REVENUE FROM OIL MOUNTING ARAB MILLIONS ARE SEARCHING FOR WORK

Press, Volume CXIII, Issue 33279, 17 July 1973, Page 14

REVENUE FROM OIL MOUNTING ARAB MILLIONS ARE SEARCHING FOR WORK

(By 1

RICHARD JOHNS,

Middle East correspondent of the “Financial Times." London) ... . , -J? r>il nrnrlllpincr

It has been calculated that the surpluses of the Arab oil produi ing countries in the next seven years or so could amount to SIOO.OOOIII o more. The International Monetary Fund, for one, has not worked out tie implications of such a breathtaking prospect. Nor. indeed. ha\e the Aia > states which are going to have these riches thrust upon them.

However, in Cairo, finance' and economy Ministers have been meeting to discuss monetary problems and the use of their excess wealth for the wider national interest. The Voice of the Arabs Radio has cryptically referred to “certain attempts to impose limitations on the surplus funds of producing states in foreign banks.” This ( must be taken as a reference' to the disincentives to the flow of capital into some of the more desirable markets for idle Arab money seeking a secure haven —in particular, the measures taken by West Germany in February to discourage foreign deposits and the negative interest rates of Switzerland. Beyond that, there are tie fears that the Committee of Twenty might recommend the placement of Arab oil surpluses in a special fund paying a low rate of interest and resentment that Arab countries have only 8 per cent of the voting power in the International Monetary Fund. The Arab oil producing

I states, having lost money as ,a result of the dollar’s devaluation, but nevertheless having been apportioned some of ■the blame for precipitating I the last monetary’ crisis, are ■somewhat confused and not ■ a little angry. I Just after the devaluation, Mr Abdel Rahman al Attiqi. Kuwait’s Minister of Finance and Oil, told me, “We have been hit twice by the pound and twice by the dollar now. It is not a happy situation.’’ The Kuwait Government with foreign assets estimated at about SUS3OOOm at its disposal — a large proportion inevitably in dollars — was particularly aggravated by an £BO-90m paper loss on state and quasi-state funds. In so far as Arab money did flow into Germany, fund managers were of course acting no differently from anyone else. Given the volume, liquidity and volatility of "Arab dollars” however, it can be assumed that they were a significant part of the February flood. In this context, Kuwait’s commercial banks, which at the end of last year had assets placed in Europe amounting to an estimated 500 m Kuwaiti dinars (over £6som) including some state money, must have been heavily involved. The Kuwait Government,

I relatively sophisticated in |financial matters, handles the I bulk of its funds abroad, 'directly through the investment office in .London. Nevertheless, with much of its dollar capital invested in bonds and longer-term instruments it was badly exposed. The funds of Saudi Arabia, Libya and Abu Dhabi are mainly handled by intermediaries, while Iraq as yet is hardly in the market at all, though it is expected to be before long.

A recent problem For the Arab producing States, with the obvious exception of Kuwait, the problem of deploying big surpluses is relatively new — dating from the time of the Teheran revenue settlement and coinciding with the period of greatest monetary instability. In the two years to the end of March, 1973, the gold and foreign exchange reserves of the four major Arab oil producers — Saudi Arabia, Kuwait, Iraq and Libya—increased from rather less than SUS33OOm to about SUS7SOOm, even though the last three underwent restrictions on output for a variety of reasons.

In the meantime, Abu Dhabi and Qatar began to accumulate surpluses over and above expenditure and the demands of the Privy Purse (the ex-Ruler of Qatar, deposed in February 1972, is reliably said to be worth £2oom). After 1975, Abu Dhabi, whose State portfolio was a modest £6om at the end of 1972, will be swollen by surpluses. Qatar’s State fund which was understood to be £lsom at the end of 1971, will have increased substantially since. Projections are inevitably hazardous. However, estimates made early this year by the United States Department and quoted by Mr R. G. Aiken, director of the Office of Fuels and Energy, probably have as much plausibility as any. Revenues of Arab producers of the Gulf and North Africa in 1975 were calculated at SUSI4,4OOm on the basis of the provision of the Teheran pact, but not taking into account the increases on June 1 in Geneva (to compensate for $ devaluation) or, indeed, the possibility that producers may force a revision of the 1971 price settlement. On what some would now consider an over-optimistic calculation of prices (from the consumer’s point of view) the State Department estimated that the 1980 revenue of these States would be rather more than SUSSO,OOOm.

