Spring cleaning of Petrodollars

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Petrodollars! What a word! It is a term coined by Prof. Ibrahim Oweiss professor of economics at Georgetown University in 1973. Oweiss felt there was a need for a word to describe the situation then occurring in oil producing, OPEC countries which were earning large amounts of money, in dollars, from oil production. And this stuck.

This so called petrodollar, burn holes in pockets of the Gulf states. What could not be spent at home, found a home elsewhere abroad. It was spent in buying US treasuries, London palaces or football clubs to mention a few. This spending spree earned the Gulf Nations the name Gulf Bling!. However the Arab Spring sure cleaned the money routes.

Leaders in the Middle East are made to reconsider where their revenues would be housed. Instead of foreign assets and luxury, the surplus money is spent on creating jobs, building new homes and helping other states in the region.

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. Theres less money available for the sovereign wealth funds.

Globally, the worlds 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.

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 GCC has promised $10bn each to Oman and Bahrain to help create jobs

Saudi Arabia

The Arab worlds largest economy, is leading the way. Its in state spending is expected to exceed this years budget by about 40%. Elsewhere, political unrest has pushed governments including Kuwait, Bahrain and Oman to offer sweeteners to their populations.

HSBC estimates that Saudi Arabia will earn $234bn in oil export revenue this year and the United Arab Emirates $71bn. In May, Saudi Arabia pledged $4bn to Egypt in the form of soft loans, deposits and grants.

As a result, Saudi Arabias 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 kingdoms 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 dont look very reliable right now? asks Eckart Woertz, a visiting fellow at Princeton University. Its only natural that they need more money at home. Its pretty dramatic what weve seen in the region.

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 theyve 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.

UAE

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.

HSBC estimates that UAE will earn $71bn this year in oil export revenue.

The UAE, shielded from anti-government protests that have rocked Arab states, is conscious of the potential for discontent especially among Emirati youth, more so since state jobs are no longer guaranteed.

In the capital Abu Dhabi, it had made many expats redundant in it Government Departments, paving way to give the jobs to the local population.

One expatriate employee at the ADCH said 118 staff had been asked to leave within one to three months, including himself.

The reason theyve given is Emiratisation, he said, referring to the incentives and quota program aimed at boosting national employment.

There are 35,000 unemployed Emiratis in the UAE, and only seven percent of nationals work in the private sector, according to the Ministry of Economy

There is clearly some anxiety about the risk of rebelliousness among the new generation of Emiratis, said David Butter, MENA regional director at the Economist Intelligence Unit in London.
Many … have reason to question the decisions that have been taken to create a society and work environment so skewed in favour of expatriates.

Regional events may have prompted the government to hasten the Emiratisation of the job market in order to pre-empt any potential socio-economic unrest, said Ghanem Nuseibeh, founder of London-based Cornerstone Global Associates.

The governments challenge is to balance the needs of the local population in terms of adequate employment and employability, as well as ensuring the country does not lose its competitive advantage.

Qatar

Qatar, the worlds 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 development plan through government investment arms.

Qatars real estate investment arm is part of talks to take over Londons Olympic Village after the 2012 games, signaling 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.

Source: FT, Saudi Gazette

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