Newsletter No. 1213
News-Analysis
December 4, 2008

 

JAPAN AND SAUDI ARABIA DISAGREE ON OIL PRICE TARGETS

My little investment portfolio in the United States has taken a big hit in recent months due to the global financial crisis, but that is nothing compared to the problems that the Gulf States are facing. Oil prices have plummeted from the sky-high US$147 per barrel level in July to around US$50 now. Governments that had been expecting and receiving major inflows of cash have seen the money spigot suddenly turned off. Imagine the horror of government planners trying to deal with such wild price fluxuations.

King Abdallah of Saudi Arabia and Oil Minister Ali al-Naimi recently said that US$75 prices would encourage new oil production from marginal, higher-cost sources, and would help prevent a possible shortage in years ahead. This was a break from tradition, as the Saudi authorities have usually avoided giving any signals on what they believe might be a sustainable long-term oil price.

The Saudi plea for US$75 per barrel oil prices received no sympathy in Tokyo. METI Minister Toshihiro Nikai was blunt: “There are frequent comments by oil producers about $60-$75 per barrel, but for us, the cheaper the oil price, the better.” Nikai and the Japanese government are less concerned with the problems of oil suppliers than they are with the Japanese economy sliding into recession. Japan’s Institute of Energy Economics Senior Economist Shigeru Suehiro told Reuters: “Against this background, I think a rebound in crude prices again would be unbearable.”

Reuters comments: “The danger in that attitude is that oil markets could face a repeat of the price spike that began six years ago, when demand from emerging economies surged faster than anaemic growth in crude output after years of middling investment.”

Saudi Arabia has recently edged back ahead of the UAE as Japan’s largest oil supplier.

SAUDI NEWS BRIEFS

Tax Treaty Negotiations between Japan and Saudi Arabia were launched in an initial meeting from October 27th to 31st. These first talks took place in Tokyo.

The Emperor’s Birthday was celebrated by Japanese expats in Saudi Arabia on the 1st. A reception was hosted by Consul-General Toshmitsu Ishigure in Jedda.

ASAHI INTERVIEW WITH GOVERNOR OF SAUDI CENTRAL BANK

In late October, the Asahi Shinbun published an interview with Hamad al-Sayari, who has served as governor of the Saudi Arabian Monetary Agency since September 1985. The global financial crisis and Japan-Saudi economic relations were major features of this interview.

Asahi Shinbun: How do you view the current financial crisis?

Al-Sayari: Well, the crisis is a serious development that will not be limited to one country, given the globalization and interlinking of the world economy and markets. It will extend to all corners of the world, I would say, either directly or indirectly, especially given the integration of the global financial system. So it is very important to address the current credit, liquidity and other problems and to deal with them to maintain stability in the global financial system.

We have seen crises in the past, but this current crisis is more serious. One reason is that it has happened after a prolonged period of growth and expansion, which has probably encouraged exaggerated risk-taking and other forms of excessive market behavior. And now we see the result of this excessiveness. In addition, I believe the regulatory regime was lax, especially in the investment banking area, which allowed these excesses to happen.

In Saudi Arabia, fortunately, our approach to supervision is more conservative. Also, over the past decade, Saudi banks were busy participating in (our country's) economic development and there were multitudes of opportunities in the domestic market.

Asahi Shinbun: Some people may argue that during the early part of this year many GCC (Gulf Cooperation Council) countries' funds were invested in U.S. financial institutions, but in times of crisis that kind of activity is not seen. What do you think is the reason for GCC countries not coming to the rescue at this point?

Al-Sayari: We don't have a so-called sovereign wealth fund, and I cannot speak either for such funds, but from my observation, first, they are investors and they seek opportunities everywhere there is an opportunity. They don't act for altruistic reasons. It is an investment decision. Second, it is not just the GCC countries but also there are others: Singapore, Norway, China, (South) Korea etc. Third is that the negative views and concerns that are raised about the danger of the sovereign wealth funds and the dangers, and the need for regulations, are not helpful. They discourage global investors because of the excessive demands placed on them and the placing of conditions and restrictions on them. I would not be surprised that this is a factor in the thinking of many such investors.

I think such investors have been affected by the excessive demands placed on them along with the questions raised on their investments. If any country has concerns about foreign investment in any of its institutions, they should take the necessary measures themselves. Every country has the legitimate right to make regulations on foreign investment in its jurisdiction. And foreign investors, when they come to a market, they study the laws which they are expected to observe in each country that they are investing in. But to make a major issue of their entry into a market because of political reasons and politicization of these basically investment decisions is counterproductive to the flow of investments and of surplus global capital. I think the critics of sovereign funds went too far, but we will have to wait and see what actions they take after these current developments.

