For the second time in 30 years, the oil-rich states of the Gulf are overwhelmed with cash. But this time, they are handling their riches differently and showing signs that they have learned some lessons from the past.
During the previous boom that ended in the early 1980s, the Gulf states spent money at a breakneck pace, pouring billions into their often rudimentary economic infrastructures. What they saved was mostly "recycled" by being placed on deposit in dollars with western banks.
These days, Gulf governments are saving a higher proportion of their income than they did then -- and higher than some other oil producers such as Russia.
According to officials from international financial organisations and private bankers, they are also managing their investments more actively, diversifying across currencies, regions and investment vehicles.
"There's a big change," says Mohsin Khan, director for the Middle East and Central Asia at the International Monetary Fund (IMF). "They have saved a large part of their earnings -- the experience of the 1980s convinced them they can't depend on high prices staying high." Although oil-rich governments are rolling out huge capital investment plans and raising salaries, Mr Khan says the bulk of the spending will be on expansion in the energy sector and will be spread out over many years.
Since 1998, members of Opec have earned an estimated $1,300bn (£740bn, euro1,100bn) from oil sales, about half of which has gone to Saudi Arabia and the Gulf emirates. But precise data on Gulf investments are hard to come by: governments do not break down capital account figures and the line between state and ruling family money is often blurred. Secrecy -- especially since the attacks of September 11, which increased scrutiny of Arab accounts in the US -- has complicated efforts to track investments.
But examination of the figures provide some clues. When oil prices rose between mid-1998 and mid-2000, Opec producers first funnelled funds into international banks in dollars, according to Bank for International Settlements (BIS) data. But after that, they changed tack, moving an increasing proportion of deposits into euros. That changed again from last year as US interest rates started to rise. As they switched into dollars, governments diversified investment among a much wider range of assets.
"The international banking system is less important as a repository of these funds than it once was," the BIS said in its quarterly review, published recently.
The BIS suggests Opec countries are buying US securities, but often through London and other financial centres outside the US. American figures show UK holdings of US Treasury bonds jumped 80 per cent in the first three quarters of 2005 to $182.4bn, and bankers surmise that much of this buying has come from the Gulf.
Bankers say this reflects a search for yield, which is higher in dollars than in competing currencies -- but also caution among Arab governments that they may be penalised in New York by US actions aimed at terrorism. Middle East stock and bond markets, which hardly existed 25 years ago, have also become a more important outlet for oil surpluses. "Recycling is happening in the region," says Mr Khan of the IMF.
Alternative assets, such as hedge funds and private equity funds, also appear to have seen inflows, According to the BIS. Bankers say there is growing interest in emerging markets equity and debt instruments and US Treasury inflation-protected securities. "Now that they have more money, they're doing more than the traditional thing of US and European equities," says a London fund manager.
Yet these broad conclusions hide differences among the investment approaches of financial institutions across the Gulf. The oil windfall goes into two types of accounts: foreign reserves and government investment arms. Foreign reserves are usually managed conservatively by monetary authorities and central banks, as a cushion to ensure financial stability and liquidity. Reserves of the six countries of the Gulf Co-operation Council (GCC) are estimated to have risen from $63.1bn at the end of last year to about $85bn now, with Saudi reserves jumping from $27.5bn to $43.9bn.
The Saudi Arabian Monetary Authority (Sama) manages both accounts in that country. But in Kuwait, Qatar and the United Arab Emirates, the greater share of the oil surplus goes to separate government entities, which often invest abroad in higher yielding -- and therefore riskier -- assets.
Bankers and analysts say that the largest and most powerful of the government investment vehicles, and perhaps the most aggressive, is the Abu Dhabi Investment Authority, with estimated assets of $250bn. This compares with estimates of $100bn for the Kuwait Investment Authority.
Estimates for Qatar are sketchier and some economists say anecdotal evidence suggests the Supreme Council for Investment and Economic Affairs, recently rebranded as the Qatar Investment Authority, is in the $10bn-$20bn range.
Sama's stock of foreign investment is even more difficult to estimate, as no figures provide a breakdown between private and Saudi government funds. Though Dubai Holdings, the investment arm of the Dubai emirate (which has little oil), has been making high-profile acquisitions in the west, but shies away from taking controlling stakes, and rarely has to announce its investments.
FT Syndication Service