Gulf petrodollars stay home for once

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By Camilla Hall in Abu Dhabi

For years, petrodollars burnt holes in Gulf states’ pockets. What could not be spent at home, went straight into investments abroad. Buying US treasuries, London palaces or football clubs was a norm. But in the aftermath of the Arab spring, leaders in Middle Eastern countries have had to reconsider where to put their revenues. Instead of foreign assets and luxury, the surplus money is spent on creating jobs, building new homes and helping other states in the region. 

Saudi Arabia, the Arab world’s largest economy, is leading the way in state spending with plans to exceed this year’s budget by about 40 per cent. Elsewhere, political unrest has pushed governments including Kuwait, Bahrain and Oman to offer sweeteners to their populations.

“The combination of the Arab spring and the efforts taken in the financial crisis mean that a lot more of the oil revenue is being spent at home,” says Rachel Ziemba, senior research analyst at Roubini Global Economics. “There’s less money available for the sovereign wealth funds.”

The states are flush with cash. Globally, the world’s oil exporters will save on average $70bn a month over the coming year, exceeded only by peaks during the summer of 2008, according to Goldman Sachs.

HSBC estimates that Saudi Arabia will earn $234bn in oil export revenue this year and the United Arab Emirates $71bn.

As a result, Saudi Arabia’s surplus may shrink to SR61bn ($16.3bn) from SR108bn last year, Riyadh-based Banque Saudi Fransi estimates, based on oil prices that have averaged $112 a barrel so far, according to Thomson Reuters. But the higher domestic spending has pushed the kingdom’s budget breakeven oil price to $88 from $67 a barrel, the bank says.

“Why should they spend their precious oil money on paper assets that don’t look very reliable right now?” asks Eckart Woertz, a visiting fellow at Princeton University. “It’s only natural that they need more money at home. It’s pretty dramatic what we’ve seen in the region.”

Government nervousness is largely at the root of the additional spending. Since pro-democracy protests swept the region, toppling rulers in Tunisia and Egypt, the Gulf Co-operation Council has promised $10bn each to Oman and Bahrain to help create jobs. In May, Saudi Arabia pledged $4bn to Egypt in the form of soft loans, deposits and grants.

Back at home, the kingdom announced a $130bn five-year plan to create jobs and build 500,000 homes after protests by the majority Shia community gripped Bahrain. Despite its oil wealth, Saudi Arabia does not have a principal sovereign wealth fund like Abu Dhabi or Qatar. Instead it invests through the central bank which holds about $480bn in foreign assets, largely made up of US treasuries. That pattern may change, however.

“If Saudi Arabia spends the amount they’ve committed over the next three to four years, certainly they will have less money to allocate to foreign assets,” says John Sfakianakis, chief economist at Banque Saudi Fransi.

Even in countries such as the UAE and Qatar that have not seen much in the way of unrest, significant funds are being spent to prop up and develop domestic economies. Future investments made in developed markets are likely to re-focus on strategic assets that will help to diversify their own economies rather than on, for example, financial assets such as government debt.

Qatar, the world’s largest exporter of liquefied natural gas, plans to spend tens of billions to build the stadiums, hotels and infrastructure needed to host the World Cup in 2022. The country also announced a five-year development plan in March that allocated $65bn to infrastructure projects and $60bn of spending “in a national deveopment plan” through government investment arms.

Qatar’s real estate investment arm is part of talks to take over London’s Olympic Village after the 2012 games, signalling that sport may be an area of future foreign investment, in line with the World Cup ambitions.

Qatar and the other Gulf states are unlikely to stop investing in the west completely but less may be directed to the sovereign wealth funds for investment in the developed markets.

“They play a considerable role in balancing international global imbalances . . . But the oil exporters as a total, including Russia and Norway, are crucial in terms of surpluses ,” Mr Woertz says.

Related reading:
Saudis raise oil production to curb prices
Mideast investors boost UK property activity
Real estate: Market holds up in spite of regional turbulence

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