Arab states' petrodollars are burning fast and that's bad news for emerging markets, real estate and, above all, Asian securities.
Gulf Cooperation Council countries have to refinance $94 billion of debt over the next two years, as reported by Bloomberg News on Sunday. As the price of oil drops, so do the foreign-exchange reserves of those nation's central banks. That's an indication that sovereign wealth funds built with petrodollars aren't investing much lately. In fact, they're selling.
Such sovereign wealth funds are, naturally, key buyers of sukuk, or Islamic bonds. No surprise then that 2015 was the slowest for issuance of Islamic debt since 2011, and offerings last month were the least for any January in six years, according to data compiled by Bloomberg.
It goes way beyond Sharia-compliant securities, however. Middle Eastern investors, especially the sovereign wealth funds and banks, are big backers of infrastructure around Asia and important buyers of bonds, in particular those from Indian companies, as noted recently by Ken Hu, Invesco's chief investment officer for Asia-Pacific fixed income.
Investors from Arab states bought about a quarter of the $650 million of notes sold by India's Adani Ports in July, while 42 percent of the $500 million of debentures issued by Mumbai-based ICICI Bank in August were placed in Europe and the Middle East.
Institutions from the Middle East are usually a mandatory stop for any Asian company seeking infrastructure investors because their Islamic mandate doesn't allow them to profit from interest unless it results from real earnings. The same reason draws them to real estate -- in 2008, Abu Dhabi's sovereign wealth fund bought the iconic Chrysler building in New York. They also like to invest in financial institutions and often take up bonds from banks and insurance companies. (In case anyone forgot, they were instrumental in helping U.S. financial institutions recapitalize following the 2008 financial crisis.)
After decades of buying, sovereign wealth funds globally hold more than $3 trillion of stocks. According to a report released earlier this month by the Las Vegas-based Sovereign Wealth Fund Institute, some $404.3 billion of that may be withdrawn this year if crude stays between $30 to $40 a barrel.
That figure doesn't include bonds or real estate. As Gulf state sovereign wealth funds try to keep purchasing power steady at home, they're likely to unload a little bit of everything they own. Buying into new bond offerings is hardly going to be top of their agenda. That's especially bad news for countries like India and Indonesia, which are planning to outlay hundreds of billions of dollars to upgrade infrastructure.
If they were hoping for the support of Middle Eastern investors, it'll have to wait. Meantime, those money managers who hold the sorts of securities favored by investors from the region had better start marking down their value.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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