Print
Email
Share
Facebook
Twitter
LinkedIn
CiteWe aren’t there quite yet. At least not on an annual basis. The oil exporters foreign asset growth in 2008 will likely top their 2007 foreign asset growth.
But we may not be that far away.
On a quarterly basis, the foreign asset growth of the oil exporters probably peaked in either q2 or q3 2008.
The oil exporters certainly aren’t feeling quite as flush as they once did. Somehow an import bill that can be covered — without dipping into existing assets — if oil is above $70 and a $90 a barrel market price doesn’t feel quite as secure as an import bill that can be covered if oil is above $20 a barrel and a $40 a barrel market price.
Three things have combined to put a bit of pressure on the oil exporters — and the portfolio managers of their central banks and sovereign funds:
1/ Oil prices are no longer rising faster than domestic spending and investment. Instead oil prices are falling as domestic spending and investment (and associated imports) rise. That means the oil exporters have a smaller monthly surplus, as a higher fraction of their oil export revenue is spent on the imports associated with higher levels of domestic spending and investment. Rachel Ziemba and I believe that the oil exporters will “break even” (neither adding to their foreign assets or dipping into their external savings) this year if oil is around $70 a barrel. That break even price though has been rising quickly — and it isn’t inconceivable that the break even price might be $75 or $80 a barrel next year (unless some folks with ambitious plans cut back in the big way; with rents up 65% this year in Abu Dhabi there is certainly a bit of froth in the market) and, well, the market price of oil could potentially be lower than that.
2/ Any sovereign wealth fund that invested heavily in equities has been hurt by the global sell-off. Anyone who shifted from the US to Asia (remember all the talk of a new silk road?) has been hit particularly hard. Hedge funds haven’t been a safe haven either. Global equities indexes are down 25% on the year. I don’t think the Abu Dhabi Investment Authority is quite as large as some people think, so I don’t think it started the year with a $400b equity portfolio. But even it didn’t have a big enough equity portfolio to be in position to see a $100b loss on its equity portfolio, it clearly is down substantially. Indeed, Rachel and I now suspect that SAMA will have more foreign assets than ADIA by the end of the year. Holding a conservative portfolio has paid dividends this year.
3/ The oil exporters are increasingly using their reserves (and sovereign funds) to stabilize their own markets. Russia has indicated that it will lend up to $50 billion from its reserves to domestic banks having trouble rolling over their external credit lines. The UAE has announced a similar $13.5b facility, a facility that is considered to be a “quiet” bailout of Dubai by the much richer sheiks of Abu Dhabi. Dubai itself has indicated that one of its funds — DIFC Investments — will support the local market. Kuwait’s central bank is lending domestically as well — and the KIA has been intervening to support Kuwait’s domestic stock market.
A lot of the oil exporters had very large fiscal surpluses from oil — as the foreign exchange from oil sales was held in foreign currency at the central bank or invested through a sovereign fund. But a lot of private (or quasi-private, as the dividing line between public and private often isn’t clear) banks and firms in the oil exporters were borrowing heavily from banks abroad. That flow has dried up. And the state is being called on to step in to stabilize things — much as the state in the US and Europe is trying to offset a collapse in private intermediation.
The net result: the oil exporters portfolios aren’t growing at their former pace. The times are a changing.
The big oil exporters no doubt all have substantial sums stashed away — sums that if they were say lent out on the European interbank dollar market might make a difference. But they also aren’t quite as rich as they used to be; they have lots of cash — but many also probably believe that they need to hold a lot more cash to protect against swings in oil prices and global capital flows than they used to.
How will it affect the US dollar?
Excellent analysis! I also agree with the analysis of mistakes done by managers and decision makers of those countries as pointed out in post below.
http://marketwarnings.blogspot.com
Manch:
Short their currencies, and buy the dollar, as discussed in article I alluded to above I did not include the full URL, it is below.
http://marketwarnings.blogspot.com/2008/10/oil-and-commodities-exporters-mistakes.html
You can’t really short their currencies, since they are all pegged to the dollar, or to a basket that is mainly composed of dollars. Even if oil prices continue to fall, it will take a long time for the Gulf States to run out of money to defend their pegs with.
