Oil Exporters with $311 Billion Excess, May Pressure US Debt

Asian central banks tend to invest their surpluses in U.S. Treasury securities which help finance the U.S. current account deficit.  These countries, however, also buy real estate and stakes in corporations, allocate cash to private-equity funds, place money with hedge funds and invest in emerging markets, according to George Magnus, senior economic adviser to UBS AG.  “We see a trend particularly away from riskless assets, like U.S. Treasuries,'' said Emanuele Ravano, the London-based head of portfolio management in Europe for Pacific Investment Management Co.  “At the margin, this is an evolution of a system that means that the U.S. has to pay more for its financing.''

The prospect of reduced demand for Treasuries has caught the attention of government officials.  Then-Treasury Secretary John Snow said in May that Middle Eastern oil producers will buy less U.S. debt.  Federal Reserve Chairman Ben Bernanke told Congress this month that the U.S. needs to keep its securities attractive to foreign investors.  In addition, further increases in the price of oil and the more aggressive approach to revenue management by oil producers may eventually exacerbate the U.S. trade deficit.  They also may create tensions in a global economy that is already set to slow. 

The investment motives of the oil exporters are more diverse than those of the People's Bank of China and other Asian central banks, said Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which has roughly $30 billion under management.  Motivated by a desire to keep their currencies weak and exports competitive, Asian central banks generally use the revenue received from selling goods to the U.S. to buy low- yielding, dollar-denominated Treasuries, he said.  By selling their own currencies to buy dollars, Asian central banks keep the U.S. currency stronger than it would be otherwise, fueling more purchases of Asian goods.  The purchases of Treasuries help keep U.S. interest rates low.  “Profit motives take a back seat to exchange-rate policy,'' Sargen said.  “The U.S., in effect, obtains automatic financing of its external deficit.''

Assessing where oil exporters keep their cash isn't easy.  For instance, the Bank for International Settlements is unable to identify where 70 percent of oil-exporting nations combined revenue surpluses have been invested since 1999.  Oil-exporting nations made net purchases and deposits of roughly $270 billion of U.S. securities between June 2003 and the end of 2005, according to U.S. Treasury data.  Magnus said the $270 billion accounts for just a quarter to a third of oil exporters' total financial investments. U.S. data doesn't identify the owners of assets purchased indirectly through third parties such as brokers.

Still, anecdotal evidence indicates what oil exporters are up to. The Kuwait Investment Authority is the largest shareholder in DaimlerChrysler AG with a 7 percent stake, valued at about $3.7 billion.  In March, Dubai Investment Group, an affiliate of Dubai Holding LLC, joined New York-based The Milestone Group in buying 21,000 apartments in the U.S.  Tatweer, a government-owned investment group based in Dubai, in May said it planned to build a $27 billion complex of themed hotels.  “Oil exporters are the new financial force in the global economy: Their reserves are growing rapidly, and their influence over the U.S. and other capital markets has grown in tandem,'' said Magnus.

Among non-OPEC countries, Russia plans to use $22.3 billion of its $262.9 billion in reserves to repay debts owed to official creditors.  Norway which is the world's third-biggest oil exporter, has a government pension fund that is funded by oil revenue and assets of $234 billion as of March 31.  “The implication of this is that the premium that investors will demand for buying U.S. assets will definitely increase -- particularly longer-term ones,'' said Ravano.  “It means that the U.S. will have to pay more to finance its spending habits.''

Treasury Department statistics show that Japan in May was the biggest holder of Treasury securities, with $637.9 billion, followed by China at $326.1 billion, the U.K. at $174.7 billion and group of oil exporters -- Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya and Nigeria -- at a combined $102.8 billion.  Russia and Norway don't show up on the list of the 26 largest Treasury owners.