Gulf Liquidity: Shifting Petrodollar Assets

The UAE central bank reserves fell to just under $35 billion at the end of November (the most recent available data.)  That represents a decline of about $6 billion in the month of November and an average decline of $5 billion a month since July.  The reduction in UAE central bank reserves came significantly before the central bank agreed to buy $10 billion of bonds issued by Dubai last week and even before it stepped up dollar/dirham swaps in December in its effort to provide new liquidity to the banks.

The UAE isn’t the only central bank in the region reporting a decline in reserve holdings. Qatar’s reserves have fallen by a third from March to December 2008 and Oman’s slightly less. (see below). But the UAE does account for most of the change in the GCC reserves (excluding Saudi Arabia whose central bank has a large stock of nonreserve assets). Ex Saudi Arabia, GCC central bank reserves almost halved from March to December 2008, falling from $125 billion to around $70 billion.  Just as it registered the sharpest increase in reserves in 2007 and early 2008 when GCC revaluation bets were in vogue, the UAE has witnessed the sharpest outflows. UAE reserves are now almost 2/3 lower than they were at the peak in February.

GCC Foreign Exchange Reserves, Stocks ($ thousand)


The bulk of these outflows reflect the reversal of the hot money inflows points on the availability of liquidity and demands for it in the UAE. Although at $35 billion UAE reserves remain far larger than they were in 2005, the increase in the UAE’s GDP, its liabilities and its imports means their need for reserves is likely larger. And since this data was released, the UAE’s fx needs have only increased.

Of course the central banks reserves are not all of the UAE’s foreign assets, its sovereign funds have additional funds, even if they may not be as liquid or as USD heavy (the central banks reserves were reportedly about 98% USD, or at least they were last time comments were made about the currency composition about reserves). In contrast the dollar likely makes up less than half of the assets of ADIA. While the UAE central bank now has less fx liquidity, the commercial banks of the UAE increased theirs. Their net foreign assets increased by the end of September from the end of 2007.

Saudi Arabia too is now drawing on its liquid assets. The total foreign assets of the Saudi Arabian monetary Agency (SAMA) have fallen for the second consecutive month. Given the price of oil, and Saudi spending patterns, a reduction in SAMA’s assets is not a surprise – the oil price is below a budget break even level.

Both SAMA’s own assets and those it manages on behalf of other government institutions have fallen – taking the total assets to lower than $500 billion, an $11 billion decrease in two months. In January the reduction in foreign deposits accounted for the overall reduction, perhaps with funds being allocated to another part of the government. In fact an amount most of the reduction in the funds of the pensions abroad seem to have shown up in their deposits with domestic banks, suggesting that once again these institutions are providing institutional deposits to local banks. image005_13.gif

Kuwait actually shows the opposite story. Its reserves have been increasing since August and are now over $5 billion higher than their lowest point in 2008, ending January at over $17 billion. The sharp increase in Nov-January coincides with the depreciation of Kuwait’s currency which fell by around 10% against the dollar in that period. Kuwait – which apparently has yet another fallen parliament- is now trying to roll out a comprehensive economic package to keep growth from slowing too sharply  (a contraction is possible in 2009).

Other oil exporters are also slowing or reversing their pace of reserve accumulation. Algeria and Libya, some of the last holdouts are seeing their reserve growth wane and in Algeria’s case reverse. Libya’s central bank manages as much as half of the fx on behalf of the Libyan investment authority which predominately has a conservative portfolio. Based on a recently released report, Reuters recently suggested that more than 78% of the  LIA’s foreign assets, or $39.81b, was invested in short-term financial instruments abroad. of the remainder,  $8b was invested in stocks of 107 firms, 65% of which are located in North Africa, 20% in Asia, with the remaining 15% in companies in Europe and North and South America. This may not include all of the assets managed by the LIA’s subsidiaries in Unicredit its stake in which increased by $1.5b  in October. Libya with its heavy allocation to safe assets, outperformed most sovereign funds, except perhaps the Chinese Investment Company. However, the CIC’s 5% returns can be explained both through its delay in investing and because of the large dividend it received from central Huijin, its subsidiaries which holds stakes in Chinese state banks and other financial institutions. The dividend must have been large to offset the losses on other investments (if these were marked to market which they may not have been) but it does suggest that we should take reported profits with a grain of salt. But back to the oil exporters, Russia was another country which never got around to shifting to equities, at least not foreign equities. Kazakhstan, Nigeria and Russia have spent significant shares of their reserves to slow the pace of depreciation of their currencies and in Kazakh and Russian cases to provide capital to the banks and corporate which borrowed heavily abroad. They will also draw on their reserves (including in Russia’s case the sovereign wealth fund) to offset fiscal deficits. Russia’s is estimated to be 7-8% of GDP this year.

However, just because the GCC is no longer adding to its assets, does not mean that they might not still be buying US liquid assets. Given the liquidity needs of domestic banks and corporations, the demand for the most liquid assets rose in the second half of last year.

But all of these trends also illustrates another point I mentioned last week – and highlighted by the FT’s editorial page. There continues to be a need for more transparency and information about the assets and liabilities of these countries, especially those that borrowed heavily abroad. More information on the foreign assets – and especially liquidity of banks, the central bank and other government actors would give a much better sense of how difficult debt refinancing would be. Providing more information might also buy credibility.  And as standard chartered analysts have suggested, the need for increasing the tools in the toolbox of policymakers, starting with a permanent repo window in the UAE for one. The policy moves are in the right direction but more clarity would alleviate concerns and make it easier for authorities to cushion the economies from the hard landing most are facing.

0 Responses to "Gulf Liquidity: Shifting Petrodollar Assets"

  1. Anonymous   March 4, 2009 at 11:10 am

    04Mar09 RTRS-INTERVIEW-Russian sees macro stability in H1 2009MOSCOW, March 4 (Reuters) – Russian fresh capital flows and trade data signals that the macroeconomic environment will stabilise throughout the first half of 2009, the central bank’s First Deputy Chairman Alexei Ulyukayev said on Wednesday.Ulyukayev told Reuters net private capital outflows fell to $4.5 billion in February from $29 billion in January while the trade surplus stood at $16 billion and the current account surplus at $9.4 billion in the two months.”Preliminary data for the first two months of 2009 lead to a conclusion that the population and businesses have adapted to new exchange rate correlations,” Ulyukayev said in an interview.”The hypothesis that we will have a sustainable trade surplus of dozens of billions of dollars this year is being confirmed,” he said.