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Open oil sector to foreign investments, Paulson urges GCC

US Treasury Secretary Henry Paulson assured Gulf investors on Monday that the United States will remain open to sovereign wealth funds and urged oil producers to open their energy sectors to foreign investment.

“As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds,” Paulson said on the last stop of a Gulf tour. “We reject measures that would isolate us from the world economy,” he said in the UAE capital Abu Dhabi, whose government-run fund manages assets estimated at up to $875 billion. The Abu Dhabi Investment Authority injected $7.5 billion in capital in ailing US banking giant Citigroup last November, becoming one of the bank’s biggest shareholders. The state-owned Kuwait Investment Authority has also pumped $5 billion into Citigroup and Merrill Lynch.

Paulson acknowledged concerns in the region resulting from the Dubai Ports World debacle, when US congressional opposition forced the Dubai government operator to offload US operations acquired through its 2006 acquisition of P and O. “Some here worry about growing protectionist sentiment in the United States, and they also worry specifically that US sentiment towards Middle East investment has been permanently affected by the Dubai Ports World case.”

The US treasury chief, who met officials in Saudi Arabia, Qatar and the UAE, said some state funds were also concerned about a US attempt to set standards for their investments. The International Monetary Fund met last month to develop “best practice” guidelines for sovereign wealth funds and a working group is expected to release its recommendations by October. Paulson said there was concern among some fund managers that the initiative aimed to limit the scope of their activities or release privileged information. “In fact, our purpose is just the opposite. We are trying to quell calls for restrictions by urging sovereign wealth funds to endorse best practices to create a dynamic rise to the top and help allay concerns about opacity and systemic risks.”

 
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Paulson said there were “no simple or quick remedies” to current record high oil prices, currently around $126 a barrel after hitting a peak of more than $135 last month. And he said the Gulf region alone could not alleviate the market pressures. Paulson defended the dollar’s status as the world’ reserve currency and said its recent decline was only a small factor behind a surge in oil prices. “The US dollar has been the world’s reserve currency since World War Two and there is a good reason for that. The United States has the largest, most open economy in the world, and our capital markets are the deepest and most liquid,” Paulson told a business group in the United Arab Emirates. Paulson’s comments mark a slight strengthening of his recent language on the dollar and could resonate with Gulf oil producing states that are struggling with soaring inflation and may be re-evaluating their dollar currency pegs.

The US Treasury Secretary is on the final day of a four-day tour to Saudi Arabia, Qatar and the United Arab Emirates to discuss currency and economic issues with regional leaders and reassure them that the United States remains receptive to their investments. In his remarks, he pledged to deal with problems in the US economy, that have hurt the dollar’s value in recent months. “I am committed to promoting policies that enhance the underlying competitiveness of the US economy and ensure that the dollar remains the world’s reserve currency,” he told the US-UAE Business Council. He said these include advocating open investment and trade and working to stave off a US recession and return capital markets to health. He said the dollar’s value would ultimately be reflected in strong long term fundamentals, which “compare favorably to any advanced economy in the world,” he said. Paulson said demand should be eased by cutting subsidies and by investing in renewable energies. “On the supply side, we are urging all oil producing countries to open oil markets to foreign investment, which would support faster and more efficient growth,” he said.

On a trip to the Middle East earlier this month, US President George W. Bush failed to win the help he sought from Saudi Arabia to relieve skyrocketing gas prices. Saudi officials said they already were meeting the needs of their customers worldwide and there was no need to pump more. On Wednesday, David McCormick, Treasury’s undersecretary for international affairs, said that Paulson will not make any specific request for nations to boost their production. Paulson also pointed to a recent law passed by Congress that he said would improve the process of reviewing foreign investments in the US “While we must safeguard national security, we can do so while continuing to welcome foreign investment,” he said.

 
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Depegging the currency was a sovereign matter, Paulson told a news conference at conclusion of his visit to Doha, part of a tour that took him to Saudi Arabia and the United Arab Emirates (UAE).

He noted that Kuwait was the sole Arab Gulf countries which depegged is local currency, the Dinar, from the USD and linked it to a basket of currencies. However, he said, Kuwait “is still suffering inflation caused by high prices of food and construction materials.” Pegging the Gulf currencies to the US dollar, he said, has long served economies of the Gulf Cooperation Council (GCC) states — Kuwait, Saudi Arabia, UAE, Oman, Bahrain and Qatar. He said he saw prosperity in the region but he also saw a noticeable monetary inflation which caused problem to decision-makers.

Paulson said his talks in the region focused on oil prices and other energy resources, the financing of terrorism and how to protect international financial institutes from terrorists. He said high oil prices was linked to the supply-and-demand. On Iran, Paulson said the regime in Tehran was isolating itself from the international banking system and investment banks because of its policies. (Arab Times, Kuwait)