Issue No. 609
Opinion
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24 - 30 October 2002 Issue No. 609 Opinion |
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| Published in Cairo by AL-AHRAM established in 1875 | Recommend this page | ||
Reinvesting assets
Ibrahim Nafie explores the changing patterns of Arab investment
The story of Arab investments abroad is many decades old, and intimately bound up with the fortunes of natural resources in the Arab world, not least of which is oil. The most crucial turning point in this history occurred following the outbreak of the October War of 1973. The Arab oil boycott against countries that backed Israel in that war triggered a four-fold rise in the price of oil. The consequent boom in the revenues of Arab oil-exporting countries gave a powerful boost to the growth of the Arab private sector and opened up vast opportunities for rapid social and economic development. At the same time, the enormous revenues, far exceeding what could be absorbed domestically, generated huge cash surpluses, rendering it necessary to explore the best possible avenues to safeguard and capitalise on the new found wealth.
The expansion of international financial markets since the late eighties offered an attractive investment climate to governments and individuals around the world. This certainly applied to those Arab governments with large balance of payments surpluses, as well as to their citizens who found they could make higher returns on their money if they invested it abroad.
Estimates of Arab money invested abroad range from as high as $2,400 billion to as low as $500 billion. Some Western sources estimate that the volume of Arab investments in the West, alone, last year stood at $1,300 billion, of which $750 billion came from the Saudi Arabian government and people. They further indicated that US markets account for 40 per cent of Saudi investments abroad, European markets 30 per cent and Asian markets 10 per cent.
Simultaneously, it is important to note that the revenues of most Gulf countries have declined sharply since the latter half of the 1980s. In addition to the growing needs of domestic investment, the requirements of national security, vast armaments outlays, not to mention the costs of the Gulf War and the reconstruction of Kuwait, have claimed increasing ratios of national revenues. Furthermore, governments also had to meet the increasing demands of rapid population growth and the consequent rise in the demand on public services, which had been provided free of charge or were heavily subsidised. Aggravating such pressures was the shortage in oil revenues due to the sharp decline in oil prices and production since 1986, although market fluctuations have brought occasional, if temporary, bursts of growth in revenues and production, as occurred in 1996 and 2000. Such factors, of course, affected levels of investment abroad. More significantly, it affected the sense of security that such investments had once generated, a sense epitomised by the law that obliges the government of Kuwait to allocate 10 per cent of its oil revenues for investment abroad on behalf of the country's Future Generations Fund.
In all events, estimates of Arab holdings abroad are inherently rough in view of the considerable difficulties surrounding the process of acquiring precise figures. The complex web connecting the various financial markets and the diverse channels and means of investment make it virtually impossible to trace the sources of investments, especially with regard to private individuals and institutions. Yet, in spite of these intricacies, the attempt should be made to arrive at as realistic assessments as possible, at least of Arab government investments abroad, since government agencies are presumed to keep accurate records of such investments. On the basis of such assessments, it will be easier to determine future policies on Arab investments abroad in light of economic and political developments.
It will not have escaped the reader that the reason for raising this subject pertains to the effects of the aftermath of 11 September on Arab assets abroad. In the wake of those events, the US issued four lists in succession containing the names of more than 150 persons or institutions it suspected were connected to terrorism. It then asked banks around the world to freeze the assets of those persons or institutions on the lists and to investigate any improprieties in their banking transactions. It is estimated that over $24 million have been frozen as a result of this action.
Other nations took similar actions. France froze assets in its banks amounting to 28 million francs, in compliance with UN Security Council Resolution 1333 of December last year calling for the freezing of the accounts of the Taliban and Al-Qa'eda organisation. Japan formed a commission to monitor financial and stock markets in the context of an extensive investigation of the financial transactions of Bin Laden's network. In Germany commercial banks closed 13 accounts containing a total of 2.7 million marks on the grounds of suspected links with terrorism and British banking authorities froze accounts with a total value of $68 million.
The scrutiny of Arab assets abroad continued to intensify over the past year. Another list containing 18 mostly Arab names was distributed around the world, as part of what was described as a wide-ranging sweep on the sources of terrorist funding. Five thousand US banks and tens of thousands of banks elsewhere around the world became involved in this investigation. Then, only last month, nearly a year after 11 September, the US froze assets of several Islamic charities and officials connected with these societies on the grounds that they financed terrorist activities or were somehow linked with Al-Qa'eda.
This is not the first time Middle Eastern oil revenues invested in the West have been subjected to this form of assault. Washington had previously ordered the freezing of Libyan and Iranian assets in the US, for example. This has generated a sense of vulnerability that has prompted some Arab analysts to observe that Arab capital abroad is hostage to the West.
Although current statistics are not available on the modes of investing petroleum revenues in the West, traditionally they have been invested in very limited ways. The most prevalent, following the seventies oil boom, was to deposit them in major Western banks, thereby preserving a large degree of liquidity as governments studied the best alternatives for long term investment of the high surpluses generated by the sudden increase in oil revenues. A considerable proportion of investments remained in the form of bank deposits, a portion of which forms part of the foreign currency reserves of the central banks. This phenomenon applies not only to the Gulf countries but all Arab central banks, which require the high liquidity of these reserves in addition to the interest paid on them, however small.
Oil revenues were invested, secondly, in Western government bonds, and, for the oil producing countries in particular, in US treasury bonds. Other Arab governments and major institutions have utilised their assets similarly, in view of the presumed long-term security offered by such investments.
Thirdly, revenues have been invested in the form of direct loans, shares, non- government bonds, real estate and other forms of investment in the West. Investments in shares, in particular, became increasingly common in the nineties when the revival in the international stock markets and the flourishing IT industries offered prospects of high dividends. This trend continued until the turn of the millennium, when indicators turned downwards, a trajectory accentuated by the accounting scandals that rocked major US firms last spring.
Developments over the past year have naturally led Arabs to take a closer look at their policies with regard to assets abroad. The wave of freezing of Arab assets has aroused considerable anxiety among Arab investors, especially from the private sector, fearful that at any moment they could lose everything as the result of a spurious allegation that their assets are somehow connected with terrorism. However, they are also worried about the risks associated with the declining value of shares and bonds in western markets. Such anxieties have prompted many to wonder whether it would not be wiser to invest those assets elsewhere, specifically in their home or other Arab countries, thereby realising reasonable returns with a higher degree of security. Favouring this alternative, they argue, are the economic and structural reforms that have stimulated the growth and vitality of Arab financial markets.
Indeed, it appears that Saudi Arabia has already set a trend in this regard. Some analysts estimate that over the past few months about $11 billion worth of Saudi assets abroad have been reinvested in the domestic market. Indicators to this effect have been a rise in liquidity in the Saudi economy and the drop over the past year of an estimated $5 billion formerly invested in international banks.
Simultaneously, there is a body of opinion that advocates using the threat of withdrawing Arab assets from abroad, as a form of retaliation against the maltreatment of Arabs and Muslims in the west or as a pressure card in the defence of Arab causes. They further argue that by utilising such funds through investment channels in the Arab and Islamic worlds, these countries will become less vulnerable to economic and political pressures and reap a greater sense of security over their investments.
Regardless of one's point of view, it is clearly time to give careful and sober thought to how best to take advantage, economically and politically, of the vast Arab assets abroad.
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