A KING’S RANSOM?
Sovereign wealth funds have lifted some Western financial markets out of danger but they’ve also raised suspicions. Christopher Owen reports
 Oil money is flooding the west via Sovereign Wealth Funds (SWFs), bringing suspicion as well as muchneeded liquidity in its wake, and the conditions for a sea change in global capital markets. SWFs are capable of disrupting markets, yet they have little accountability to regulators, shareholders or voters. At a time when western economic growth forecasts have gone limp, the arrival of inscrutable strangers at the door is unlikely to reignite the party.
Indeed, SWFs have become the focus of notoriety and suspicion, labelled as “aggressive” and “mischievous” by the French and German presidents respectively. According to research by Stephen Jen, chief currency economist at Morgan Stanley, petrodollars are getting bigger. At $100 a barrel, the total proven reserves of the oil exporting countries is around $104 trillion – equivalent to the total value of publicly traded equities and bonds in the world.
About $48 trillion of this belongs to the Gulf Cooperation Council member countries – Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Oman and Qatar. The rest of the Organisation of the Petroleum Exporting Countries (OPEC) – Algeria, Angola, Indonesia, Iran, Iraq, Libya, Nigeria, Venezuela and Ecuador – own another $44 trillion, while non-OPEC countries – Russia, Canada, Norway and Mexico – own $12 trillion worth of oil reserves.
The flows are massive too. At the current pace of production and exports, and at $100 a barrel, collectively, oil exporters are projected to earn a total of $2.1 trillion in oil export receipts per year. Given the modest size of their GDPs, the bulk of the petrodollar windfalls must therefore be saved and deployed in the global financial markets.
“There are two key implications,” says Stephen Jen. “First, the deployment of petrodollars is likely to favour equities over bonds. Second, they should favour emerging market currencies.”
“These two themes are identical to the financial market implications of the emergence of SWFs, because about half of the petrodollar receipts may be invested through SWFs, and close to three-quarters of all assets under management by SWFs are derived from petrodollars.”
A recent report by McKinsey Global Institute, entitled The New Power Brokers, identifies four key actors in the world’s financial markets – petrodollar investors, Asian central banks, hedge funds and private equity. Their rapid growth since 2000 has given them unprecedented muscle, and their size – currently $8.4 trillion or 5% of world financial assets – is likely to double over the next five years.
“Far from being a temporary phenomenon, the new power brokers represent a structural shift in global capital markets,” observes the report.
Petrodollar foreign assets will continue to grow rapidly over the next five years. Even at a low estimate of $50 per barrel, their assets would grow to $5.9 trillion by 2012, entailing new investments of $387bn a year in global capital markets, or some $1bn a day.
“We estimate that petrodollar investors currently have around $1.7 trillion in global equities and another $350bn in hedge funds, private equity and other alternative investment funds,” says the report.
Asian central banks had $3.1 trillion in foreign reserve assets at the end of 2006, up from $1 trillion in 2000. Even more than in the case of petrodollars, these investments are concentrated in the hands of just a few institutions. The central banks of China and Japan held $1.1 trillion and $875bn of foreign reserves respectively at the end of 2006. The next six largest foreign reserve holders – Hong Kong, India, Malaysia, Singapore, South Korea and Taiwan – together held a further $1 trillion.
Together with petrodollars, Asian central banks have been an important new source of liquidity in global markets. These banks currently invest the lion’s share of their assets – some $2 trillion – in dollar assets, particularly government bonds. But, going forward, some have plans to earn higher returns. China, Singapore and South Korea have announced plans to shift up to $480bn collectively into more diversified SWFs. |