Gulf exporters awash with cash from record oil income have put the brakes on foreign asset buys as the global credit crisis promises more bargains later and the political spotlight falls on how they invest.
Economists say the battle against domestic inflation in the world's top oil-exporting region is capping spending at home, leaving sovereign funds that invest much of the surplus oil revenue struggling to find a profitable home for their money.
"They are doing a little bit of hoarding right now while they take stock of the situation," said John Sfakianakis, chief economist at SABB Bank, HSBC's Saudi affiliate.
"For two years they were on a buying spree. But there is an anticipation by sovereign wealth funds that financial assets will depreciate further as credit turmoil spreads in the West."
Acquisitions outside of the region by Gulf Arab buyers more than tripled to $89.13 billion (Dh327bn) in 2007 compared with the year earlier, according to London-based research firm Dealogic.
But buys slowed to $19.8 billion in the first quarter, down over 30 per cent from the fourth quarter despite some big-ticket deals that helped shore up Wall Street financial institutions. Growing sovereign fund acquisitions have raised concern among US lawmakers about foreign influence and control over assets and questions as to whether investments are politically motivated. This may have made Gulf funds more cautious.
Aside from political scrutiny, funds have also taken some pain from their investments and are treading carefully until they get a better idea of whether the credit crisis has hit its nadir.
Citigroup and Merrill Lynch shares have lost about 20 per cent each since Kuwait's sovereign fund and Saudi billionaire Prince Alwaleed bin Talal agreed in January to invest at least $5 billion in the US banks.
"After initial forays, they've gotten their fingers burnt quite badly," said Ala'a Al Yousuf, chief economist in London at Gulf Finance House. "It showed that the worst was not over and they were a bit too hasty in buying into these institutions."
The massive transfer of wealth into the region from higher oil revenues has already unleashed startling economic growth among the Gulf's core Opec members. Gulf country economies doubled in size from 2002 to 2006.
With crude prices reaching a record $117 a barrel, Gulf oil and gas revenues look set to come in at a new record this year, touching $435 billion versus about $380 billion last year, according to SABB estimates.
The price of US oil futures has averaged $99.60 a barrel to date in 2008, up from $72.36 last year.
But government spending at home has not risen at the same pace as revenues in the Gulf as officials look to avoid swamping their economies, where they are already battling decades-high inflation. Currency pegs to the dollar have forced central banks to cut interest rates in line with the US Federal Reserve even as they struggle to contain rising prices.
Migrant workers in the United Arab Emirates and Bahrain have rioted over the erosion of wages due to the declining dollar and inflation.
Saudi Arabia, the world's largest oil exporter, should see oil revenues grow to around $235 billion this year, up nearly 12 per cent from about $210 billion last year, SABB data showed.
Despite the bonanza, spending in the kingdom – contending with inflation at a 27-year high – has been prudent, said Brad Bourland, chief economist at Saudi-based Jadwa Investment.
"Saudi government spending has risen about 15 per cent per year, which is much less sharply than oil revenues have risen," Bourland said. "I don't see many examples of spending inappropriately, it's well-targeted, mostly on social needs in health and education, and infrastructure."
With Gulf investment funds commanding around $1.5 trillion of foreign assets, according to Bourland's estimates, Gulf investors are struggling for other places to park surplus cash.
Many petrodollars are typically recycled into US treasuries, particularly by the region's central banks.
"With their currencies pegged to the dollar, central banks would tend to put money into the lowest-risk asset that currency is pegged to and that is treasuries," said Bourland.
But for more risk-hungry Gulf investors, interest rate cuts have made treasuries less attractive. Better investments would be euro-denominated bonds and, if they can stomach the risk, assets in emerging markets such as China, analysts said.
Middle East oil exporters were net sellers of long-term treasuries in six of the eight months since June 2007 for which the US Treasury provides details. Cash still flowed into the US, but went into equities.
The same exporters' direct holdings of long- and short-term US Treasury debt stood at just under $111 billion in June 2007. That was up about 22 per cent on the year.
Gulf acquisitions in Asia are on the rise, with the top 10 deals in states including Singapore and Malaysia at $2.35 billion in the first quarter, Dealogic data showed.
"There is going to be a greater concentration on Asia," Sfakianakis said. "But they will probably go slow because Asia has not really decoupled from the West."
The US Energy Information Administration estimates that the 13 members of the Organisation of the Petroleum Exporting Countries will earn $980 billion in 2008, up from $676 billion in 2007. Below are nominal net oil export revenues in billions of dollars for 2007 and 2006. The EIA has not given individual country details for 2008. (Reuters)
Gulf nations put brakes on spending