Preface
OPEC govern men Is have accumulated massive financial assets outside their own countries since the large oil price increase. These assets grew more slowly in the. however, because4 the cur rent account surpluses of the oil producers diminished and in some cases disappeared as real oil prices declined and OPEC imports rose dramatically. The latest oil price rises are once again creating big surpluses for the OPEC countries and consequently another big increase in financial assets. One of the risks created by these assets is lhat an OPEC country could use them for political purposesay that would create instability for the dollar and other currencies. Iran's plan to remove its assets from US institutions, which was preempted by the US block on Iranianvidence ofisk.
In this fifth annual report on OPEC foreign official assets, we have examined trends in OPEC investmentoting the size, composition, and location of new and existing placements. The dataaseline from which developments9an be judged. Interim reports on the status of OPEC assets will appear in the Economic Intelligence Weekly Review, published by the Office of Economic Research
ountries: Annual Rcporl On Official Foreign As
value of OPEC official foreign asset holdings* rose8 by only an estimatedSI6Ismallest increase sinceil crisis. The stability of oil prices, the decline in oil export volume, and higher import prices were the main factors. Saudi Arabia, normally the largest net investor, liquidated assets to meet cash flow requirements. Meanwhile, private and quasi-official outflows from OPEC countries increased dramatically for the year. Capital flight from Iran was an important factor; incomplete data on private transactions make otheratter of speculation.
Reflecting their growing financial sophistication, official OPEC investors increased holdings of nonreserve assets, such as corporate securities and direct loans,5 billion; at the same time, they reduced reserve assets, such as government securities and bank deposits, byillion. Dollars were shed in favor of yen and dculsche marks, and Japan and West Germany were the favored locations in placing new investments. OPEC countries reduced their nongold holdings in the United States and also drew down total assets io the United Kingdom and some other West European countries.
The net flow of OPEC official foreign investment increased dramatically9 as the result of the steep rise in oil prices. While preliminary data suggest that OPEC foreign assets declined somewhat io the first quarter when oil receipts were steady, we estimate the amount available for foreign placement9 atillion. Most of the accumulation occurred in the second half, when the effects of oil price increases were most strongly felt. Large asset buildup will continue at least through the first halfhe trend in the second half will depend on the OPEC countries' inclination to importesult of higher income and on oil pricing policies during the year.
Official foreign assets for purpCMu reponote held by ihe respective OPEC coantrict' central bonks and, in some cues, other piincipal financial insulations. The bulk or it* assets of Kuwait and Qatar, for example, arc held by entities other ihan Ibc central bank, or monetary authority; the United Arab Emintet (UAE) has no central monetary authority per k. The fijaratcul fotclgm investment in this report should be viewed as minimum amount*.
private. IIton undoubtedly eomributed to the more iban doubling of ihe residual from tbe preceding year's ievel; fears precipitated by tbe Iranian revolution may have encouraged similar action in other Middle Eastern
countries Tbe rapid growth of these outflows rngbt also reflect an incrcssicc laiuralton with luxury goods on the pan of the prmapal dcerxstie bene Puisnes of tbe enormous sums of oil money spem on devetopmrstt by OPEC governments in recentonsequent greater preference for overseas assets, both teal and financial, would be the natural result.
Tank 2
US S
Distribution
The pattern of official foreign asset accumulation among OPEC countries8 took an unusualwhen Saudi Arabia becamea net seller.. Ihe Saudis had accounted for aboutercent of total OPEC oei official forcien investment.8 they6 billion in assets to meet cash flowpercent increase in import putchascs togetherecline in oil revenuesurrent account surplus of6 billion, compared with an averageillion annually. Nigeria and Venezuela dipped into assets to help finance current account deficits.
Kuwait.the UAE, and Iraq were the largest net Investorsheir combined accumulation of assets2 billion. Iran's official foreign assets dropped slightly last year3 billion current account surplus as the revolution0 billion toother capital outflows. These other outflows were up substantially7 but not out of line with earlier years.
TypeofltuettauHt
Continuing their attempt to increase the yield oa foreign financial holdings, OPEC official investors liquidated someillion in reserve assets and built5 billion in nonreservesecurities, investment accounts, and direct loans.
The drop in reserve assets resulted from selling off government securities and closing out long-term bank deposits; the dramatic surge in the price of gctt and an increase in short-term bankby Iraq. Kuwait, Qatar, md thepartially offset the liquidations. Despite the weak oil market and lower revenues, the OPEC members increased only slightly the proportion of assets held incashand highlyccounts.
Saudi Arabia liquidated almostillion io reserve assets8 while increasing its estimated holdings of nontesetve assets byS billion. Saudi Arabia, Kuwait, and tbe UAE were almost entirely responsible for the increase in nonreserve assets.
purchasing nearlyillion in corpotatond whole bond issues. While US corporate securities and Wat German investment accounts were favorite placements, both Saudi Arabia and ihc UAE spread Ihcir new invest men (among many of Ihc major developed couniries.
