Gulf sovereign funds: bigger than ever, and growing fast
Sovereign wealth funds, many argue, aren’t new. Kuwait set up its fund in the 1950s, Abu Dhabi’s fund was established in the 1970s.
True enough. But this argument still misses a key point.
In the past, these funds were small. Now they aren’t. The existence of sovereign funds isn’t new. But their current pace of growth is. They now have a far bigger impact on the global economy – and particularly cross-border capital flows – than in the past.
And with oil now trading above $125 – and, at least according to Goldman – set to rise further, the Gulf funds in particular are poised to get even bigger. Fast.
We still don’t know exactly how big the Gulf funds now are. Abu Dhabi continues to insist that it cannot match Kuwait’s level of transparency. We also don’t know quite how big they will become. But it isn’t all that hard to come up with a guess.
If oil averages $115 over the course of 2008 (a price consistent with $125 a barrel oil for the rest of the year), the Gulf’s current account surplus should approach (if not top) $350 billion. The big existing Gulf funds (Qatar’s fund, Kuwait’s fund and Abu Dhabi’s fund) should get about $150 billion of surplus oil revenue to invest abroad. The Saudi Monetary Agency (and the new Saudi investment fund) should get another $200 billion.
The math isn’t hard. Brad Bourland calculates that the Saudis’ oil export revenues top $1 billion a day if oil is above $115 a barrel. The Saudis only need $55 a barrel oil to cover their budget. The rest is stashed abroad. And even more will have to be stashed abroad if the Saudis follow the IMF’s advice and tighten fiscal policy to fight inflation …
Rachel Ziemba and I have been trying to update our analysis of the Gulf’s foreign assets – and a key part of our analysis is trying to better understand how the big Gulf funds have evolved over time. Since the key Gulf funds don’t report data, this involves making some big guesses. However, it should be possible – using the information that the Gulf funds have released about the contours of their portfolio (most of the Gulf sovereign funds, for example, seem to have around 60% of their portfolio in equities) – and the balance of payments data to produce some estimates.
Our preliminary estimates suggest that there is something new about the current size and pace of growth of the Gulf funds. The 2008 increase in the foreign assets of the Gulf oil exporters should be roughly comparable to their total foreign assets at the end of 2000.
Consider the following graph –
There are two major sources of uncertainty about the size of the Gulf’s official portfolio.
The first stems from the lack of data about ADIA, the largest fund in the Gulf. If – as the Wall Street Journal reported in late 2000 — ADIA only had about $150 billion at the end of 2000 and if its returns matched the returns on a set of broad market indexes, ADIA might only have $500 billion or so today. That is well below most estimates — and below the trajectory implied in the graph above. To get a total in the $600-700 billion range (as in the chart above) ADIA had to have a sizeable emerging market equity portfolio and to have picked fund managers that outperformed the market. We didn’t explicitly try to model ADIA’s (assumed) participation in some high-flying (until recently) private equity funds; that could be one source of out-performance. And even the $600-700 billion portfolio above is far smaller than some market estimates.
The second is that the Saudis are now rather consistently hinting — see Henny Sender’s FT article — that they don’t disclose all of their assets. The chart is based only on the Saudis reported assets.
Generating a picture requires making some big assumptions. The potential for error is enormous. But there is little doubt that the Gulf funds grew significantly from 2003 to the end of 2007, propelled both by the rebound in global equities from the .com crash and large oil inflows. And there is even less doubt that $125 a barrel oil implies even more rapid expansion.
To me, though, the growth in the foreign assets of China’s government over the past few years is even more remarkable than the growth in the Gulf’s funds over the past few years. China has more than kept pace with the Gulf.
That is a major change from the last big oil shock. In 1979 and 1980, Asia ran a current account deficit, not a surplus. As a result, the big Asian emerging economies of the time were not building up their foreign assets at the same time that the oil exporters were building up their foreign assets. In 2007, the rise in China’s foreign assets likely topped the combined rise in the foreign assets of all the oil exporters. That likely will change if oil stays at $125 a barrel — though if hot money flows to China continue, China could be surprisingly competitive.
The resulting shift in global financial firepower — a shift toward Asia, Russia and the Gulf; a shift toward sovereign investors; and a shift away from democratically-elected governments — is staggering.
Judy Yeo Says:
This is off-topic , so apologies Brad.Apparently, (according to Pettis’ post) StanChart’s Green has some very interesting research on his latest piece on China including reserve growth and foreign currency loans- will be great if you could provide a take, not to mention a link to the report!
Twofish Says:
bsetser: The resulting shift in global financial firepower — a shift toward Asia, Russia and the Gulf; a shift toward sovereign investors; and a shift away from democratically-elected governments — is staggering.
I don’t think that democratically elected governments actually did have all that much global firepower. The main actors in the global economic system have been unelected multi-national corporations and unelected multi-national organizations. Even the parts of democratically elected governments that do play a role in the world economy are the *least* democratic parts of those government. Governments generally set up their central banks specifically to be non-democratic.
