Tracking GCC Savings and Borrowings...

Tracking GCC Savings and Borrowings...
Rachel Ziemba | Apr 27, 2008
With WTI Crude oil futures tipping over $120 billion on Friday, there's a lot of speculation about where the surplus revenues are going, especially those of the GCC.

A couple interesting data points
1) the IMF suggests that the aggregate current account surplus of the GCC may exceed $300 billion in 2008

2) UAE foreign debt, mostly of the private sector increased by a half in 2007.
3) UAE reserves increased by $25 billion in the month of November - more than the foreign asset growth of Saudi Arabia.

4) SAMA governor's warning that inflation might top 10% before falling.

5) Relatively few reported aquisitions by GCC sovereign funds in recent months - and no major role in recent bank recapitalizations.

All together these add up to illustrate some of the economic policy conundra, including some of the less than intended consequences of some policy responses.

With the oil price averaging over $100 a barrel so far this year - there's still a lot being saved (perhaps as much as $40-50 a barrel, for more on possible dynamics, check this post of mine from last month). Overall, with a constant oil price, even $90, domestic spending would likely catch up to new revenues in the medium term. As the economist notes in this week's cover story, most of the savings are still in government hands. And given the rate of growth of assets managed by UAE (likely over $50 billion) and Saudi central banks ($70 billion, stripping out valuation gains) in 2007, conservative, USD assets likely dominated the increase in foreign assets.
But more is staying in the region too. Some of this is being spent on capital projects to make up for decades of underinvestment - both in the energy sector and related. economic cities and attempts to diversify the economies away from oil or to higher value-added hydrocarbon products. As the IMF's John Lipsky noted this week, investment in the energy sector doesn't go as far as it used to. Despite nominal increases in spending, added capacity has been limited. But its not just government funds - the private sector is increasingly present in the megaprojects.

Other funds are being spent to maintain the standard of living of citizens in the face of rising inflation. The fiscal costs of subsidies to cushion inflationary pressures are rising too and furthering the inflationary pressures. this probably means Saudi Arabia won't hold to its pledge to rein in fiscal spending in the short term.

Yet oil @ or above $100 still means a lot of savings abroad.
So where have they been going?

- Shift to cash/safer assets. Like others they may be waiting on the sidelines. Brad Setser notes the rapid buildup of custodial holdings at the FRBNY, suggesting that central banks and sovereign funds have reverted to safe assets.

- They might have been among those investing in capital raising private equity funds. They may also have been investing in some small stakes in equity that aren't disclosed.

One trend we've seen is an increase in joint venture funds. QIA in particular has signed a number of such deals, including one in Vietnam. A local partner may open doors and help gain accss to some investments.

They might be wary of future losses. If funds were tracking the equity indices, funds could have sustained significant losses. Those countries more subject to public oversight might be wary of the fallout of investments - and are taking the opportunity for more due diligence.

Finally, they may also be worried about what Theodore Kassinger called the unpredictable, potentially volatile political environment in Congress. Together with the worries about the US economy, the decision to stay on the sidelines may be overdetermined.
If they've been wary, that doesn't mean people haven't been courting them. Frank Kane reports on the Dubai stop of the Freddie Mac roadshow in Dubai and suggests middle eastern
investors might be returning to Agency bonds. Yet Freddie Mac claims that recent investment from the Middle east has been in the 10s of billions of dollar range, with Saudi and the UAE accounting for most. nothing to sneeze at, but a small share of assets to place. This is hard to track though. The GCC didn't really participate in the EM shift to agencies of last year (at least as far as the US data story tells) and its purchases don't seem to have accelerated so far this year.

GCC foreign liabilities have been attracting more attention. On the one hand it seems a bit unusual to talk about the debt of the GCC. After all, all GCC countries are net creditors - the net CAS was well over $200 billion in 2007(IMF). The 2008 surplus will likely be much larger, about $330 billion if the IMF is right (oil price estimate $95). The investment funds and central banks added $215 billion in 2007 and are on track to add over $300 billion in 2008 (and maybe more). And that doesn't include private wealth.

But debt has been growing too. UBS notes that the UAE's foreign debt rose by 50% in 2007 to exceed $105 billion. These liabilities are dwarfed by savings, but its still an increased pace.
$13 billion is public sector borrowing, with the rest that of the private sector, especially the banks. Of course many of the banks are closely tied to the public sector and investors may assume that they won't be allowed to fail. After all, the GCC bank with the largest subprime related losses, Bahrain's Gulf international Bank is co-owned by many GCC governments and received a $1 billion capital injection after reporting a $757 million loss.

