Nader Habibi

Nader Habibi

Nader Habibi 

Brown Bag Summary


April 9, 2008

Oil Wealth and Global Financial Markets (Foreign Assets of GCC)

Nader Habibi
Henry J. Leir Professor of Economics of the Middle East

Record high oil prices in the past five years have resulted in very large financial savings for Arab oil exporting countries. These countries are now among the major players in the global financial markets and their investment allocations will have important consequences for the host countries. This presentation shed light on the size and structure of the oil-rich countries' foreign assets, and the impact these large investments have on the global economy.

In 2002, the common prediction was that oil would remain within the $25-$40 dollars a barrel range, today the estimate for 2008 is a rise in average price to above $90 a barrel. These countries, Saudi Arabia, United Arab Emirates, Oman, Bahrain, Qatar and Kuwait; have been unable to absorb this influx of  wealth into their economy, as a result they have put some of the capital in Sovereign Wealth Funds (SWF). These SWFs are government owned investment firms that manage their government's foreign assets.  Currently, the SWFs of the six countries mentioned is approximately $2 trillion dollars. The GCC countries have invested a sizable portion of their oil wealth in the United States and Europe.

Western countries are increasingly concerned with the growing financial power of  SWFs because of their sheer magnitude. Furthermore, a lack of concrete knowledge regarding the operations and the balance sheet of the SWFs  has added to the western fears about these firms. Those critical of Western countries accepting these investment mention such issues as a lack of transparency, ability of SWFs to adversely affect foreign currency, the potential danger of the transfer of sensitive technological information by SWFs to their home countries, and national security related risks. Those supportive of continued unregulated SWF investment mention; that history proves that these investments have not been utilized for political influence and for the most part the GCC funds have preferred to operate as passive investors. Furthermore SWFs are using many western financial experts in their portfolio management and have pursued long-term investment strategies which contribute to the stability and liquidity of financial markets.

GCC countries have expressed concerns of their own, mostly that the deterioration of U.S.-Arab relations, primarily in the political arena, will cause the U.S. to initiate various economic sanctions on the GCC. Another concern over transparency requirements of Western countries is that greater transparency of investment will make their large acquisitions more difficult.

In conclusion, Dr. Habibi argued that the best option for all parties involved is to coordinate international agreements through the IMF, in order to alleviate the concerns of all parties involved and to prevent a gradual surge in investment protectionism which will have an adverse effect on global economic growth.