Also the fact that someone in Iowa has a vote in world affairs is hardly of comfort to someone in Dubai. The average Saudi citizen is going to have much more influence over the undemocratic Saudi royal family than he is over the US Congress. In the end, most Chinese trust the Chinese government to represent their interests more than they trust the US government.
Also, what *really* concerns me is that by using the rhetoric of democracy to justify certain things, one is throwing the idea of democracy into disrepute. If one says that its a bad thing that non-democratic governments have more power in the world financial system, it looks to someone in the Middle East or China, that it’s a bad thing that the ME or China have a role in the global economic system unless and until they have governments which are acceptable to the United States. One other factor is that if you use democracy as an excuse for something, people will use it to undertake their own agendas.
“Western democracy activists” have completely lost the hearts and minds of people in China, and I suspect the same is true for the Middle East. Using democracy as a rationale for concern just makes a very, very bad situation worse.
anon Says:
The value of global oil consumption is approaching $ 4 trillion annually.
How much of this will show up in global imbalances?
mheck Says:
Unfortunately I have to second 2fish here. My impression is as well that in other countries people taking the MNC as the western society. And judged upon their behaviour, our democratic societies are really not that much better than the non-democratic ones.
Shrek Says:
This is the result of really bad policy making from the Fed and other retarded economists who think that dedicits dont matter. At some point something will go wrong and thats when everyone is going to start pointing nukes at each other again.
Shrek Says:
This is not a functioning global monetary system. Its a free for all that by sheer luck keeps working. The imbalances keep growing and policy makers act for domestic reasons.
MCS Says:
If the Gulf funds will grow $350B and 60% is going into equities then we should be seeing (350x.6) a $210B annual inflow into equities. Granted that some of these are large private placements (or bank bailouts), but have you seen any evidence of this?
bsetser Says:
2fish — I take your point that the average Saudi has more influence over the Saudi king than the US congress, and the average Chinese citizen has more influence over Beijing than DC. The same isn’t true of the average American though. They likely would prefer a world where major global financial decisions were taken in DC rather than Beijing. And the potential financial leverage the governments of China and the big oil exporters have over the US strikes me as new.
That said, part of my concerns around “democracy” reflects the fact that I am not sure the average Saudi or Chinese resident would want to invest as much in the US (whether in US debt or US banks) as their governments are now doing — i.e. the world relies on official inflows to fund large deficits without there ever being a real decision on the part of the country making the investments in the US that it is in their broad interest. That risks misunderstandings, especially when the United States creditors start taking large losses. Or when the US starts doing something that the average Saudi really dislikes and the average Saudi asks why they are financing US policies …
koteli Says:
Sorry for the rant, Brad:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajkO05voC8xU&refer=home
“Never have so many oil and gas companies spent so much to produce so little.
That’s the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.
(…) Drillers could access only 7 percent of known world reserves in 2005, down from 85 percent in 1970 after Middle Eastern nations took control of their fields, according to a July report by the National Petroleum Council in Washington. (…) “What is happening is something different. The international companies are denied access to areas of abundant oil within OPEC, and it’s getting costlier in other areas.”
What this says is that oil majors are dying animals, with shrinking access to oil, and skyrocketing costs for those fields they still have access to. Indeed, a big sign of that is that they spend more of their money buying back their own shares (effectively liquidating themselves) rather than investing. Of course, the ever-increasing oil prices allow them to mask these worrying underlying trends under comfortable-looking profits.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aB50jeKPl7gE&refer=home
“Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.
Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.
(…) “The oil sector saved the market,” said Dwane. “Ex-oil, the numbers show falling earnings and with data highlighting a U.S. recession, we can expect more earnings downgrades.”
(…) Exxon, Chevron and ConocoPhillips, the three largest U.S. producers, all produced less oil in the first quarter. Chevron[’s] reserves fell to the lowest in almost a decade last year.”
Interesting combination: lower oil production, exploding production costs and capturing a shrinking fraction of oil profits has not prevented oil companies from enjoying record high profits. And these profits have in turn masked the fact that US corporate profits are otherwise in the doldrums (even excluding the devastated financial sector).
So high prices are masking the slow elimination of the oil majors, whose profits are themselves hiding the weakness of the US corporate world.
Optimists cling to the notion that this is self-correcting, ie that the recession underway will cause oil demand to shrink and prices to recede, thus allowing all of these phenomenons to go into reverse. But this ignores the fact that demand is already shrinking in the US and Europe. We are no longer driving demand: beyond China, which could be argued to have an economy still to some extent dependent on the health of our own (even though this is highly debatable), it is oil producers like Iran, Saudi Arabia, Russia or others that are enjoying the fastest demand growth - and with current prices (both external, driving their revenues, and internal, driving demand as they are kept very low) this is unlikely to change.
With that in mind, you’d expect policy to start focusing on what we can control (ie our demand) rather than to keep on doing little but the all-too familiar - and unwholesome - combination of an arrogant sense of entitlement, casual recourse to raw threats and the most abject begging towards Saudi Arabia et al.
But hey, oil profits are flowing, supply-side policies are working!