Asahi Shinbun: So you mean that, at this time, taking too much risk is not a reasonable action for many funds operating in this area?

Al-Sayari: No, what I am saying is that it is understandable that an investor would weigh all risks when making decisions.

Asahi Shinbun: And the other point you raised is that there is so much regulation.

Al-Sayari: The other point is that, well, this view of sovereign wealth funds is counterproductive and discourages the flow of capital, because the capital is a coward. Investors will always be concerned about excessive regulations and the extraordinary demands placed on them.

Asahi Shinbun: I assume you are referring to the arguments in the U.S. Congress.

Al-Sayari: Actually, it is an argument in the press and now there is a Working Group at the IMF looking at these practices, which are supposed to be voluntary. They start out voluntary and then they will push them as global standards and, follow up on their implementation, and this may intervene with the sovereign decisions of countries unnecessarily. But yet, if they are limited to just being guidelines and not compulsory, that would be OK. But the concern is that it starts as something voluntary and then becomes compulsory. Each country has its own legal, social and political requirements. You cannot impose external guidelines that may be too restrictive and would impact on the flow of capital.

Asahi Shinbun: I have learned that some IMF executives are saying that there should not be restrictions but that appropriate guidelines could be established to help better relationships between the SWF and distributing countries.

Al-Sayari: On the face of it, yes, but from our experience things like this start out on a voluntary basis but then they soon become compulsory. Sovereign wealth funds have been there for more than thirty years and they have been behaving properly in the global markets. Before, they (investors) go into any country, they study the local laws and they obey the local regulations. There were no problems before. It was only when some newcomers have come on stage that it has become a political issue and concerns have been raised.

Asahi Shinbun: Yes, some Americans worry about being taken over by foreign funds. A person who was with the U.S. government was saying that they are not focusing on the funds of GCC countries, but that they are actually afraid of Chinese and Russian funds.

Al-Sayari: It is only recently that they say they are concerned about abuse of the power of these funds for political reasons.

Asahi Shinbun: So may I understand that the funds of GCC countries do not have any political purposes?

Al-Sayari: As far as I know they don't have. They are only for investment purposes.

Asahi Shinbun: From that viewpoint, how do you evaluate Japan as a field for investment? Compared with the high growth rate of China or India, Japan has a very low growth rate.

Al-Sayari: Well, Japan is a very important economy. It's an important trading partner and investment partner for Saudi Arabia and the GCC countries. We have strong interest in developing and increasing the economic and investment ties with Japan. It's the second largest economy. It has advanced high technology. We would like to encourage mutual investment and trade with Japan. We welcome companies here and we also have interest in investment.

Asahi Shinbun: Are there any changes in how you view Japan through this financial crisis?

Al-Sayari: Japan now is collectively in better shape, given that it already had its own bubble more than ten years ago and now it is more stable with a better financial system. This is now clearly reflected in the flow of capital to and from Japan and in the relative stability of its currency.

Asahi Shinbun: With the recent hike in the price of oil your surplus must have greatly increased. Is there any strategic change in your capital employment or asset allocation with that growing surplus amid this financial crisis?

Al-Sayari: Of course, we always take all risks into account. We follow a prudent investment policy and seek returns without taking too much risk. Also, we invest globally. Our strategy is a dynamic strategy, always adjusting to new market realities and opportunities.

Asahi Shinbun: So you are investing abroad mainly in government bonds like U.S. Treasury notes?

Al-Sayari: No, we invest in various securities.

Asahi Shinbun: Including individual company securities?

Al-Sayari: Not in individual securities, but in portfolios that include various securities.

Asahi Shinbun: So you are avoiding high risk?

Al-Sayari: Yes, we avoid high risks.

Asahi Shinbun: How should I describe that kind of approach? Prudent?

Al-Sayari: You can say it is prudent or you can say it is conservative, but it is the style of a central bank.

Asahi Shinbun: I see. Not aggressive.

Al-Sayari: We don't take a direct interest and we don't invest in fancy products that are high risk/high return.

Asahi Shinbun: I heard a growing rumor in London that SAMA may create a huge amount of new funds, if not a sovereign wealth fund.

Al-Sayari: SAMA is a central bank and if there is a sovereign wealth fund, it's going to be outside, but so far there is no sovereign wealth fund.