Gulf Arabs put brakes on buying spree, await bargains

By Daliah Merzaban and Simon Webb - Analysis

DUBAI/ROME (Reuters) - Gulf Arab exporters awash with cash from record oil income have put the brakes on foreign asset buys as the global credit crisis promises more bargains later and the political spotlight falls on how they invest.

Economists say the battle against domestic inflation in the world's top oil-exporting region is capping spending at home, leaving sovereign funds that invest much of the surplus oil revenue struggling to find a profitable home for their money.

"They are doing a little bit of hoarding right now while they take stock of the situation," said John Sfakianakis, chief economist at SABB Bank, HSBC's Saudi affiliate.

"For two years they were on a buying spree. But there is an anticipation by sovereign wealth funds that financial assets will depreciate further as credit turmoil spreads in the West."

Acquisitions outside of the region by Gulf Arab buyers more than tripled to $89.13 billion in 2007 compared with the year earlier, according to London-based research firm Dealogic.

But buys slowed to $19.8 billion in the first quarter, down over 30 percent from the fourth quarter despite some big-ticket deals that helped shore up Wall Street financial institutions.

Growing sovereign fund acquisitions have raised concern among U.S. lawmakers about foreign influence and control over assets and questions as to whether investments are politically motivated. This may have made Gulf funds more cautious.

PRUDENT SPENDING

Aside from political scrutiny, funds have also taken some pain from their investments and are treading carefully until they get a better idea of whether the credit crisis has hit its nadir.

Citigroup and Merrill Lynch shares have lost about 20 percent each since Kuwait's sovereign fund and Saudi billionaire Prince Alwaleed bin Talal agreed in January to invest at least $5 billion in the U.S. banks.

"After initial forays, they've gotten their fingers burnt quite badly," said Ala'a al-Yousuf, chief economist in London at Gulf Finance House. "It showed that the worst was not over and they were a bit too hasty in buying into these institutions."

The massive transfer of wealth into the region from higher oil revenues has already unleashed startling economic growth among the Gulf's core OPEC members. Gulf country economies doubled in size from 2002 to 2006.

With crude prices reaching a record $117 a barrel, Gulf oil and gas revenues look set to come in at a new record this year, touching $435 billion versus about $380 billion last year, according to SABB estimates.

The price of U.S. oil futures has averaged $99.60 a barrel to date in 2008, up from $72.36 last year.

But government spending at home has not risen at the same pace as revenues in the Gulf as officials look to avoid swamping their economies, where they are already battling decades-high inflation. Currency pegs to the dollar have forced central banks to cut interest rates in line with the U.S. Federal Reserve even as they struggle to contain rising prices.