Dispute may impact huge swathe of investment
LONDON, July 12, (RTRS): Qatar’s tensions with its neighbours 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 US 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, US 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-fuelled 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 US rate rises which, though the pegs, are stymying their bid for economic diversification. “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.” 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 US 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 billion .
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.
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.