Reply #79: A KING’S RANSOM? [View All]

[54anickel]

http://www.cnbceb.com/Articles/2008/May/42/sovereign-wealth-funds.aspx

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.

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