In the days of the commodity boom a few years ago, oil-rich nations and their petrodollar wealth were the darlings of the World Economic Forum.
A panel that included Kuwaiti, Saudi and Russian sovereign-wealth fund officials was one the hottest tickets at Davos in January 2008, just before oil prices surged to $150 a barrel. It was a time when crude producers were accumulating billions of dollars in debt and equities, plus real estate, sports teams and other trophy assets. So influential were the fund managers that a group of bank chiefs told them behind closed doors at the Swiss resort to become more transparent, or risk antagonizing American legislators.
Now, with oil below $30 a barrel, the situation has reversed. Instead of buying U.S. Treasuries, British department stores and French soccer teams, producing countries are selling, helping depress already-spooked markets. Only a handful of wealth-fund heads are scheduled to appear at the 2016 annual forum of the rich and powerful. And not one panel is devoted to the topic.
"They are selling, they are selling a lot," said Paolo Scaroni, deputy chairman at Rothschild & Sons and a former head of Italy’s largest oil company, ENI SpA. "The selloff will continue in 2016 because oil-rich countries need to finance" their spending.
Across the Middle East, central Asia, Africa and Latin America, governments are tapping the reserves accumulated during the good times. Petrodollars are pouring out of a myriad of vehicles: sovereign wealth funds, stabilization funds, development funds and the foreign-exchange reserves sitting in central banks.
To be sure, petrodollar-stocked government funds are still a influential force in global finance, accounting for about 5 percent to 10 percent of global assets. Nor is the selling unexpected: Stabilization funds, for instance, are designed to grow during the boom years and help governments keep up spending during the lean times.
Yet the magnitude of the declines has surprised many who help commodity countries manage their wealth. Saudi Arabia, Qatar and Kuwait "are all withdrawing money," said Alberto Gallo, head of macro credit research at Royal Bank of Scotland Plc. "Petrodollars are becoming petropennies."
Gallo has a point: the gross flow of petrodollars into the global economy last year fell to as little as $200 billion, down from nearly $800 billion in 2012, according to the bank.
Market Sentiment
While wealth fund assets aren’t big enough to move markets alone, they can have an impact on market sentiment. Royal Bank of Scotland said in a note to clients this month that the selloff is potentially reducing "the demand for fixed-income assets, which was a significant portion of major oil exporting sovereign wealth funds’ growing investments over the past decade."