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Oil income boosts Gulf producers’ foreign buying power

DUBAI: Gulf Arab states’ oil revenues this year are likely to be near last year’s record $336 billion, giving them an edge in buying foreign assets as credit dries up for competing investors.

US crude oil futures hit a record of $83.90 a barrel last week. Oil prices have quadrupled since 2002, triggering a transfer of wealth from energy consuming countries to producers’ coffers.

Gulf investment agencies and state-owned and private companies spent $40 billion on foreign assets in the first-half, more than in any other year, according to London-based data reseach company Dealogic.

Saudi Arabia, the United Arab Emirates and the four other Gulf Arab states from the world’s biggest oil producing region are looking to reduce their reliance on crude oil, which accounts for about a third of their combined gross domestic product, to cushion against a decline in prices and an eventual end to their petroleum reserves.

Competition for assets may ease as the global credit crisis makes it more difficult for private equity funds to finance buys.

“We’re going through a period now on global financial markets that will open doors for the Gulf producers,” said Giyyas Gokkent, head of research at the National Bank of Abu Dhabi. “If there is bigger fallout from the credit crisis, the region’s funds will be able to cherry pick the assets they want.”

“It has created tremendous opportunities for us,” said Kenneth Shen, the head of strategic and private equity at the Qatar Investment Authority (QIA), earlier this month. “Things that were a bit pricey before are looking more interesting for us.” The QIA manages around $50 billion in assets, Washington-based Peterson Institute for International Economics estimated in a report in August.

Gulf funds could find themselves competing more with each other on the international asset market, which could drive up asset prices. Dubai and Qatar locked horns last week to take stakes in global stock exchanges.

Financial muscle: Aside from asset buys, Gulf oil producers have spent their oil windfall on domestic industrial, infrastructure and tourist projects to spur growth. Tens of billions more were also being spent on boosting oil and gas output.

After four years of rising revenues, the Gulf states are in a better position than ever to weather a fall in oil prices or an economic slowdown, said Monica Malik, senior economist at EFG-Hermes.

“It’s going to be another spectacular year for oil revenues,” said Malik. “I don’t think Gulf countries have ever been in such a strong position. They’ve paid off debt, but also built up reserves, which gives them a huge cushion at times of economic downturn or lower oil prices to continue to stimulate their economy.”

Oil revenue forecasts for Gulf Arab states were down on last year’s $336 billion but still near record levels after prices dipped below $50 earlier in the year and crude output was less, in line with OPEC agreements, Gokkent said. Still, if prices stay near current levels, revenues will be closer to last year’s record, analysts said.

Oil revenue for the world’s largest crude exporter Saudi Arabia’s were likely to come in at around $165 billion to around $170 billion, down from around $187 billion last year, John Sfakianakis, chief economist at Saudi Arabia’s SABB bank said. The region’s fiscal and capital account surpluses would remain strong but were likely to steadily decrease as Gulf governments invest more of their revenues, and their growing economies devour more imports, Malik said.

The rise to record levels on oil prices has helped compensate oil producers for the weakness of the US dollar, which has fallen to a record low against the euro.

Gulf producers receive all their oil revenues in dollars, but an increasing amount of imports - over a third - are from the euro zone. Asian imports were also rising. Dollar weakness has driven up import costs and helped drive inflation in the Gulf.

Saudi Arabia quashed speculation on Wednesday that it would revalue the dollar-pegged riyal after the currency hit a 21-year high as the kingdom held back from matching a US interest rate cut last week.

A revaluation would lower the value of the trillion-dollar plus investments the kingdom and other Gulf states have amassed overseas.

Gulf states are diversifying their investments, but there were limits to how quickly and how much they could do, Malik said.

“There has been a shift where countries want more exposure to Asia and Europe,” she said. “That is sound management of investment. But with so much oil revenue, there are a limited number of assets you could diversify that aren’t dollar-termed.” reuters

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