Surplus problem Mr Aiken said cumulative income of Arab oil States between 1973 and 1980 could exceed State spending by as much as SUSIOO,OOOm. In practice, he added, the surplus was unlikely to be “remotely approximate” to that figure. “Either they will spend money at home, or they will find adequate investments abroad. If they do not or cannot they will very’ likely conclude that the oil had better stay in the ground — and this would cause a problem for the developed world far greater than floating billions.” For its part the I.M.F. men in the field, when consulted, are said to have recommended maximum investment at home involving imports of goods from the industrialised, oil-consuming countries and that is certainly the course Saudi Arabia now seems bent on (apart from the massive military spending programme it is engaged in). At the same time, there is the growing conviction that surpluses over and above i domestic needs should be invested in the Arab world.

The philosophy behind these initiatives was put pungently by Mr Attiqi at the April Board meeting of the Arab Fund for Economic and Social Development when he spoke of “these unsatisfactory relationships which i make us a mere source of finance for economies stronger than ours, whereby a larger part of our national capital is placed at the disposal of industrialised coun-

tries in exchange for a return (which is scarcely worth mentioning in comparison •with the economic benefits, the employment and the (prosperity derived from it by (those countries.” Strengthening Arabs ( From the exploratory ministerial meeting in Cairo (no-one expects a coherent (plan of action to emerge let alone executive action. But la central preoccupation is (bound to be mobilising the (oil States’ resources for the I strengthening of the Arab nations’ economic sinews. (The poorer “oil have-nots, (especially those involved in the confrontation with ■lsrael, naturally want to see >a wider distribution ot ’petroleum wealth. i However, the producing (states, led by Kuwait, are more and more thinking in terms of investing surpluses (in the wider Arab world. The i concept is not new and dates (back to the creation 10 years ago of the Kuwait Fund (which has now granted loans lin excess of KDIOOm. It has now developed further with the emergence of the multilateral Arab Fund. The volume of Arab aid can be expected to increase, but it is difficult to see schemes of pan-Arab collaboration soaking up a sizeable share of surplus revenues generated or giving the kind of return the producing states expect from the bulk of their funds. Saudi Arabia, notably, has not joined the Arab Fund to the irritation and disappointment of Kuwaitis.

Special case Saudi Arabia is, of course, a special and extraordinary case. By 1980 it will probably account for half the Arab petroleum revenue with an income of SUS2S,OOOm to SUS3O,OOOm annually or more (if output increases as anticijpated. Mr Walter J. Levy, the oil consultant, has suggested its surpluses in the early 1980 s could be in the region of SUSIB,OOOm a year. The proposal made last September by Sheikh Ahmed Zaki Yamani, the Saudi Minister of Oil, that his country should invest downstream in 'the American oil industry has now quietly receded from the foreground. Emphasis in Saudi thinking is increasingly, though perhaps rather unrealistically, on massive industrial investment at home and, in the petroleum sector, the processing of products domestically for export abroad.

Not the very least because of monetary upheavals, Arab oil wealth is showing an inclination to retire into its shell. What Arab oil states want, conscious of the appreciating black gold backing their currency, is profitable outlets that are also free of exchange risk. That is why World Bank issues in Kuwait dinars have proved to be acceptable to the State. The fifth and most recent dinar issue in Kuwait last year in which local banks participated, brought to KDlO5m the amount raised in the Emirate. It led Mr Abdel-Latif al Hamad, managing director of the Kuwait Fund and the State’s outstanding financial man, to quip: “To a degree the white man’s burden is becoming a brown man’s burden.” There were also International Bank of Reconstruction and Development (1.8.R.D.) placements in local currency with the Saudi Arabian Monetary Agency and the Libyan Central Bank last year. On his tour of the Gulf early in the year, Mr Robert McNamara, 1.8.R.D. president, left no doubt that he would be looking for more funds in the future. And Mr al Hamad, for one, would like to see the Kuwait dinar become more widely used as an international currency for borrowing. But inevitably the use of dinars and riyals must be conditioned by the limited demand for these currencies until such time as the oil states are prepared to see them used as a reserve currency and give guarantees of convertibility which will inspire confidence.

Western involvement As it is, the Arab oil states must be reconciled to the fact that they will be more heavily, rather than less, involved in the Western money markets as their revenue’s rise. Saudi Arabia, which has in the past passively entrusted most of its money to United States banks, has set up a top-level State investment committee chaired by Prince Fahad, the Premier. It is even said that Libya is trying to work out a more sophisticated approach to the markets.

In 1971, Libya announced the withdrawal of its funds from London in a fit of pique against Britain. But by the very nature of things it is more actively involved in the market here than ever. Even in Baathist Baghdad it seems to be accepted that when Iraq starts generating surpluses over and above its spending requirements, some time in the 1980 s, politics will not bar it from Europe’s money markets. Certainly, the prospect of the Arab producing states holding a large proportion of I the world’s liquidity is one that must be taken fully into account in the halting moves {towards world monetary reform. In itself it makes the : creation of a stable system all the more urgent.