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Mideast upheaval signals sovereign fund rethink

Mideast upheaval signals sovereign fund rethink

World markets could be disrupted as the management of windfall oil wealth changes in the face of mass social unrest.

March 2, 2011 1:21 by

Popular revolts across the resource-rich Middle East and North Africa may transform the management of windfall oil wealth, potentially denting national balance sheets, boosting inflation and disturbing world markets.

The region’s state-owned funds, managing almost $1 trillion of assets — equivalent to nearly two-thirds of the entire hedge fund industry — have been a key driver in financial markets, making wide-ranging investments including stakes in blue chips such as UniCredit and luxury department store Harrods.

But political turmoil is rapidly changing the landscape for oil wealth management, prompting governments to spend more at home to appease angry protestors than invest overseas. Using oil windfall revenues for potentially inflationary pump-priming or even wealth redistribution may slow or even halt the accumulation of resource wealth in the long run.

This could hit national balance sheets and removes a key support factor for credit ratings. It may also disrupt world financial markets, whose strong recovery since the crisis was partly underpinned by petrodollar demand for risky assets.

Last week, Saudi Arabia unveiled benefits worth some $37 billion, in an apparent bid to insulate the world’s top oil exporter from an Arab protest wave.

Bahrain, Libya, Oman and Kuwait have also increased domestic spending or handed outright cash to its citizens in packages totalling as much as 4 percent of gross domestic product.

“In the long term, we will probably see a meaningful shift in the balance between hydrocarbon revenues that are saved and invested overseas and those that are deployed at home,” said Andrew Rozanov, head of sovereign advisory at Permal.

“Recent events in the region are refocusing people’s minds rather urgently on new spending on domestic investment and welfare needs to maintain peace and social cohesion.”

Among these countries which increased domestic spending, Saudi Arabia’s is by far the biggest. Its spending plan, financed by its foreign exchange reserves, includes pay rises, unemployment benefits and affordable family housing.

“If oil prices stay sufficiently high to finance it, this will simply slow the growth of sovereign portfolios in the future. If, on the other hand, oil prices come down significantly, then certain funds may be required to make some adjustments to accommodate increased spending,” Rozanov said.

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