CmntHcy CompoiiiioH of Iwrtsimeitf Prompted by uneasiness about tbe US dollar. OPEC reduced assets denominated in dollars by about SS billionaudi Arabia and Venezuela were Iheollar disinreslors,3 billion worldwide. Kuwait, on Ibe other band, increased lis dollar holdings5 billioo;ercent of new Kuwaiti invesiment was placed in dollars compared wiih onlycrceniuwaili officials continued lo believe that dollar investments yield the best return in ihc medium to long term.
West German marks and Japanese yen were the most atlractive currencies to OPEC investorshe increase in deuiiche-mark-denominaied investment was reflected primarily in short-term bank deposits and noorescrvc assetsairly wide geographic basis. Iraq accountedarge share of Ihe bank deposits, while Kuwaii, the UAE. and Saudi Arabia were primarily responsible for (he increase in mark-denominalcd noo reserve assets. Investors in the yen-chiefly Iran. Saudi Aiabia. andfunds almost exclusively in short-term bank deposits because of Japanese restrictions on other types of foreign investment.
Tbe value of official OPEC gold holdings increased5 billion8 primarily because pold prices soared,6 an ounce, z; yearend. Tbe Saudis increased their official gold holdings by
-flnr.nl-
TableW TM
OPECfficial Foreign Awli. by Type1 JlH
TaMeloul
OPEC Countries: Official Foreign Awls, hy8
TMal
Ar.bu
million ounces, and five other OPEC countries together made net purchases ofounces.
Besides the increased value of goW holdings and new investment In nondollar assets,oldings in dollar terms also rose because the dollar dent eclated against other hard currencies.ollar deptcci-ation boosted the value of OPEC nondollar assets (excluding gold)6 tuition This appreciation of nondollar foreign assets more than compensated OPEC members for declines in put chasing power attributable todolbrdcprcciatHio.
localim of latrumtn
8 OPEC couttries withdrew aboutillion (net) from the United Stales, the United Kirgdom,ew West European coaairies ii favor of new investments in Japan. West Germany, and ia less developed countries. The dra-doams. led by Vencrueli and Saudi Arabia, occurred chiefly in dollar, denominated bank accounts in the United Kingdom
and ii; holdings of government securities in thetates. The decline in such assets in the United State was not quite offset by Ihe appreciation of CPEC gold holdings located here and by new invcsimcni in nonreserverimarily US corporate seeurilies. Nigeria and Libya were the only OPEC countries making net wiihdrawals from continental Europe as nhole; Nigeria faced cash flow problems in the wake of reduced oil exporl earnings and rapid import growth.
Tokyo's restrictions. Japan icccived Ihechunk of OPEC official investmenthe net increase in OPEC bcMings5ore Ihan twKe ihe flowest Germany0 million, mostly for corporate seeurilies and other nonreserve assets Other West European countries2 bilbo* ia official OPEC investment, aboutn bank
assets in LDCs, most of which consist of bilateral loans, roseillionew loans amounted to moteillion, but some bank deposits were drawn down. The new loan placements, as might be expected, were below historical levels, amounting to aboutercent of tbe amount placed
OPECAuets at8 The small amount of new foreign investment8 increased the value of the official OPEC portfolio to an1 billion asecember. Despite the continuing increase in rtonreserve assets,SIU6 billion were held in reservebank deposits, and government securities. OPEC international reserves amountedillion less than the combined reserves of the seven major non-Communist industrialUnited Stales, Japan, West Germany, France, the United Kingdom, Italy, and Canada.
The top four assetArabia. Kuwait. Iron, and thetheir share al total OPEC holdings ever so slightly as gains in the Kuwaiti and UAE holdings more than offset liquidations in the Saudi and Iranian portfolios. Asof8 these four countries heldercent of all OPEC foreign official assets.
TfpeafAma
The nonreservc share of total assets has climbed steadily fromercent at5 io nearlyercent byaudi Arabia and Kuwait continued to diversify their portfolios by increasing tbe share of nonreserve assets; corporate securities and direct loans generally yield higher returns than those offered by bank accounts and government securities. Kuwait, considered Ihe most sophisticated OPEC investor, is the only cartel member with more than
60iu portfolio in iMorcserve assets. Of the nine OPEC members with official foreign assets of SIO billion or less, only Libya has consistently increased the share of nonreserve assets in its holdings, from IS percent5 toercent
At the end
The five OPEC countries with current accountEcuador. Indonesia. Nigeria.andan average ofercent of their reserve assets In short-term bank deposits and government securities: the average for tbe surplus countries wasercent.
Official OPEC holdings of foreign corporateamountedillion, comparedillion at
Other nonreservebondnvestment accounts, andmore than any other portion of the OPEC portfolio last year; theyillion by yearend. upillionaycar earlier.
Location of Assets
The share of OPEC assets heW in developed countries dropped slightly, from an average of two-thirdsercent
. An estimatedercent of total OPEC assets were invested in the United States athe same relative share as.
