On Saturday, we argued that if one focuses narrowly on official FX reserves, the effect may be to underestimate the total size of accumulated petrodollar assets.
As Credit Suisse notes, "oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in sovereign wealth fund assets." And while the composition of the SWF asset pool is likely to be far more multifarious than the makeup of official FX reserves making it more difficult to assess i) how quickly they could be liquidated in a pinch, and ii) what effect that liquidation would have on USD assets, especially USTs, the important point is that if we have indeed entered a new era in which crude and commodities are destined to trade at comparatively depressed levels, the pressure on exporters to adapt to the new reality could force them to begin drawing down the vast store of SWF assets. Thus, if one wants to understand how large the petrodollar unwind could potentially be in the worst case scenario, it’s important to take stock of SWF assets.
With that in mind we present the following infographic from TheCityUK which should help to show how critical sovereign wealth funds are to global investment and liquidity.
And some further color on the effect low crude prices are having on SWF asset accumulation, from the report:
The first three months of 2015 only saw a marginal increase in SWF assets in the headwind of falling oil prices. TheCityUK expects that SWFs’ assets will increase by 4% in 2015 to $7.4 trillion, well below the 12% average annual growth seen over the previous five years. Flows into some funds could turn negative. Growth in SWFs’ assets is closely related to the price of oil, as around 60% of SWFs’ assets originate from commodity exports. For years, major oil producing exporters funneled foreign exchange reserves into funds aimed at stabilising economies and paying for pensions. The fall in oil prices since mid-2014 has left some of these countries with a cash shortfall. If oil prices remain low for an extended period, some oil rich countries may divert money from SWFs to stabilise their domestic economies and finance budget shortfalls. Slower GDP growth in China is also likely to constrain growth in assets during the year.