Traditionally, the US has been the destination for the bulk of GCC capital. According to Samba Financial Group report — Tracking GCC Foreign Investments: How the Strategies are Changing with Markets in Turmoil — interest in the US market has remained strong in recent years, accounting for almost half the foreign assets accumulated during the past five years.
The share of GCC capital flows destined to countries other than the US over the past five years — some $ 450 billion — has found its way into a variety of asset types in other parts of the world. Favored areas have been Europe, the Middle East and North Africa and East Asia. GCC foreign asset accumulation in 2008 is likely to reach around $ 390 billion.
“The onset of the credit crunch in the second half of 2007 triggered increased GCC demand for US Treasury bills and, more surprisingly, US corporate securities,” Howard Handy, chief economist at Samba, said.
“The current turmoil is likely to spur interest in the safety of US government debt. However, those Gulf funds that emphasize longer term investment strategies may be attracted to the comparatively cheap valuations of US and European equities, and are likely to gradually build up their holdings of these assets in the period ahead,” Handy added.
The report said net GCC purchases of long term US securities fell into negative territory in the immediate aftermath of the onset of global financial distress in August 2007, but not by much. Appetite quickly recovered, and in December 2007 net purchases of long-term securities reached a record $ 5 billion. GCC demand for US paper has remained firm, and net transactions between August 2007 and June 2008 were about $ 18.7 billion and GCC net purchases of US corporate securities reached a substantial $ 23.6 billion.
The GCC countries have been running large and increasing external current account surpluses since the onset of the oil boom in 2003. From mid-2003 to mid-2008 oil prices more than quadrupled, from just over $ 30 a barrel to $ 140 a barrel. The price surge, in conjunction with incremental additions to export volumes, boosted the GCC’s cumulative export earnings over the period to about $ 2.2 trillion. Because of surging oil prices, the current account surplus swelled dramatically from around $ 50 billion in 2003-04 to almost $ 400 billion in 2007-08. In aggregate, the current account registered a cumulative surplus of $ 912 billion over the period, the Samba report said. Much of the unidentified capital flows are managed by the GCC’s public investment funds or sovereign wealth funds. Traditionally, the Abu Dhabi Investment Authority (ADIA) and the Kuwait Investment Authority (KIA) tended to invest passively, or indirectly, with holdings in a broad range of asset classes, such as equity, fixed income (including Islamic bonds) and alternatives, but also with large holdings of cash deposits. In recent years, KIA has made more direct, strategic investments. Both institutions are thought to favor equities (accounting for perhaps 60 percent of assets), and are often overweight on Europe, though KIA appears to have been increasing its exposure to MENA and East Asia.
The Samba report said Saudi Arabian Monetary Agency, (SAMA) is not a sovereign wealth fund (SWF) though it has a large portfolio of foreign assets worth about $ 433 billion at the end of September 2008, with foreign reserves worth an additional $ 9.5 billion. Most of the assets under SAMA’s management are thought to be invested in liquid, low-risk bonds and cash and equities. Its holdings are likely to be heavily weighted toward the US dollar. The Public Investment Fund (PIF) has been mandated to establish the Kingdom’s first SWF with $ 5.3 billion of start-up capital.
The decline in global oil prices, which are now around $ 50 a barrel, has been rapid during the second half of 2008. “The outlook for oil prices remains very uncertain, but our current expectation is that prices will average around $ 60 a barrel in 2009, not far below the average for 2007. A slight increase to around $ 75 a barrel is envisaged for 2010 as global demand begins to recover. Given this, we expect that GCC capital outflows will amount to about $ 430 billion between June 2008 and June 2010,” Handy said.
