Mideast firms putting oil money into emerging markets
Mon Sep 12, 2005
By Sujata Rao
LONDON (Reuters) - Armed with cash from $70 a barrel oil, Russian and Middle Eastern companies are on the prowl for acquisitions abroad and more and more of this money is being invested in companies in emerging markets.
While most of this money still flows into high-end real estate in Western capitals or into U.S. and European equity, oil-rich investors are increasingly focusing on cheaper assets in emerging economies.
Last month Turkey agreed its biggest ever privatization deal, selling a 55 percent stake in Turk Telekom to a group led by Saudi Arabia's Oger Telecom for $6.5 billion, a sale that brings in much-needed cash to bridge Ankara's widening current account deficit.
"For the first time we are seeing Middle Eastern money cruising into foreign direct investment," said Charles Robertson, emerging markets strategist at ING in London.
"The Saudi $6 billion Turk Telekom deal is the best example of FDI helping to cover a widening current account deficit which has been made worse by high oil price."
The oil boom has created a situation where purchasing power has slowly shifted from oil consuming nations to oil exporting nations.
Middle Eastern oil exporters are estimated to have netted over $1 trillion in oil revenues in the past five years. This money has been flooding from the state oil sector to banks, then to other companies which are gaining from lucrative government contracts as well as booming domestic demand for their goods and services.
Traditionally, billions of dollars of Middle East oil money were used to purchase dollar assets, mainly U.S. Treasuries.
But nowadays, analysts say, governments are not converting petrodollars into U.S. Treasuries straight away.
"To some extent money from the last oil boom was also being recycled via massive lending to Mexico, Brazil etc," Robertson said. "But this time it appears to be longer term FDI -- at least there are some examples that this seems to be happening."
Robertson cited a Saudi firm's recent $140 million purchase of a stake in South Africa's Cell C as another recent example.
THE DIFFERENCE FROM LAST TIME
The trend is fairly recent.
Data provider Dealogic estimates Middle Eastern firms concluded emerging market acquisition deals worth $9.9 billion this year, up from just $264 million in 2004.
Saudi, Kuwaiti and UAE firms have bought Western assets for years now -- owning stakes in companies such as Euro Disney, DaimlerChrysler and Ferrari. Now there is evidence of moves to emerging markets, with Turkey an apparent favorite.
UAE-based Etisalat recently paid $2.59 billion for a 26 percent stake and management control of state owned Pakistan Telecomunications Co (PTCA.KA: Quote, Profile, Research) and earlier this year bought a 50 percent stake in west African mobile operator Atlantique Telecom.
It is planning to bid in Turkey's upcoming sale of telcoms operator Telsim with a starting price of $2.8 billion, along with Saudi and Kuwaiti firms.
Russia's Alfa Group, part owner of the BP-TNK oil firm, bought into Turkcell (TCELL.IS: Quote, Profile, Research), giving troubled stake-holder Cukurova a $3.3 billion refinancing deal.
Said al-Shaikh, chief economist at the National Commercial Bank in Riyadh sees as normal the shift by Middle Eastern investors toward direct investment and away from portfolio holdings of securities such as U.S. Treasuries where yields for 10 year bonds are near all-time lows of four percent.
"Investors have become more sophisticated. They are looking for companies in emerging economies, as growth prospects are higher. And instead of just putting their money in, they are keen to influence policy and exercise control," al-Shaikh said.
"They have realized that buying shares in major (Western) companies gives only limited influence. Instead they are going for smaller firms with high prospects for growth."
And raising money has never been easier -- or cheaper. Stock indices across the Middle East have boomed, fuelling a wave of IPOs and rights issues. Stocks listed in Dubai for instance are up almost 150 percent this year.
The other factor is there are a lot of assets for sale as countries struggling to pay oil bills kick-start long stalled privatization programs.
Turkey has one of the largest privatization programs anywhere in the world and has already sold about $13 billion worth of assets so far this year -- more than the sum of privatizations in all the past decades.
Its big, increasingly prosperous population and hopes of European Union membership make it especially attractive.
DOES NOT COMPLETELY OFFSET OIL PRICE
"The fact there is oil money coming through has been very helpful to Turkey," said Merrill Lynch emerging markets strategist Mehmet Simsek. "One reason Turkey's privatization program has succeeded this time is that there is a lot of investor interest as the region is awash with liquidity."
Turkey's bond and equity markets have seen a flood of foreign fund inflows this year but analysts see this kind of cash as fickle, making markets vulnerable to a selloff.
"The FDI flows are key to improve the quality of current account financing," said Deutsche Bank economist Tevfik Aksoy.
But analysts warn the money flooding in via privatizations does not completely offset the impact of the soaring oil price.
This is because direct investments of this kind are a one-off and sustained benefits can come only by boosting exports to oil-rich nations. But investment flows are contributing to currency appreciation and this has started hurting exports.
"Once these privatizations are done, Turkey must either come up with more assets to sell or enact reforms to boost greenfield investments and exports," Aksoy said. "Otherwise we will be talking about the current account deficit for a long time yet."
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