Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily, on March 1, 2016.

ARAB states’ petrodollars are burning fast and that’s bad news for emerging markets, real estate and, above all, Asian securities. Gulf Cooperation Council countries have to refinance US$94 billion (RM395.74 billion) of debt over the next two years, as reported by Bloomberg News on Sunday.

As the price of oil drops, so do the foreign-exchange reserves of those nation’s central banks. That’s an indication that sovereign wealth funds built with petrodollars aren’t investing much lately. In fact, they’re selling.

Such sovereign wealth funds are, naturally, key buyers of sukuk or Islamic bonds. No surprise then that 2015 was the slowest for issuance of Islamic debt since 2011, and offerings last month were the least for any January in six years, according to data compiled by Bloomberg.

It goes way beyond syariah-compliant securities, however. Middle Eastern investors, especially the sovereign wealth funds and banks, are big backers of infrastructure around Asia and important buyers of bonds, in particular those from Indian companies, as noted recently by Ken Hu, Invesco Ltd chief investment officer for Asia-Pacific fixed income.

Investors from Arab states bought about a quarter of the US$650 million of notes sold by India’s Adani Ports in July, while 42% of the US$500 million of debentures issued by Mumbai-based ICICI Bank in August were placed in Europe and the Middle East.

Institutions from the Middle East are usually a mandatory stop for any Asian company seeking infrastructure investors because their Islamic mandate doesn’t allow them to profit from interest unless it results from real earnings.

The same reason draws them to real estate — in 2008, Abu Dhabi’s sovereign wealth fund bought the iconic Chrysler building in New York. They also like to invest in financial institutions and often take up bonds from banks and insurance companies. (In case anyone forgot, they were instrumental in helping US financial institutions recapitalise following the 2008 financial crisis.) After decades of buying, sovereign wealth funds globally hold more than US$3 trillion of stocks.

According to a report released earlier this month by the Las Vegas-based Sovereign Wealth Fund Institute, some US$404.3 billion of that may be withdrawn this year if crude stays between US$30 and US$40 a barrel.

That figure doesn’t include bonds or real estate. As gulf state sovereign wealth funds try to keep purchasing power steady at home, they’re likely to unload a little bit of everything they own. Buying into new bond offerings is hardly going to be top of their agenda.

That’s especially bad news for countries like India and Indonesia, which are planning to outlay hundreds of billions of dollars to upgrade infrastructure. If they are hoping for the support of Middle Eastern investors, it’ll have to wait. In the meantime, those money managers who hold the sorts of securities favoured by investors from the region have better start marking down their value. — Bloomberg

 

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