Western firms and governments are turning to the world's top oil-exporting region for money as the global crisis bites, but Gulf funds that lost billions in the turmoil may be more choosy with their cash as oil income falls.
With an estimated $1.6 trillion under management, Gulf Arab sovereign wealth funds (SWFs) are under growing pressure to shore up plummeting stock markets at home as the global financial crisis hits confidence and squeezes liquidity.
To make matters worse, oil prices have dropped by more than half since hitting a peak of almost $150 a barrel in July, substantially staunching the flow of fresh revenues that has allowed Gulf Arab states to flash their cash in recent years.
“The region is being asked to contribute at a time when the oil price has fallen... when there is credit tightness globally and governments have a greater responsibility to invest in home economies,” said John Sfakianakis, chief economist at SABB bank.
“There has to be a careful balancing act between what Western governments want and what Gulf states can contribute.”
Just two years ago, the prospect of SWFs from Muslim states snapping up strategic Western firms was enough to raise national security fears and calls for more transparency among such funds.
But faced with the worst financial crisis in 80 years, leaders from Britain to the United States have arrived in the Gulf in recent weeks asking oil exporters to pour more cash into their firms and the International Monetary Fund (IMF), which only weeks ago was busy imposing transparency conditions on SWFs.
Yet, rich as they are, analysts say Gulf Arab SWFs do not have unlimited income to continually come to the rescue and may only part with money if they see a benefit for their countries.
Their cash is tied up in stocks, bonds or elsewhere and cannot be easily reallocated, analysts say. The less ready cash they have, the harder Gulf states will think about investments.
“Some of these Gulf sovereign wealth funds are estimated to have over half their portfolios invested in equities which have lost 30% or more... so naturally they are reluctant,” said Eckart Woertz, economist at Gulf Research Center.
“Gulf funds have less fresh money available as their surplus is lower at the new lower oil price level. They cannot sell equities to give money to the IMF as the markets would fall further and they cannot sell the US Treasury paper they hold as this would affect confidence in the US economy. What they have is less and what they have coming in is less.”
Some Gulf Arab states have said they will continue to make long-term strategic investments abroad but, having lost billions through their existing stakes in top Wall Street firms, are now more likely to shop around or hold out for bargain buys.
Investors from Abu Dhabi and Qatar upped their stakes in British bank Barclays in recent days, helping it avoid government aid, but Gulf Arab investors have made it clear that they will choose wisely and can no longer be viewed as gullible cash cows.
“I think some people need to have a reality check and shouldn't get confused,” Mohammed al-Hashimi, executive chairman of Dubai's Zaabeel Investments, which is invested in Sony and EADS, told Reuters last month. “We don't overpay for assets.”
Many Gulf Arab funds are now either considering investments closer to home, or sitting on the sidelines and waiting for the global financial system to stabilize before making more moves.
“Given that global conditions in financial markets and economies overall are so volatile, investors, including sovereign wealth funds are likely to be very cautious,” said Steffen Kern, author of a Deutsche Bank report on SWFs.
“What you do in such a situation is have your money in less volatile assets. At the same time, owing to the very low prices there are extremely good opportunities on equity markets.”
Analysts said it was important to distinguish between investments by Gulf Arab billionaires willing to take risks, and funds investing oil income on behalf of their nation, who may be tempted to reassess as the credit crunch hits home.
Kuwait has faced protests outside the bourse with small investors complaining that their SWF, the Kuwait Investment Authority, was too busy investing abroad to rescue them.
“At the height of the oil boom and for the past two years, there has been a lot of sovereign wealth fund exuberance. Now the same level of exuberance cannot be there,” said Sfakianakis.
“Now they will take a step back and reprioritize and think about what is worth investing in and what they can invest in as their money is not so readily available any more.”
Gulf states tend to assume conservative oil prices of around $50 a barrel in their budgets, not far off Thursday's price of just under $60. Kern said SWFs keep a close eye on oil price and use them as a key variable to forecast scenarios for investment.
Yet the spending spree of recent years has not all come from windfall oil revenues. For instance, development in and by Dubai, the Gulf trade hub, is leveraged. Fitch estimates the United Arab Emirates external debt at $170 billion in mid-2008.
Saudi Arabia is already a top contributor to the IMF and has been willing to assist in global crises before, so analysts say it could respond to British calls to help boost the global body.
But with more US debt expected to be issued to cover economic bailout efforts, Gulf states face competing demands.
“The bill for this American bailout will be paid ultimately by Asian and Gulf funds through their investments in US Treasury bills but will such bonds continue to perform well with so many new issues?” Woertz said.
“We are asking for money out of thin air. Is there really enough cash in the Gulf to pay for all this? I don't know.” (Reuters)