Neighborly Investments

• Author: Mahmoud Mohieldin
• Position: Minister of Investment of the Arab Republic of Egypt
• Pages: 40-41

Gulf oil producers are investing petrodollars in other Middle East countries-a trend that should continue even as oil prices fall

Page 40

There has been extensive coverage of the impact of expensive oil on infl ation and growth in both developed countries and energy-scarce nations. But the largely benefi cial impact of petrodollar surpluses on Arab economies has been a neglected topic. Although oil prices have come down dramatically since their peaks in the middle of 2008, the surpluses oil-producing countries have available for investment are still considerable.

As a result, the flow of petrodollars has not only improved the economic prospects of the six oil-producing countries in the Persian Gulf, but, because many of those petrodollars are being invested in the region, it has also improved the outlook for neighboring Arab nations. The accumulation of financial wealth and the search for higher yields have led the Gulf Cooperation Council (GCC) investors to diversify their investment strategy, geographically and across asset classes.

The GCC states have become more strategic about investing their wealth, generated from the increase in oil revenues. The six oil producers that comprise the GCC-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates- have learned from the bad experiences of the boom-bust cycles of the 1970s and 1980s. Moreover, the investment restrictions that the United States began to impose after the attacks of September 2001 have encouraged GCC states to diversify the investment of their surpluses regionally. Instead of investing revenues in U.S. treasury bills or depositing earnings in Eurodollar accounts at multinational banks, the oil producers are now using their oil to accumulate foreign exchange reserves, to reduce public debt, and to build up sovereign wealth funds (SWFs) and a variety of state-controlled but sophisticated investment institutions.

Neighbors feel the impact

Despite the recent price declines, GCC oil revenues are expected to exceed $600 billion in 2008 and remain sizable in 2009.

There are three major channels through which such revenues could affect both the Gulf states and neighboring countries.

* Trade in goods. This remains a relatively unimportant area. Trade among Arab countries grew to 11.2 percent of their total trade in fiscal year 2006-07, but at that level does not play a major role in cross-country benefits...