Members of Opec have increased their holdings of US Treasury securities by 12 per cent in the year to July to $123.8 billion (Dh454bn) – almost double the $67bn (Dh245bn) held in December 2005, data from the US Treasury Department shows.
News reports also show the biggest quarterly rally for US Government securities in five years is getting an extraordinary lift from the burgeoning reinvestment of petrodollars by Opec.
Among foreign holders, only Japan, China and Britain own currently more Treasury securities than the 12 members of Opec.
A seemingly unending stream of petrodollars – a direct result of high oil prices – is flooding the United States in terms of recent global movements of overwhelming capital from the Middle East back into US assets.
The GCC countries in particular have accrued a substantial oil windfall since 2002 when global oil prices began their escalation.
The management of much of the region’s foreign assets lies with government bodies, such as the Abu Dhabi Investment Authority, the Kuwait Investment Authority, and the Qatar Investment Authority, who between them are reckoned to control some $1 trillion (Dh3.67trn) in assets.
Based on current account data from 1971, and assuming a re-invested rate of return of around seven per cent from the mid-1980s, the Institute of International Finance reckons that the total net foreign asset position of the GCC was $1.6trn (Dh5.8trn) at end-2006.
However, acknowledging lack of proprietary statistics, the institute accepts that this may well understate the total given changes in market valuations of various assets over a period of time.
The bulk (more than 90 per cent) of this is held by the UAE, Kuwait, and Saudi Arabia (Qatar’s investment development strategy was initially debt-financed and it has only begun to accumulate substantial foreign assets in the past few years).
Also, Arab states are now major buyers of goods from Japan, China, and the rest of Asia, where they sell the bulk of their oil. So petrodollars get “recycled” as Japanese yen or Chinese yuan – which the governments of Japan and China convert into US Treasuries. Indirectly, then, oil money is bankrolling US deficit spending.
Moreover, petroleum exporters are adding to holdings of US debt three times as fast as other foreign investors. Demand from oil exporters may help drive yields lower, even as signs the US economy is weathering the worst housing market in 16 years reduce investors’ expectations for lower interest rates. Opec’s windfall suggests there will be demand for US debt from international investors even after the dollar fell to a record low versus the euro.
According to the US Government, Opec members bought a net $13.6bn (Dh50bn) worth of Treasury securities this year to July. They have purchased a net $45.6bn (Dh167.3bn) since the end of 2005, or 29 per cent of the $155.6bn (Dh571bn) overall increase. About $4.5trn (Dh16.5trn) in marketable Treasury issues are outstanding.
Despite an increase in the Opec spend on US securities, it is largely believed there is a substantial understating of GCC claims. This undercounting is possibly in the order of $100 billion (Dh367bn), according to the Institute of International Finance.
The institute suggests that about a quarter of M&A flows from the GCC involved US-based entities, equivalent to around $15bn (Dh55bn), or three per cent of the total flows from the region over the period.
This would imply GCC acquisitions of US assets over the period 2002-06 could have amounted to some $300bn (Dh1.1trn).
However, the Opec nations’ need to do something quickly with their huge pile of US dollar, which is on the slide, to preserve its value.