While some projects could be delayed, it seems unlikely big projects at home will fail. But credit costs may rise or delay financing. But new projects could be on hold, especially those outside. This week Emaar pulled out of a big project in Seattle in part because of financing - and perhaps questions about the health of the US property sector. In the property sector, even capital rich investors still care about debt costs, especially for multi-year projects.

Short-term cash flow may be a bigger concern. Yet, the GCC is protected from some of the refinancing issues faced by a country like Kazakhstan where challenges of rolling over foreign financing have made Kazakh banks ripe for foreign investors.

Global credit tightness could have the side benefit of deepening domestic capital markets. Markaz reports that GCC funds and state corporations are are increasing their stakes in GCC equity markets. Gulf news suggests that rather than seeking more expensive funds abroad, GCC banks may seek to raise more funds at home, issuing medium term notes to mitigate against existing maturity mismatches. This might have the side benefit of new listings for the Dubai Financial exchange. Mubadala, Abu Dhabi's economic development arm just bought almost a billion dollars of bonds issued by aldar, the abu dhabi property development arm. Mubadala has always had domestic investments - and invested abroad in joint ventures to support economic development at home - perhaps it is just a shift from equity to debt. This trend, matches that of increased domestic and international private sector involvement in the large capital projects.

Yet international trends may also limit economic policy autonomy and asset allocation choice. Speaking of the savings of the Emirates, I'm a bit delayed in noting the stunning rise of the UAE's reserves in the fourth quarter. Although the central bank has yet to officially report the data, the press quoted officials stating that the reserves reached $75 billion in November. a record $25 billion over October and almost trippling from January - November 2007. To put it in perspective the UAE added more in reserves in the month of November than Saudi Arabia's foreign asset growth ($17 billion). This increase is almost entirely the result of central bank intervention to neutralize inflows betting on a revaluation. After all, it was in November that 12m UAE dinar forwards surged and the UAE central bank governor seemed to endorse moving to a basket and away from the US dollar. No wonder Charles St-Arnaud of Morgan Stanley sees a continued fast pace of reserve accumulation and suggests that the GCC could join the ranks of the largest reserve stockpilers - without even including the over $300 billion in non-reserve assets of Saudi Arabia's Monetary Agency. He suggests GCC reserves might increase by a factor of 3-7 over the next 8 years.

But as he notes the pace of reserve growth is dependent on one major thing - the exchange rate regime and its credibility. For now at least, revaluation seems off the table - likely a fear of kicking the dollar when its down. Furthermore, the GCC monetary union seems back on the table. Yet current denials of a revaluation may be more credible and 12 month forwards have stopped rising in recent months. Yet it is another example of the way in which the dollar peg limits freedom of economic policy.

The biggest implication of this news though - is that GCC countries have yet to really diversify their currency holdings. Central banks of the GCC - including SAMA- likely added around $140 billion in assets, compared to just over $100 by sovereign wealth funds. Central banks tend to hold a much higher share of US dollars.

One data point to watch is the international banking data of the bank of international settlements released this week. It may give some indication of borrowings but also clues whether countries like Libya have increased the risk profile of their assets, as the creation of the Libyan Investment authority would indicate.

UAE decision favours single GCC currency

UAE decision favours single GCC currency

Khaleej Times - 01/01/2008

(MENAFN - Khaleej Times)The decision by the UAE government to retain the dirham peg to the US dollar demonstrates its commitment to achieving a GCC monetary union, according to a note by UAE-based firm HC Brokerage. GCC monetary union had been slated to come into effect by 2010, but the deadline has been extended indefinitely.

"The UAE is very dedicated to achieving a GCC monetary union, which was evident in its decision of not de-pegging its dirham from the US dollar," the note states. Speculation about a possible currency de-pegging has driven the dirham up to a 17-year high and increased pressure on the peg.

And although the note acknowledges the success of the fixed exchange rate system for attracting foreign investors and "maintaining stability in the market," HC Brokerage advocates the need for a more independent monetary policy.

"The GCCs/UAE's path and that of the US has recently diverged, restraining monetary policy instruments from controlling escalating inflation in the UAE," it says. While also noting the official claim that skyrocketing house prices is the main reason for the high rate of inflation and that officials in Dubai are trying to find ways to tackle this problem, HC Brokerage states: "It is important to note that without free monetary instruments it is difficult to control inflation especially since last year's (2006) 15 per cent ceiling set on Dubai rent rates did not stop prices going up."

However, the report concedes: "Economic growth is growing at unprecedented rates and even with high inflation rate many foreign investors are still showing interest. The UAE attracts the largest amount of foreign direct investment (FDI) in the GCC. Officials are not resting on their laurels and are still working on facilitating and encouraging foreign investments in the country like foreign ownership in the UAE."

But recent figures show "that some other GCC economies seem to be catching eyes, with FDI increasing at higher rates than that of the UAE," comments the brokerage firm. "The GCC attracts only 3.9 per cent of the FDI invested in the world."

