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Page added on February 29, 2016

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How Oil Is Burning a Hole in Asia


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released earlier this month by the Las Vegas-based Sovereign Wealth Fund Institute, some $404.3 billion of that may be withdrawn this year if crude stays between $30 to $40 a barrel.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.


6 Comments on "How Oil Is Burning a Hole in Asia"

  1. twocats on Mon, 29th Feb 2016 10:48 pm 

    part of that indian infrastructure was their solar initiative at the Paris talks, which is one of the never-ending zombie-tropes we hear of what is causing energy prices to be so low.

    Let me see if I got this: people talking in Paris causes oil prices to plummet, which causes investment to wane, which undermines the talking in Paris.

    So you can have cheap oil, just don’t use it to build renewable infrastructure.

    And for anyone still not convinced that Paris was absolutely meaningless, I give you – the WTO (and soon TPP)

    hmhmhmmwhaha… mwahahahahahah!

  2. twocats on Mon, 29th Feb 2016 10:51 pm 

    the key to a good maniacal laugh is to start small, almost like a deep humming, get your body shaking like a motor coming to shuddering halt, then pause for a second to let it wash over you, and then let ‘er rip.

  3. JuanP on Tue, 1st Mar 2016 8:51 am 

    Oil production article,

  4. Davy on Wed, 2nd Mar 2016 5:06 am 

    “Moody’s Downgrades China’s Credit Outlook From Stable To Negative – Full Text”

    “It is likely just a coincidence that just a month after we reported that China’s real consolidated debt/GDP was far greater than the 280% or so accepted conventionally, and was really up to 350% if not higher after the recent record loan issuance surge, moments ago Moody’s officially downgraded its outlook of China’s credit rating from stable to negative, citing three key risks:”

    “The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet; A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks; Uncertainty about the authorities’ capacity to implement reforms – given the scale of reform challenges – to address imbalances in the economy.”

    “Moody’s has said nothing at all about China’s biggest current risk factor – its collapsing labor market and surging unemployment.”

  5. Nony on Wed, 2nd Mar 2016 9:54 am 

    This article completely ignores the fact that USA is in bedt and produces expensive oil and GCC countries have years worth of savings and produce low cost oil. Who you gonna bet on, the guy with five years savings in the bank or the other in debt to their eye balls.

    I have no idea why an article like this even needs to be posted here. It’s likely that Tom ‘Aspergers’ Whipple is behind this website.

  6. Nony on Wed, 2nd Mar 2016 10:58 am 

    I like Tom Whipple. If you are going to imitate me, do so more accurately.

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