Analysis: Arab Spring diverts part of Gulf petrodollar flows

Wed Jan 30, 2013 9:05am EST
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By Andrew Torchia

DUBAI (Reuters) - At an economic summit of Arab leaders in Riyadh last week, Saudi Arabia's crown prince called for a minimum 50 percent increase in the capital of a fund that lends money for development projects around the region.

Prince Salman, next in line to the Saudi throne, said the kingdom was ready to pay its share in any expansion of the Kuwait-based Arab Fund for Economic and Social Development, now capitalized at 2 billion Kuwaiti dinars ($7.1 billion).

The pledge illustrated a shift in the way Gulf Arab states are deploying the hundreds of billions of dollars which they earn annually through oil exports: More of the money is being used in their own countries and inside the region, rather than being invested automatically in Western markets.

Both push factors and pull factors are at work, said Shawkat Hammoudeh, a former economist with the Kuwait-based Organization of Arab Petroleum Exporting Countries who studies petrodollar flows at Drexel University in the United States.

The U.S. credit crisis of 2008-2009 and the 2010-2012 euro zone debt crisis have made the Gulf states more wary of investment in the West, traditionally the place where they park the vast bulk of their petrodollars.

Meanwhile, the Arab Spring uprisings over the past couple of years are diverting some petrodollars to the Middle East. Although most of the Gulf states escaped serious unrest, the political turmoil persuaded Gulf leaders of the need to spend more of their wealth on buying social peace in the region.

The changes in petrodollar flows are gradual. Markets outside the West won't become deep enough to absorb the bulk of the Gulf's money for years. Gulf countries' currency pegs to the U.S. dollar mean it makes sense for them to buy dollar assets.

But the fund shifts could eventually slow Western markets that have been lubricated for decades by flows of money from the Gulf. Petrodollars could also bring Arab states closer together diplomatically - a goal that governments have proclaimed for decades but struggled to achieve without economic integration.   Continued...