ANALYSIS - OPEC investors mature, keep petrodollars at home
today.reuters.com
Mon Jan 30, 2006 3:00 AM ET
By Barbara Lewis and Ghaida Ghantous
VIENNA (Reuters) - Thirty years of experience have turned OPEC countries into sophisticated investors, who pile their record amounts of petrodollars into a range of assets, increasingly in the Middle East, rather than the United States.
In the 1970s oil boom, producing nations spent lavishly and concentrated investment in U.S. treasuries.
Now the United States is still a big recipient, but so too are Europe and the growing economies of the Middle East.
"There is much more investment in Europe and the Middle East and generally the Muslim world," said Valerie Marcel, an energy expert at the London-based Royal Institute of International Affairs (RIIA). "They are trying to diversify so they don't get caught. Many were burned by 9/11."
"Producers have been paying down debts," she added. "They have also increased spending, but not as much as last time."
The Organization of the Petroleum Exporting Countries, which meets on Tuesday, had earned $1.3 trillion in petrodollars since 1998, while the world's other exporters Russia and Norway had received $403 billion and $223 billion respectively, the Bank for International Settlements (BIS) estimated in its December quarterly report.
Overall, net revenues in oil-producing countries were expected to reach $650 billion in 2005, though the BIS, which serves as the world's central bank, said the estimates were probably on the low side.
Less of this cash was finding its way into the international banking system, it said, making it harder to track how it was being used, but evidence pointed to diversification.
Within the United States, there has been a shift away from U.S. treasuries, once oil producers' "asset of choice," toward U.S. corporate and agency bonds and equities, the BIS said.
It noted hedge funds and private equity funds, which are not required to release information on their investor base, have received large inflows.
KEEPING IT IN THE REGION
The most striking new recipient has been the economies of the oil-producing Gulf.
The stock market indexes of Saudi Arabia, Kuwait and the United Arab Emirates more than quadrupled between the end of 2001 and the end of June 2005, while increased local expenditure is stimulating economic growth.
"They (Gulf governments) have more money now. They can keep the same nominal amount in U.S. treasuries, but in terms of percentage, they are investing elsewhere," said Joe Kawkabani of Dubai-based Shuaa Capital.
"A very good indication of this is government budgets. They have all increased expenditure to stimulate their economies and most of this expenditure is going into infrastructure projects."
Europe, as a key trading partner of OPEC nations, has also been drawing more petrodollars, though in part this has reflected euro strength relative to the dollar and increases in euro-related assets have been reversed as the dollar has stabilized, the BIS said.
Any shift away from the United States is generally more practical than political -- as is the decision to stay loyal to U.S. assets.
Oil producers have an interest in helping to support the dollar, as it is the currency of oil trade and Gulf state currencies are pegged to it.
"Their foreign assets are kept in treasury notes because it's a safe investment and it also has a political angle as well as a currency perspective related to the fact that all GCC currencies are pegged to the U.S. dollar," said one Saudi-based economist who declined to be named.
But while governments might seek to support the dollar and maintain U.S. ties, the OPEC member states' private sector is more at liberty and analysts say that is where the biggest changes in investment flows have taken place.
"The private sector sees great opportunities in the region. You have an unprecedented boom in the region and that is creating huge incentives for the private sector to keep money within," said the Saudi analyst.
Following the post 9/11 decline in Western stock markets, he said private investors were particularly nervous about investing in the United States and also reluctant for other reasons.
"There are just a lot of people who dislike the United States," he said.
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