In the long run, you’re probably better off shorting the dollar instead. After all, a country with a ten trillion dollar national debt is rather more likely to face a currency crisis than a group of countries that sit on top of most of the world’s remaining oil.
less petrodollars means less bond buying of US assets as well and potentially higher interest rates maybe? hmmmm…..
In the long run, you’re probably better off shorting the dollar instead.
Short the dollar against what? The only thing that looks even a little attractive is the canadian dollar.
Jim Rogers has been buying Japanese yen and Swiss franc for over a year now. I understand the yen part (unwinding of the carry trade), but not the franc. Anyone has a reason why swiss franc?
To answer the question about Rogers and the Swiss Franc:
from: http://www.moneymorning.com/2008/09/06/jim-rogers-book/
(Q): Is there a specific signal that this is “over?”
Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.
(Q): They’ll move their own money.
Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.
Businessweek Wishful thinking… LOL.
http://www.businessweek.com/print/magazine/content/08_41/b4103032192140.htm
Shared Sacrifice Will Ease the Credit Crunch. Foreign lenders will have to take a haircut while American consumers spend less and taxpayers take a hit
by Michael Mandel
Is the U.S. heading for another Great Depression? Probably not—but we are about to go through a period future generations may call the Great Repudiation.
The root cause of today’s crisis lies not in the housing market but in America’s foreign debt. Over the past four years the U.S. private sector has borrowed an astonishing $3 trillion from the rest of the world. The money, directly and indirectly, came from countries such as China, Germany, Japan, and Saudi Arabia, which ran huge trade surpluses with America. Foreign investors trusted their funds to U.S. financial institutions, which used much of the money for mortgage loans.
But American families took on a lot more debt than they could comfortably afford. Now no one is sure how much of that towering sum the U.S. is going to pay back—and all the uncertainty is roiling the financial markets.
The Washington bailout debate boils down to this question: Who is going to bear the burden of the $3 trillion mistake? Will low- and middle-income borrowers have to cut back on spending to pay their mortgage bills? Will taxpayers have to chip in big bucks to pay for defaults on those debts? Or will Washington act in a way that imposes large losses on foreign investors—in effect, repudiating some of the debt? The best outcome is shared sacrifice among borrowers, taxpayers, and foreign investors—but that result may be politically difficult to achieve.
FINDING A FAIR PLAN
Since mid-2004, American households have taken on a bit more than $3 trillion in mortgage debt. The official statistics are very fuzzy, but it looks like at least one-third of the debt, and perhaps half, was financed with foreign money. As a result, foreign investors are sitting on an enormous mountain of mortgage-related securities.
US Interest Rates Absurdly Low
http://www.usatoday.com/money/econom…-bailout_N.htm
Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe’s top-rated bonds look like a better bargain: “U.S. bill and bond yields will have to go up to attract Asian buyers,” Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now.
“Whatever the U.S. is trying to issue would have to be relatively more attractive than what the rest of the world is offering,” agrees Joanne Hon, head of Asia research for Thomson Reuters. And a Thomson Reuters survey of 100 market analysts in August — before Wall Street melted down and Treasury announced its rescue plan — was already predicting that 10-year Treasury yields would rise to 4.5% over the next year.
Trouble with Dubai mortgage lenders:
http://www.ft.com/cms/s/0/93373ed4-92b0-11dd-98b5-0000779fd18c.html
DJC: Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener.
In the short term (i.e. today and tomorrow) this isn’t true, since there is a flight to short term US treasuries as the world financial system crumbles.
In the immediate to long term, it’s really hard to figure out what the currency dynamics will be since we have really only a vague idea of what the new financial order will look like.
Why is the world concerned about America defaulting on its obligations? I would be more concerned about America deciding that after all these years of securing the world’s oil supplies and permitting the Gulf States, the Saudi princes, Iraq, etc to profit from oil fields developed by the British and Americans, that they subsequently “nationalized” that we unilaterally decide retake our vested property interests in the region.
The rest of the world would have to sit back and watch as we took back what was ours and sold the proceeds at an inflated price to the rest of the world. Just stopping the outflow of $700 Billion/yr for US oil imports would repay the entire official US debt within 20 years.
Does this mean no more rotating buildings, and islands in the shape of palm trees and islands in the shape of arabic poems???
May I remind you all that on Nov 12 the IEA will release the results of a study assessing the depletion status of the world’s top 400 oil fields, which was announced here, here, and here.