Now, The Desert Kingdoms Are Thirsty For Cash

About a year ago, a group of Kuwait's most powerful money managers quietly recommended borrowing abroad for the first time ever to increase their leverage on their country's $100 billion foreign investment portfolio. In Saudi Arabia, meanwhile, mounting budget deficits were prompting similar proposals for overseas credit. None of them got off the ground. That was before the war.

As the bills for Operation Desert Storm come due and the reconstruction of Kuwait begins, the Kuwaitis and the Saudis have undergone a battlefield conversion. Once the providers of surplus petrodollars to banks around the world, both nations are now stretching out their palms to U. S. and European lenders for help. They prefer this over dumping their remaining foreign assets, which could unsettle markets worldwide.

The Saudis and Kuwaitis are already receiving a warm response from bankers. So warm, in fact, that other borrowers--from the capital-starved economies of Eastern Europe and Latin America to the deficit-plagued U. S. government itself--may have to pay more for their money or risk getting pushed to the end of the line. Saudi Arabia and Kuwait's 351 billion barrels of proven oil reserves are collateral that chary lenders prize above all. Some expect the two states to borrow $20 billion in the next few years. Other Arab states may borrow still more through a proposed regional fund.

SOFTER LINE. Raising billions offshore will change the very nature of Kuwait and Saudi Arabia. Kuwait's strict nationalist investment laws, which mandate that all businesses in the emirate be 100% Kuwaiti-owned, are likely to be softened to get projects moving. Hotels and chemical plants may be opened to foreign equity investment (table). Some Western bankers also expect the Kuwaitis to borrow against oil exports once production resumes. Gaylen J. Byker, head of commodity-indexed transactions for Banque Paribas in New York, notes that Iran has already lined up $2.2 billion in oil credits for 1991.

Foreign borrowing may embarrass the secretive Saudi government, which will have to disclose state revenues for the first time. Some reform-minded Saudis hope that will increase government accountability. For war-torn Kuwait, the postwar investment boom "will be a golden opportunity to reshape the economy," says Muhammad al-Sabah, a leading Kuwaiti economic adviser. He suggests that Kuwait could become the financial center of the gulf if it allowed foreign banks to transact business there.

But other Kuwaitis say their country may not reach its prewar strength anytime soon. Although reconstruction could cost $50 billion, the work may be spread out over 10 years. Getting oil production back to Kuwait's prewar level of 1.5 million barrels a day could take three years. Indeed, officials now are looking at recreating a country of about 1 million, less than half Kuwait's prewar size. Such a state would have little room for the army of 1.4 million guest workers--many of them Palestinian supporters of Saddam Hussein--that served 750,000 Kuwaiti citizens in prewar days.

While Kuwait may now have the leisure to plan its future economy, Saudi Arabia faces dire financial straits. On the hook for $13.5 billion in Desert Storm expenses, Riyadh is borrowing $3.7 billion from Morgan Guaranty Trust Co. and others. That won't go far. Despite $33 billion in estimated oil revenues this year, Riyadh may still post a $50 billion budget deficit over 1990 and 1991.

OIL FOR DEBT. Some relief could come from Washington. The Saudis may offer to pay part of their Desert Storm commitment to the U. S. in crude, which would go into the U. S. Strategic Petroleum Reserve. The Energy Dept. first broached the idea of buying Saudi oil two years ago. The plan went nowhere. But now, "the Saudis will probably go along if Bush decides the oil purchase is a good move," says Joseph C. Story, a Saudi oil expert with Gulf Consulting Services Inc. in McLean, Va.

One source of funding Riyadh would like to tap, but can't, is Kuwait, whose overseas financial assets are 10 times those of the Saudis. Since last August, the Kuwaitis may have sold as much as $10 billion to $15 billion of their foreign holdings. But some $85 billion is left. "The Kuwaitis should lend to us or give us money," says a Saudi official.

Kuwaiti Finance Minister Ali Khalifa al-Sabah has brushed off questions about Saudi financial woes, noting that the Kuwaitis also face hardships. That's not the kind of talk the world might expect to hear from captains of the gulf. But until the oil starts gushing and the bills are all paid, pleas such as these are going to be standard fare.


OIL May be allotted $20 million a day from Saudi oil revenues until their own output resumes. By yearend, may be pumping a few hundred thousand barrels a day

ASSET SALES Kuwait Investment Office is selling as much as $15 billion in stocks and bonds from its $100 billion global portfolio

LOANS Government may borrow $5 billion to $10 billion. Considering oil-backed loans

FOREIGN INVESTMENT May permit foreigners to own interests in chemicals, communications, transportation, hotels, and banks


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