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Thai Prime Minister Samak Sundaravej piqued global interest this week when he suggested the formation of a rice cartel with other producers, a government spokesman said.
A journey to the Red Sea commercial hub of Jeddah and the Saudi capital Riyadh this week offered a unique vantage point for what were some politically charged economic decisions for Middle East leaders.
Despite the weight of 95 percent of the region’s “expert opinion”, the Gulf Cooperation Council decided to do nothing, which in turn means something – loyalty to the White House and, for the time being, loyalty to the beleaguered U.S. dollar.
Washington can thank Riyadh for this one. King Abdullah’s high profile visit to Doha for the GCC Summit dominated headlines while in Saudi Arabia, having declared his support for the dollar peg before boarding his private jet. There would be no revaluation of the riyal or a shift to a basket of currencies (euro, pound, yen and dollar) to better reflect the imports coming into the region.
Times they are a changing
According to Dr. Nahed Taher, CEO of Gulf One Investment Bank, Saudi Arabia imports only 20 percent of their products from the U.S. During an interview in Jeddah this week, the young, first female CEO of an investment bank in the Gulf says that with a weaker dollar and the riyal linked to the greenback, Saudi Arabia is importing record inflation, along with the goods from Europe, Britain, China and India. This is putting the squeeze on the Saudi public, the 90 percent not enjoying the fruits of record oil prices. Even the domestic workers complain these days how the weak dollar is eroding their repatriations back home.
Saudi Arabia stood down recent calls from officials in Qatar and the U.A.E for change, which gives the dollar a chance to recover as tensions with Iran subside and the U.S. Treasury offers an array of tools to fix the credit crisis.
One who called the Saudi action (or inaction) correctly was Dr. John Sfakianakis, chief economist of SABB (HSBC’s partner bank in the region). Over dinner in Riyadh, and a toast with Saudi martinis (the famous non-alcoholic fruit concoction) he didn’t say “I told you so” but he did tell me so more than a month ago. This was no time for Saudi Arabia to throw its weight against Washington, but behind it. With oil priced in dollars, the world’s largest producer also did not want to re-price its riyal and undercut revenues.
So instead of a historic, collective GCC move to re-price their currencies when they captured at least part of the global spotlight, discretion ruled. However, I would not bet this will be the last on this subject. Once the attention shifts away from the Gulf, a re-evaluation against the dollar or going to “the basket” might be in the offing.
The New Frontier
This trip to Saudi Arabia was also a fascinating look through the window of what might be. King Abdullah is putting forth change at what is a rapid pace for his citizens. You can see this for yourself when both driving the streets and looking at the blueprints for the future. On the drawing board today is a plan to build six cities from scratch, 20 regional airports and a $6 billion dollar cross country railway. Infrastructure is needed and this leader knows the country has been run down. After all it is the biggest economy in region, possesses the largest oil reserves in the world – collecting $165 billion this year alone -- and right now is the largest investor outside its country. And that is the rub. Saudi business leaders have focussed on other markets for real estate and manufacturing. This economy needs to spruce up what it has today, offer a world class infrastructure for tomorrow and capture a unique selling proposition. The private sector – the famously discreet Saudi trading families – will be part of the process, but one gets the sense that the path to partnership still needs to be defined so that this corner of the Arabian Desert can fully leverage what lies below.
It was an active few days on the ground where I was in place to chair panels for the annual “Leaders in Dubai Forum”.
This week will likely go down in the financial record books as the one which redefined how the world looks at sovereign wealth funds. It is also part of a bigger geo-economic shift underway, which lends itself to the East-East moniker, meaning the wealth and trade belt from the Middle East to China.
While we have been covering the power of these government funds, where they are seeking to make a mark and the new emerging players within this space, it is only now that these funds are flashing on the global radar.
It is challenging to get hard figures on the total government investment funds under management, but there are a handful of Western banks attempting to do so. Standard Chartered Bank places the value at around $2.2 trillion dollars. I personally think this is off the mark since the Abu Dhabi Investment Authority may have more than half that amount itself
SWFs - Big & Getting Bigger
· $2-3 trillion dollars in assets
· $10-15 trillion dollars by 2015
· Bigger than private equity
(source: Standard Chartered, Morgan Stanley)
More eye-popping clearly is the path ahead. If oil stays in the range of $60-$80 a barrel over the next five years, the amount will surge to $10-$15 trillion. To provide some context, the current sum is already bigger than the global private equity pool, which made all the headlines in the past two years with record buyouts.
Is this a new phenomenon? Certainly not. The Kuwait Investment Authority (KIA) can trace its roots back to 1953; the Abu Dhabi Investment Authority (ADIA) to the mid-1960s. While they traditionally deployed assets in government bonds and currencies, that trend has changed over the past five years and accelerated in the last six months.
Chris Wheeler, banking analyst at Bear Sterns, points to global wealth surveys to illustrate the point that liquidity from record oil prices has to find a home. “A lot of excess funds are being generated which the SWFs are having to invest somewhere and they are finding interesting opportunities in difficult times in the banking sector.” Wheeler, like many others, believes the often talked about recession in the U.S. will lead them to more bargains in other sectors.
This must sound familiar. Saudi Prince Al Waleed bin Talal bought stakes in Citigroup back in 1991 at the equivalent of $2.75 a share. Even at in the mid-twenty range it is today, he is (excuse the cliché) smiling all the way to the bank. He obviously thinks this latest downturn created a similar opportunity and so did others who jumped in this week. They are not traders, but investors who hold their stakes for years, sometimes decades.
Like the financial markets, which create buyers and sellers, this market and story will continue to evolve. One of the newer players on the scene, the Qatar Investment Authority, will re-emerge after its participation in the bid for U.K. supermarket giant J. Sainsbury, and Mubadala of Abu Dhabi has recently put itself on the map with its stake in investment banker The Carlyle Group.
G-8 Wish List
· Invest on commercial grounds
· Respect national transparency rules
· Compete with private sector fairly
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