How Gulf countries spend their petro-dollars had been a long-standing mystery which has now been partly unraveled by the Institute of International Finance (IIF). The amounts involved are huge because in the past five years there has been a sharp increase in oil prices. The way they spend their money can therefore make considerable difference to exports, interest rates, exchange rates and asset prices in different countries.
Oil prices trebled in the five years from 2001 to 2006 and the six member countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) of the Gulf Cooperation Council (GCC) earned on average $327 billion (Rs 1,340,700 crore) a year. That is a total of $1.54 trillion to be accounted for. Of this, about $1 trillion was spent on imports and the balance $542 billion invested, mainly overseas.
Imports increased only 19 per cent a year and the trade surplus consequently jumped from 22 per cent in 2002 to 40 per cent of their GDP in 2006. There was also a shift in the direction of trade. Asia’s share in Gulf imports increased to 31 per cent and of United States declined to 11 per cent. The biggest beneficiary was China which doubled its share in Gulf imports to 8 per cent. India’s exports to GCC countries funded only 28 per cent of its oil imports.
It is the investment of $542 billion about which information is scanty and which has been investigated by IIF. The US was a loser in respect of trade, but it was a gainer in respect of investment. That indicates that in spite of the weakening of the dollar, investment in dollar securities assures greater safety or better return. The US had a 55 per cent share in the investment of GCC surplus funds in the past five years. Most of it was in US equities and long term debt. This helped impart some buoyancy to Dow Jones and push the long rate below the short rate of interest which kept the rate of investment — and consequently growth in the US — high.
While the appetite for US securities was strong, the GCC was also drawn towards Europe, emerging markets and neighbouring Middle East countries (MENA). There was also interest in other assets like real estate, private equity, hedge funds, etc. Of the total investment of $ 542, about 18 per cent went to Europe and 11 per cent each to Asia and MENA. In Asia it was China’s IPOs that attracted heavy investment.
The GCC countries were to some extent responsible for the imbalance in US trade but funded it also by investment in US securities. The emerging markets like China and India spent a lot more on oil and were able to partly pay for it by larger exports to the Gulf countries. Consequently, the dislocation created by the increase in the price of oil was, to some extent, made up by the change in the direction of trade and pattern of investment. This enabled the world economy to maintain its pace of growth.