Asymmetrical Information

From the desk of Winterspeak:

Folly

I recently wondered whether the investment boom in Dubai was folly, consumption, or investment. It seems that the money financing much of the Middle East has come from Saudis rich on oil money.

The first pillar is liquidity: OPEC members have earned around $1.3 trillion in petrodollars since 1998, according to the Bank for International Settlements. The extra liquidity injected into the gulf economies by the oil price hike since 2002 is estimated at around $300 billion by HSBC. Some of this money has been spent on building up foreign currency reserves and on the acquisition of foreign companies, such as P&O. Arab takeovers of European and U.S. firms totaled $30 billion last year. Some money has even been invested in hedge funds and gold. However, a great deal has stayed in the gulf region.

On the one hand, the kind of speculation described in the article is clearly mania. On the other hand, Saudi and the UAE, for all their flaws, are countries with fairly strong property rights where investment can expect to earn a return. Surely they should be expected to grow quickly.

However, it seems that the bubble has popped, with shares being dramatically lower than they were a few months ago. However, I doubt that this will effect real estate or investment in the region, that money is in government hands and therefore quite insulated from market fluctuations.

Posted by Winterspeak at March 20, 2006 8:04 PM | TrackBack | Technorati inbound links