GCC Currency Forum 2008 (Dubai, U.A.E.)

GCC Currency Forum 2008 (Dubai, U.A.E.)
Arabian Banking & Finance is delighted to announce the launch of GCC Currency Forum 2008 on June 2008 at Madinat Jumeirah, Dubai, U.A.E.

An established and respected magazine, "Arabian Banking & Finance" provides news, data and in-depth analysis for the region’s finance professionals, while also illustrating the latest trends and product developments within the industry. Every issue highlights the key stories of the month from across the region, identifying the current ‘hot’ topics and predicting their market impact. "Arabian Banking & Finance' is truly a mirror of the regional Finance industry".

The current debate on the GCC’s unified currency has proverbially stirred the hornet's nest. What is the rationale for the proposed unified currency? What basket of currencies ought to be used as the reference peg? Will the peg be a narrow or wide band, the first causing the currency to be overvalued in times of oil trade surpluses, while the latter inviting speculative pressure? Would domestic borrowing, as a certain percentage of GDP, be a major factor in determining who strays in or out of the unified GCC currency, or would other factors such as population be taken into consideration? How would a unified currency restrict national monetary and fiscal policies? Kuwait's move to peg the Dinar to a basket of currencies in flagrant violation of the stated dollar peg, Oman's recalcitrant attitude coupled with an unequivocal statement that meeting the GCC monetary union criteria may have a negative impact on its development plan.

Sticking to entrenched official stated positions is not helpful in this matter, as individual countries might break ranks and catch other GCC members by surprise as Oman and Kuwait have done. Economic policies, and specifically monetary policies, should follow and react to current realities
Whether the GCC unified currency comes about by 2010 or later is not the main issue now. The actions of Oman and Kuwait have brought to the surface fundamental questions of policy implication that need to be addressed and openly debated.

Looking forward to meeting you at the GCC Currency Forum 2008 on June 2008.

A golden alternative to the dollar

A golden alternative to the dollar
By Peter Cooper on Wednesday, April 9 , 2008

The UAE Central Bank is now to be saying that there is no chance of a revaluation of the dirham before a GCC currency union in 2010. Logically anybody who has been holding dirhams hoping for a revaluation to correct the 37 per cent loss in value since 2002 should now be looking for an alternative.

Step forward gold, and in particularly the timely news that the Dubai Multi Commodities Centre and World Gold Council is about to launch a shariah-compliant gold ETF. What is that some might ask?

Essentially this is a certificate backed by gold deposited in Dubai by the DMCC and in London by HSBC. The Dubai gold will be held in a giant vault under the Almas Tower in the DMMC’s new headquarters in New Dubai. It will also be the first ETF in the world to be fully Shariah-compliant, something likely to be very attractive for Islamic financial institutions and retail customers who prefer Islamic banks.

Once the Dubai Financial Services Authority has given its approval, the world’s newest gold ETF will be traded on the DIFX just like any other share. This easy liquidity and the absence of storage is a reason why gold ETFs have become popular among global savers, and the Dubai version joins nine others listed on stock markets worldwide.

The unique selling point for Dubai exchange-traded gold shares is that they will be Shariah-compliant. The DMCC has recently taken a stake in London-listed Shariah Capital that will be taking care of this compliance.

Chief Shariah Officer Shaykh Yusuf Talal DeLorenzo told Emirates Business that anybody buying the Dubai gold ETF could be sure that an actual bar of physical hold was held on their account in the DMCC vault. In short, all gold will be held in physically allocated form. No other ETF can give this physical guarantee and it makes the Dubai gold ETF unique.

Other gold ETFs have been known to use futures contracts to meet sudden surges in buying, and financial techniques that would not meet strict Islamic standards. But the main reason for buying the gold ETF is for protection against the devaluation of the US dollar and, therefore, the UAE dirham.

It is a matter of statistical fact that gold and the US dollar move in opposite directions. If the dollar goes down, then gold goes up and vice-versa; and as the dollar has sunk towards $1.60 to the euro, the price of gold has recently surged above $1,000 an ounce.

Now with some analysts now seriously suggesting the US dollar will fall to $1.65 this October, and bullion experts targeting $1,200 an ounce for gold at some point this year, this might not be a bad time to be investing in gold, and the Dubai gold ETF is an attractive new way to do it. It is all well for the governor of the UAE Central Bank to argue the US dollar rose for a decade until 2002 and has now been falling for three-and-a-half years. But who is to say this decline is about to come to a halt and reverse?

The Fed continues to pump more liquidity into the US economy, precisely the same medicine that caused the decline in the US dollar in the first place. Indeed, by devaluing the dollar, the US is exporting its economic troubles to other countries and spreading its pain.

