talking to Times, Al-Waleed categorically said “he’s not in the market for any more US financial sector assets.”

Al-Waleed has a big exposure to the international market, in banking, hotels and in real estate. But right now, Al-Waleed says he is concentrating on Saudi Arabia. “There’s a lot of focus on development in Saudi Arabia. It is experiencing a big boom. There’s a lot of emphasis on real estate, and on companies in Saudi Arabia,” he said.

Global markets were shocked when the Lehman Brothers, the fourth largest US investment bank, filed for bankruptcy and the Bank of America bought troubled Merrill Lynch for $50 billion. Markets were further rattled by the near bankruptcy of the insurance and financial services group AIG, the largest companies in the world, which was rescued by US government.

The Gulf banking system does not appear affected but the Gulf nations are fretting about their huge investments in western markets.

“I don’t think any Gulf financial institution will be directly affected by the collapse of Lehman Brothers because they hold no key stake in the giant investment bank,” al-Shaikh, of Saudi Arabia’s largest bank the National Commercial Bank said.

The GCC central bank governors, meeting in Saudi Arabia, also reiterated recently that their banking system will not be affected by the US financial crunch. However, “Certainly there is serious concern over the fate of other major US financial institutions in which the Gulf Sovereign Wealth Funds (SWFs) and private investors hold important stakes,” Shaikh said.

Kuwaiti economist Hajjaj Bukhdur estimates that the value of the Gulf SWFs investments in the United States and Europe was around one trillion dollars a year ago when the US sub-prime crisis began to unfold. “The Gulf SWFs assets in the US and Europe have dropped by 30 per cent during the past year, or an estimated book loss of $300 billion,” Bukhdur said, referring to losses incurred as a result of the US sub prime and financial crises.

In the past year, the UAE and Kuwaiti SWFs pumped more than $12 billion into a number of major US banks, and the value of those investments have been cut by a half as price of shares dropped. Gulf private investors are believed to be holding investments worth $800 billion abroad, said Bukhdur, adding that they also have suffered similar losses.

However, the NCB Chief economist asserts that the Gulf SWF investments in the United States are not concentrated in the financial or banking system but are well diversified over several sectors and are run in a highly professional way.

While some of the Gulf investments in the major global financial houses may face a melt down, the region also seems to be bracing itself for a slow down in global crude consumption, as a result of the current global economic woes. And to many with the vast financial resources at its disposal, it was in much better condition than before to meet the upcoming challenges.

http://www.dawn.com/2008/09/29/ebr16.htm