Lounsbury: Dollar, MENA and OPEC

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December 08, 2004

Dollar, MENA and OPEC

An interesting development, as reported in The Financial Times

Opec sharply reduces dollar exposure
By Steve Johnson and Javier Blas in London
http://news.ft.com/cms/s/67f88f7c-47cb-11d9-a0fd-00000e2511c8.html
Published: December 6 2004 21:12 | Last updated: December 6 2004 21:12

Notable development that I missed earlier:
Oil exporters have sharply reduced their exposure to the US dollar over the past three years, according to data from the Bank for International Settlements.

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent.

I note, however that OPEC and MENA are not the same, so the remainder of the article confuses the issue a bit. Nevertheless, the motors are Middle Eastern.

So of note
Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.

Interesting development. I note that this is an ongoing process and likely to accelerate as the dollar depreciates. Euro pricing might emerge within the next several years, probably incrementally.

I also wish to note this:
Private Middle East investors are believed to be worried about the prospect of US-held assets being frozen as part of the war on terror, leading to accelerated dollar-selling after the re-election of President George W. Bush.

I note that I began warning (on the SDMB) about this quite a bit back - and I recall with a degree of amusement that the arguments that it was impossible that private investors would reduce their exposure to the US because the US is just inherently too attractive, that my warning that there were economic implications to unbalanced "terror financing/business" reaction was off base. It would appear I was right:
Opec officials also point to political motivations after the 2001 terror attacks on the US.

Middle Eastern foreign exchange reserves are relatively small - those of Saudi Arabia, UAE, Kuwait and Qatar are estimated at $61bn by BNP Paribas - but any switch may be seen as indicating the mood of private investors in the region, who control far greater wealth.

I am not sure CB ForEx position decisions are of necessity reflective of private investors, but in this case I do believe they are.

Hans Redeker, global head of foreign exchange strategy at the French bank, said the Patriot Act, introduced after September 11 to stop US financial institutions being used by terrorists to launder money, was worrying private investors.

"If you trade with what the US regards as a 'dodgy' bank, you are at risk of your assets in the US being frozen," he said. "After the re-election of George Bush, the Middle East started to sell dollars like crazy due to the fears of assets being frozen."

The BIS report also showed that, in spite of oil prices having risen 85 per cent since the fourth quarter of 2001, overall OPEC bank deposits have barely risen. "Oil reserves have not been channelled into the international banking system in the most recent cycle," the report said.

One school of thought is that Middle Eastern businesses and individuals increasingly prefer to invest at home, leading to sharp rises in real estate and equity prices in many countries. Another argument is that many Opec governments are having to increase public spending to support rapidly growing populations.

The underlined sections are interesting. First, in re the dodgey bank issue, my sense is the US authorities are being quite aggressive in characterizing "dodginess" and so the risk faced by asset holders or dollar holders with potential "terror association" exposure (even indirect) is not trivial, and above all is perceived as being non-trivial. I could be wrong given I have not studied the matter, but that is my sense.

Second, the non-recycling of the revenues is of no small interest. I would say the two schools of thought are non-exclusive. Certain there is much more investment in region by regional actors; the multiple regional bulls while perhaps in part reflecting new consciousness of economic reforms undertaken in the past ten years or rather their results, I suspect very much reflect a new fear in the region that MENA capital passing through or residing in the US, and Europe to a lesser extent, is in real danger of being siezed/frozen. In short, for a MENA or perhaps even a Muslim investor, US and even Europe looks less like a safe haven, while improved protections in the region for investors make re-investment more attractive - in fact feasible rather than unfeasible.

Now, one item I have noted is that not much seems to be going into new business creation. A lot is going into real estate, a goodly portion into the stock markets in grosso modo, some percentage of liquidity seems to be going into the ever deep (relative to the other markets) government debt markets; I don't get the sense of a lot of new business creation as of yet. It is possible that we will see this - something that bears thinking about. With continued reforms it may be Gulf and North Africa may actually become interesting investment destinations with local capital helping create a virtuous circle. Not a story I am necessarily going to buy into right now, but something to keep on the agenda.

December 08, 2004

Dollar, MENA and OPEC

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