There will come a point when these trading partners begin to buckle under the strain. The pound sterling could be an early casualty. But in a real US dollar crash the greenback could head much lower, and there is presently no sign of an end to falling house prices which caused the US sub-prime crisis.

The new Dubai gold ETF will form an integral part of the World Gold Council’s $24.2bn family of ETF products around the world. At the end of March, 806 tonnes of gold worth was held in these ETFs and more than $1bn a day was traded in gold ETFs.

This is clearly a timely new financial product, and it will appeal to the retail investor who wants to buy as little as one-10th of an ounce of the yellow metal, right up to Islamic financial institutions buying gold by the tonne.

But as an insurance policy against dollar weakness and global financial instability, there is nothing better than gold, and this is hardly a new commodity to Dubai, already dubbed “The City of Gold”. Last year Dubai imported 559 tonnes of gold and handled around 10 per cent of the global gold trade.

The price of gold also has considerable potential upside. Merely to return to its inflation-adjusted high of 1980 the gold price would have to hit $2,400 an ounce, and few commentators argue gold is about to top out anytime soon. Perhaps it makes more sense to put your money into gold than keeping it in dirhams in the hope of a revaluation.


Related Articles
No revaluation, says Al Suwaidi
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GCC fears loss from currency revaluation


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Last Update at 7:42 pm on April 9, 2008

DJ Qatar Central Bank Gov: GCC To Stick To 2010 Deadline

DJ Qatar Central Bank Gov: GCC To Stick To 2010 Deadline
Saturday, April 05, 2008; Posted: 01:42 PM

DOHA, Apr 05, 2008 (Dow Jones Commodities News Select via Comtex) -- -- The future Gulf Cooperation Council's currency will remain linked to the U.S. dollar and GCC countries are able to meet the 2010 deadline for the GCC monetary union, Qatar's central bank governor said Saturday.

"We have taken a strong initiative in 2001 to link all the currencies to the dollar and we are sticking to it," Governor Abdullah Bin Saud Al Thani told reporters in Doha.

He added Qatar, Saudi Arabia, Kuwait and three other GCC countries could still meet the 2010 deadline.

"All GCC countries are capable of entering the GCC (monetary union) by today," he said, adding that inflation was a key issue for all the six nations. He played down the contribution of the dollar peg by saying he expected inflation to decrease by year-end in Qatar as the government is working hard to relieve it.

"Inflation is due to increased government expenditure," he said, adding that the global rise in commodities such as food, energy and agricultural products were also contributing factors to Qatar's record high inflation which some economists put at 14%.

-By Tahani Karrar, Dow Jones Newswires; +9714 364 4965; tahani.karrar@dowjones.com

(END) Dow Jones Newswires

04-05-08 1342ET

UAE inflation affects nation's security

UAE inflation affects nation's security
by Stanley Carvalho on Thursday, 03 April 2008 A member of the United Arab Emirates Federal National Council (FNC), which advises the government, said on Thursday the Gulf state's dollar peg was stoking inflation and fuelling discontent.

Aamer al-Fahim, one of eight members from Abu Dhabi among the FNC's 40 members, said the UAE government should explain to the public why it remains committed to the dollar peg and clarify its course on currency policy.

"We need the government to be transparent in this matter as we do not want our market to be unstable," Fahim told Reuters by telephone. Fahim is also a director of the Abu Dhabi-based family business, the Alfahim Group.

"Inflation has affected many expatriates, consumers and traders," he said. "There have been cases of violence and this affects our security."

The dollar has lost 6.6% of its value against the euro this year alone, making some imports to the Gulf states that peg to the dollar more expensive and remittances to some countries less lucrative.

UAE Minister of State for Finance Ubaid al-Tayer will answer a question from Fahim on the dollar peg before a meeting of the 40-member FNC next week, the body's secretary-general said on Tuesday.

The dollar peg forces the UAE, and most of its neighbours in the Gulf Arab region, to track U.S. interest rate cuts as the United States tries to ward off recession, while Gulf economies surge on a five-fold rise in oil prices since 2002.

"Interest rates are one of the best tools to control inflation but the dirham's peg to the dollar does not allow the UAE to control inflation," Fahim said.

UAE Prime Minister Sheikh Mohammed bin Rashid al-Maktoum said on Tuesday a committee was studying the country's peg to the dollar, though it would be retained for now.

The FNC, which has no legislative powers, is not involved in the committee and has no plan to discuss currency reform, FNC secretary-general Mohammed al-Mazrooei said on Tuesday.

Foreigners, from labourers to bank executives, comprise more than 85% of the UAE population of about 4.5 million. Relatively cheap manual labour from India and other countries has underpinned the country's construction boom. (Reuters)