Global liquidity deluge

The proportion of oil wealth reinvested in the world economy is increasing as oil-rich states channel money into sovereign wealth funds (SWFs) rather than government securities in a bid for higher returns.  This wave of liquidity may be contributing to the global surge in asset prices -- from London properties to Chilean copper.

The secretive Abu Dhabi Investment Authority (ADIA) is one of the biggest government investment agencies in the world. Founded in 1976, it manages the emirate's excess oil reserves. It is considered to be the world's second-largest institutional investor, behind only the Bank of Japan.

High oil prices are allowing other countries to fill their coffers. Kuwait and Norway have followed Abu Dhabi's lead in creating SWFs. And Russia, which was nearly bankrupt a decade ago, is planning to put around 10% of its 357 billion dollar official reserves into a Future Generations Fund. Elsewhere, China's enormous trade surplus is producing rapid growth in its dollar reserves as the country seeks to hold down the value of the Chinese currency by purchasing dollars from Chinese exporters.

The Institute of International Finance has tried to figure out how these countries invest their petrodollars. It is not easy because many are very secretive. However, the organisation calculates that over the five-year period 2002-06, the members of the Gulf Co-operation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- had export earnings in excess of 1.5 trillion dollars, or more than double the previous five years. Of this, about 1 trillion dollars was spent on imports.

While a substantial fraction of the remainder may have gone into US Treasuries, the financial institute points out that a growing share of Gulf capital is going into direct investments in Asia, including major infrastructure. A great deal of Gulf money may also be present in private equity groups.