As Qatar row smolders,
world markets tot up dependence on Gulf petrodollars
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[July 12, 2017]
By Sujata Rao
LONDON (Reuters) - Qatar's tensions with
its neighbors are making world markets edgy about any hint of financial
instability among the Gulf economies, whose vast store of petrodollar
savings permeate global investments.
The diplomatic spat -- in which a number of Gulf states cut links with
Qatar over alleged support for terrorism, which Doha denies -- comes as
U.S. and European central banks are already fuelling a rise in global
borrowing costs by preparing to unwind years of super-easy credit.
Any petrodollar repatriation by Gulf states in a deeper crisis could
exacerbate financial strains.
The concern stems from long-standing Gulf currency pegs. Qatar has
already battled to steady the riyal's fixed exchange rate to the dollar;
investors now fear a prolonged crisis could spread to pegs in Saudi
Arabia, Kuwait, United Arab Emirates, Bahrain and Oman.
Gulf governments are adamant they will hold the pegs and with collective
sovereign assets approaching $3 trillion in Kuwait, Saudi Arabia, Qatar
and the United Arab Emirates they have the resources to do so.
But much of that buffer is held overseas.
From Italian banks to Silicon Valley start-ups, U.S. Treasury bonds and
London skyscrapers, there is barely a mainstream asset class untouched
by Gulf money. At the height of the oil boom around 2006, net
"recycling" of oil-fueled surpluses into world markets was estimated at
over $500 billion a year, most of it from the Gulf.
"The (Gulf) stand-off could last years," said Abhishek Kumar, emerging
debt specialist with State Street Global Investments. "They own prime
properties around the world as well as undisclosed amounts of liquid
assets -- bonds and equities -- so if they need to sell, the impact is
going to be felt."
Such concerns arose in 2014, when plunging oil prices caused the first
net withdrawal of petrodollars from markets in 18 years, according to a
BNP Paribas report at the time.
Gulf countries have easily fended off past episodes of peg pressure such
as during the 2009 Dubai crisis and in early-2016 when oil prices hit
$27 a barrel. And so far, pressure has been confined to Qatar.
Qatari banks, whose $50 billion external liabilities dwarf central bank
reserves, may need more aid if the crisis deepens.
But the Qatar row is just one hurdle for regional governments. They face
a bleak oil price outlook, as well as a firmer dollar and U.S. rate
rises which, though the pegs, are stymying their bid for economic
"The (Gulf) pegs are going to be challenged," said Michael Cirami, head
of emerging debt at Eaton Vance. "Does it matter? It should matter if
you have investments in the region."
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The logo of Qatar Petroleum is seen at its headquartes in Doha,
Qatar, July 8, 2017. Picture taken July 8, 2017. REUTERS/Stringer
The biggest problem for Gulf watchers is pinpointing the true extent and
location of the overseas wealth, with high-profile holdings such as Qatar's
Volkswagen stake or Saudi investments into Uber just the tip of the iceberg.
What is known from U.S. government data is that Gulf states own some $240
billion of Treasuries. Saudi Arabia is believed to hold the lion's share of its
central bank assets in dollar deposits, with Treasuries amounting to $126
How easily could Gulf states can swap overseas assets for hard cash if needed?
Some is embedded in companies. But Fitch estimates just 10-20 percent of assets
are illiquid, even in Qatar which has a big property portfolio.
The 2014 BNP Paribas report calculated that over a tenth of the petrodollars
recycled the previous year went into stocks and bonds, while 20 percent made
their way to direct equity stakes.
Of the remainder, at least half went to bank deposits and thereafter into loan
markets, the note said.
"One should expect Gulf governments to sell liquid assets when they have to. I
am sure the Qataris will be moving some of their less liquid assets into more
liquid ones as a form of insurance, i.e. real estate into equities," said Marcus
Chenevix, a Middle East economist at consultancy TS Lombard.
Gulf holdings in European firms, meanwhile, may be four times bigger than
previously thought because these investments are often made via external asset
managers, according to a study by Nasdaq Corporate Solutions [nL8N1AJ3OM].
The Gulf crisis impact may be diluted by two factors, though.
First, the global pension and insurance industry's $70 trillion asset base
continues to grow, offsetting putative Gulf sales. Second, low debt levels
should allow Gulf states to borrow, rather than sell the family silver.
The external sovereign debt of six Gulf states has already quintupled from 2009
levels to around $150 billion, Fitch data shows and they will likely tap bond
markets regularly in future.
"If they had not issued bonds and accumulated liquidity I think we would have
seen more pressure. They have been using the proceeds of these bonds to bridge
the gap," Salman Ahmed, chief global strategist at Lombard Odier said.
(For a graphic on the largest sovereign wealth funds click http://tmsnrt.rs/2tskfub
(Additional reporting by Karin Strohecker and Claire Milhench in London Editing
by Jeremy Gaunt)
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