SPeterson Says:
The curve for Japan is very interesting. Two relatively long slow growth periods divided by a remarkably steep and short growth spurt. It seems that China has absorbed export growth that in the past had been captured by Japan.
Judy Yeo Says:
Brad,
It’s not a matter of democracy, it’ll be ridiculous for any government to put eveery investment decision to the vote, or to reach consensus before making the investment, can you imagine Japan or Norway doing that before financing the US via investment in treasuries or investing in a US bank?
That might prove disastrous considering how long they took to decide on a boj governor…
At least there weren’t be banners proclaiming that each tax cut was sponsored by some gulf government…
glory Says:
well maybe where paulson has failed, congress could step in: “Congress is considering a grab bag of ideas: Withholding arms sales to Saudi Arabia until it ramps up production by one million barrels per day; opening up the Organization of Petroleum Exporting Countries to anticollusion lawsuits in the U.S.; and tightening regulation of oil trading.”
and then they’ll depeg and stop buying treasuries thru london
altho maybe then even not!?
In the end, the currency question is as much political as economic. The link between the dollar and the riyal (or dirham or dinar) in large part reflects the links between the U.S. and the countries that both supply American oil and depend on American might. Keeping the riyal stuck to the dollar is “the implicit way of paying back the provider and guarantor of security,” says John Sfakianakis, chief economist of Saudi British Bank in Riyadh.
but if nazif has anything to say, petrodollars should stay put to revitalise the [strike]libarary of alexandria[/strike] region’s human/social capital.
The Canadian-educated prime minister said that one of the region’s main challenges is to raise the competitiveness of its work force. “Education is a very important factor in this area. We need to make sure that the new generations are capable of competing in a global economy,” he said.
Twofish Says:
bsetser: The same isn’t true of the average American though. They likely would prefer a world where major global financial decisions were taken in DC rather than Beijing. And the potential financial leverage the governments of China and the big oil exporters have over the US strikes me as new.
Sure, and that’s perfectly understandable. However, this has nothing to do with democracy, and confusing American national interest with democracy and human rights has the effect of undermining promotion of democracy and human rights in the world. Mixing the two has lead to the suspicion (and in my view the correct suspicion) that a lot of the talk of democracy and human rights is merely a cover for promotion of US national interests.
If the US really wants to promote democracy, then it has to realize that any sort of democratic world is just not going to be a place in which the interests of 350 million people who are Americans are automatically placed above the several billion people who aren’t, and I think the general shift in power to the Middle East and China is on the whole a good thing.
I don’t think that the average Chinese, Saudi, or American thinks too much about their governments reserve policies. They just care that they have jobs and good standards of living. They just care about results, and how its done they leave for technical experts.
As far as being in the broad interest. I think that there *has* been a decision in both Beijing and Riyadh that pumping money into the United States is in the Saudi and Chinese national interest, and at least in the case of China, there is a lot of popular input into that decision. As the events of the past three month have demonstrated, Chinese aren’t terribly shy at screaming when they think their national interests is being threatened. If there really was a popular feeling that China is funding the US too much, the government just wouldn’t be able to do it.
And yes, if the US starts doing something that the Saudis or the Chinese believe to be against their national interests, the Saudis and Chinese will start pulling money out, and don’t think that there is any misunderstanding here at all. If the US had encouraged Taiwan toward independence or recognized the Dalai Lama as a state leader, then I don’t think that it would be getting as much funding. Keeping the US from doing these things is a large part of the reason that money is being pumped in.
Bio Says:
“I am not sure the average Saudi or Chinese resident would want to invest as much in the US (whether in US debt or US banks) as their governments are now doing”
An *average* person has enough common sense to realize that they do not know enough about investing to make such decisions. But once they are educated (and I mean really educated), then who knows – maybe they decide that the present course of their governments’ is the right one.
Why do bankers get such exorbitant salaries, wouldn’t it be much more efficient and money-saving to just to hire a Joe-six-pack from the street?
Pallj Says:
I think $125 for the barrel is more likely to be the year’s average than it is leveling out at that price.
If you suppose the average cost of the Saudi barrel is around $55, or that is the revenue that will run their country at a steady pace, there is a big pile of money *exported barrels times $70* that needs to be invested abroad.
Is there such a great difference between what your average sheik decides to do with his share, and what their SWF does with the portion that is channeled through their pipes?
I think the only practical difference is that the SWF is under international pressure to disclose details of what they are up to, while no one is questioning the sheik’s investments.
You are also right that the state of the Chinese economy in these times is what sets this oil shock apart from other recent ones. The net result will be a delayed bubble burst, which will stiffle the US economy for a longer period of time, than if we we had what us Westerners have come to think of as “normal times”.
The stiff demand factor outside of US and Europe is the sting in the tail, so to speak.
I don’t think the average Chinese or the average Saudi is too concerned about potential economic hardship in US or Europe. They will be more upset when they loose their jobs, which will probably be the result of less buying power in the West.
I don’t think religious belief in “democracy” will be of any great comfort to someone who’s starving, regardless of which part of the world they come from…