The share of assets held in the United Kingdom-many of which are Eurodollar bank deposits-declined steadily fromercent4 toercent at the endhis trend reflects the movement into nonreserve assets and the decline in tbe use of sterling for oil payments.
OPEC continued to hold almostercent of its assets in LDCs, almost entirely in the form of bilateral loans.
The cartel's assets in Communist countries declined5 millionoillion orercent of the total.
Currency Composition of Assets Tbe share of total OPEC assets denominated in dollars, whicheak ofercenteclined toS. Dollar holdings in the United States accounted forercent of total dollar-denominated assets at the end of last yean dollar holdings in Great Britain accounted forercent:
Assctsdenominaled in West German marks and Japanese yen accountedercent of8 bc4dings.comparedercent
Gold. Special Drawing Rightsnd reserve positions in the International Monetary Fund madeercent of the OPEC portfolio at the end
Assets denominated in British sterling have declined steadily in recent years, claimingercent of OPEC's foreign official assets at
Carrrni mudCnpltnl Accounts Reconciliation of current and capital accounts for OPEC countries requires examination of privateas well as official transactions other lhan asset accumulation. The task i* complicated byiming problems,aps in theata. Since some inconsistencies cannot be resolved, an errors and omissions category is necessary.
et capital outflows from OPEC countries, other than additions to official foreign asset holdings,illion (seeany different types of capital movements make up this Iota'.
Debt. n: OPEC couniries repaidillion in principal onlgeria, Indonesia, Iran, and Venezuela accounted for overercent of the total.
Net Priiat* Investment in the United States and tbe United Kingdom. Private citizen* and nongovernment institutions from OPEC nations0 billion in the United States and the United Kingdom.
Subscription* lo MuliuaicraJ Aid Inaiitutioos.of SOU billione to aidsuch a* the Islamic Development Bank, the International Find for Agricultural Dmlcrpmeai. the Atab Bank for EccaocMc Dcvclcasnscal io Africa, and Ihe OPEC Special Food The primary contributors were Saudi Arabia aad Iran, accounting forercent of tbe total.
Frruaymcnls to Ik* United Stair, for Importsfor US goods, primarily military goods and services, amounted lofl) billion; Saudi Arabia accounted for almoil ibe entire amount.
Other Capital Outflow* and Error* and Omissions.illion mother usesesidual, calculated by deducting the known uses of fundi from the total sources. Included in the residual are (I) allplacements othei than official foreign asset accumulation attributed lo central banks or principal financbl institutions (for cumpie. funds placed byed companies contribute to theverseas private inwsttiKni ineounuteserther than the United State* and the United Kingdom by individuals, firms, and commctoal banks, and O) errors arid omissions Since our bfeneiationoa official. doubtless is not all inclusive, our official uses figure must beinimum. To tne exieni lhat official inveslment is actually higher ihan our estimate. Iheoutflow figure is overstated.
Weestimate that theountries badillion of investablc surplus available9 (net of gam from assetil price trends and development policies in OPEC countries indicate lha! the current account surplus for the ca.tcl reachedOIion. Oil ciport volume was about the same asut price incteases pushed revenues upaboutetceat.9 import bill, on tbe Other band, probably was only moderatelyominal terms because of massive spending cuts in Iran and slower paced devchipnxm plans in other major OPEC countries. Partly offselting the larger trade surplus and continued borrowing was an increase in oil company indeblcdncu to OPEC states of possibly
illion. This dramatic change from8 billion reduction8esult of rapid price increases, which pushed the accrued value off imp above cash receiptsoderate further increase in private and Quay-official holdings and in other uses of investsbie fuadi. our preliminary estimate is thai OPEC official foreign assetsocreascdbyn
lively, even (hough some OPEC countries probably tried lo reduce Iheir share of new investment placed in dollar-denominaicd asseis because of their concern about US inlUiiou and Ihe strength ofthedolhr. The US block on Iranian asseis incaused additional concern smorg tbe oil eipoeters about tbe safety of assets io general. Oil ministers in soom of ihe OPEC governments have used the crisis to strengthen ibc recurrent argument thai oil in the ground is the safest of all assets
Avaibbfc informal .on indicates that OPEC govern-menu continued Ihe trend toward diversification in the types of asseis purchased. Movement into Doureserre assets takes time, howe <ei. and we suspect there was'a surge in bank deposits and government seeurilies. raising the proportion of short-term reserve assets at leasthile (merest and exchange rates remained key faciors determining where funds were placed and in whai currencies Ihey were denominated. The US block on Iran's assets wilt uiuJoubtedly provide added push to conlinue the asset diversification already evident
portend growing recetpts will be
The Urge accumulation of OPEC assets in90 Prese.it oil prkevailable for investment, ch more rapidly ihan at least in the first halfrends in aisci accumulation for the Utter hah" of Ihe new year will depend upon OPECs willingness to spend ill iiKiCdted income, import price inflation, and OPECs deiite to protect the real value of oil.
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Original document.
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