WASHINGTON: The recycling of surplus petrodollars through the global financial system is set to intensify, with Saudi Arabia and the five other members of the Gulf Co-operation Council exporting at least $450bn of capital over the course of this year and next, the Institute of International Finance predicted on Tuesday.
The capital exports are the mirror image of the oil-rich region's massive current account surplus. The IIF, a lobby group for global financial institutions, forecasts that this surplus will jump 37 per cent this year to $227bn, and decrease only fractionally in 2007.
If these estimates are correct, the six GCC countries - Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates - will together accumulate foreign assets almost as rapidly as China is expected to add to its foreign exchange reserves over the two-year period. This would put them at the centre of the global debate on economic imbalances.
The IIF warns that poor capital account data make it impossible to track capital flows from the region with any precision. But it says "the bulk of the region's surplus is used to finance portfolio investment" and adds: "We suspect that the bulk of the surpluses are finding their way - one way or another - into the major capital markets, predominantly in the US."
The IIF notes that large financial flows from the UK and Asian banking sectors into US Treasuries "suggest that GCC money is being used to purchase US assets through intermediaries".
The IIF says "this may be due to concerns about asset sequestration" following the terrorist attacks of September 11 2001. However, the IIF found little hard evidence of a widespread shift out of US dollar assets.
While some GCC countries have pledged to increase the proportion of their central bank reserves held in euros, these reserves account for only a small proportion of their total foreign assets, most of which are held in investment companies. "With their fixed currency pegs, there is little incentive for GCC countries to undermine the dollar," the report notes.
Over the course of the past three years, the region's economy has grown by 74 per cent in nominal dollar terms, making it the world's 17th biggest economy. The IIF says economic growth in the region will power ahead at 6.7 per cent this year and 7 per cent next.