this post is by Rachel Ziemba
Thanks again to Brad for letting me fill in while he’s on vacation. Sorry I’m late catching up with you all but I’ll try to chime in on some of the key releases especially on China in the next week. But let me start out with something from the world of oil wealth.
Timothy Geithner, the U.S. Treasury Secretary, travels to the GCC (Saudi Arabia and the UAE) in a few days to commune with some of the more significant creditors of the U.S. and possibly urge these savings-rich countries to contribute to the IMF, as several emerging market economies have pledged. As a result it seems an apt time to re-estimate how much these governments and their neighbors in Qatar and Kuwait have accumulated.
While the Gulf’s holdings of U.S. assets pale in comparison to China’s, the GCC possesses the largest trove of US stocks among foreign governments. With most of its assets managed by the central bank, Saudi Arabia likely holds the most US treasury bonds. The other GCC countries, most of whom entrusted their oil windfall (and gas in Qatar’s case) to an array of investment funds, tend to have a more diversified portfolio. However, the U.S. dollar still dominates the Gulf’s foreign asset position.
With the rise in the price of oil in Q2, some analysts have again been talking again about the global role of sovereign funds. While some, such as the China Investment Corporation (CIC), for one, seem to have become more active investors again, armed with new advisers, the Gulf funds still seem to be homeward looking for now. The latest –and forthcoming – RGE Monitor Global Outlook suggests that growth in the GCC will be flat in real terms, with a slight contraction possible in 2009. The significant assets of the region have allowed GCC countries to steer their economies to a softer, if still, harsh landing. Much of the region’s output, investment and sentiment remain linked to oil despite various attempts to diversify its economy. Steffen Hertog has a nice new piece on the lessons learned from the 80s by Arab oil producers.
Many GCC sovereign funds have boosted their holdings in domestic banks, domestic equity markets other savings been drawn on to meet fiscal deficits. Meanwhile, some of the few identifiable foreign investments in H1 2009 were made by hybrid funds like the UAE’s Mubadala, which tend to invest in sectors that could help domestic economic development or in sectors they already dominate (such as oil and petrochemicals).
The foreign assets of GCC central banks and sovereign funds are estimated to have fallen to just over $1.1 trillion at the end of June 2009 from about $1.2 trillion at the end of 2008. This estimate draws on a methodology Brad and I created last year, which estimates the inflows to the funds, and assumes similar performance to benchmark indices for each asset class. This estimate though, is somewhat lower than some other prevailing estimates. Recently released analysis by McKinsey Global Institutes suggests that Sovereign investors of the GCC, one of their ‘new power brokers’ managed closer to $2 trillion at the end of 2008.
The national breakdown suggests that Saudi Arabia accounts for over $400 billion of the assets (including the non-reserve assets of the Saudi Arabian monetary Agency and the foreign assets it manages for other parts of the government). The UAE, accounts for the next largest amount, around $350 billion, not including Mubadala and some Dubai funds. Kuwait’s fund managed just under $240 billion and Qatar, over $60 billion. The remainder is managed by the central banks of the region.
The slightly more fiscally-conservative (and richer) countries with more oil reserves per capita, like Abu Dhabi and Kuwait, or gas reserves (Qatar) and their more risk-tolerant funds should have seen the value of their assets reflate along with risky assets. Despite the increase in the oil price, the correction at the end of June 2009, limited the paper gains.
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