The Wall Street Journal-20080117-Politics -amp- Economics- Gulf States Seen Raising Foreign-Asset Holdings
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Politics & Economics: Gulf States Seen Raising Foreign-Asset Holdings
WASHINGTON -- Total foreign assets held by the oil economies of the Persian Gulf are forecast to increase by more than 10% to $2 trillion this year, with high crude prices fueling a global buying spree, the Institute of International Finance said.
Near-$100-a-barrel oil is pumping up the buying power of government investment arms in countries such as the United Arab Emirates, Saudi Arabia and Kuwait, according to the international association of investment banks. In a new report, the group forecasts another round of multibillion-dollar deals like last year's purchase by the Abu Dhabi Investment Authority of a $7.5 billion stake in U.S. banking giant Citigroup Inc. and a 7.5% share in private-equity concern Carlyle Group for $1.35 billion.
The downside to being so flush with cash is that the Gulf states will need to be wary of internal inflation and a depreciating dollar, as well as the potential for political backlash, especially during an election year in the U.S., analysts say.
Charles Dallara, managing director of the IIF, said the Gulf countries will likely put a growing volume of resources into reserve and wealth-management funds, giving traditional institutional investors more competition in the global assets market.
"We estimate, for example, that 2008 will see the states' current- account surplus exceed $250 billion, compared to an estimated record $215 billion in 2007," he said.
Even if oil prices soften, the IIF said, the impact on the Gulf region could be mitigated by major infrastructure projects already under way there.
"The economic boom now taking place in the Gulf oil-exporting countries is likely to be sustained well into the medium term," said George Abed, a special adviser on the study.
The banking association expects the region's gross domestic product to grow to around $900 billion, double its GDP in 2003.
The Gulf countries "seem to be making pretty sharp decisions, though a lot of them do seem to be more political than financial," said Paul Sullivan, a Middle East expert and professor of economics at the National Defense University in Washington. He cited the deal that gave Dubai major stakes in the Nasdaq Stock Market Inc., the London Stock Exchange and Nordic exchange OMX AB. "Taking over stock markets could be questionable in terms of the overall return, particularly as they continue to turn more to electronic trading, and the valuation of that investment won't be as good as it could be in the future."
The IIF's Mr. Abed said a critical issue for Gulf governments is rising inflation in the face of a depreciating U.S. dollar, to which five of the six of the region's currencies remain pegged. The dollar peg (oil traditionally has been bought and sold in U.S. currency) has long served the countries profitably, contributing to macroeconomic stability and facilitating a regional convergence toward monetary union.
