The fate of oil-rich billionaires doesn't often elicit much sympathy among everyday investors but the waning fortunes of foreign buyers of U.S. assets are worth watching closely. That's because foreign demand for American assets is waning as problems at U.S. banks continue to tarnish America's long history as the globe's favorite investment spot.
RIYADH, Saudi Arabia (Reuters) — The Kingdom Holding Company, owned by the Saudi billionaire Prince Walid bin Talal, posted a $8.26 billion net loss in the fourth quarter after a drop in the value of its assets, including a substantial stake in Citigroup.
The earnings announcement, which came after the Saudi stock exchange’s close, could add to investors’ concern on the impact of the global crisis on local companies. The company is also the largest private shareholder on the Saudi exchange.
“The loss is shocking,” said Ibrahim al-Alwan, deputy chief executive at KSB Capital Group.
There was the usual uproar last year when sovereign wealth funds and deep-pocketed Asian and Middle Eastern investors moved in to invest in U.S. banks at fire-sale prices. Unfortunately, those investors are taking hefty losses now when most large pools of capital seem to have dried up (except in the U.S. Treasury). Also, there are worrying signs that foreign buyers today are becoming less inclined to buy American debt. As researchers at CreditSights recently noted (via Research Recap), demand for U.S. securities fell in November, with foreign investors selling a net $22.88 billion, the biggest net monthly sales in two decades. For more, see the always excellent Brad Setser today when he asks, "Should the US worry about the drop in foreign demand for US long-term assets?" Some highlights:
If the US weren’t the US, I suspect analysts would now be worried about a fall in the quality of financing for the US external deficit. The US external deficit is increasingly financed at the short-end of the curve (usually a danger sign) and by the sale of the United States existing portfolio of external assets, not by the sale of long-term debt.
The robustness of the dollar will likely help reduce the threat of a major dislocation, but:
At the same time, it is risky to finance a large external deficit with short-term debt. Even for the US. If the US deficit starts to head back up again — as, for example, the effect of the recent fall in oil prices wears off and a large fiscal stimulus in the US stimulates the world economy — without a shift in the composition of inflows, there would be cause for concern.
Setser rightly wonders how long the world's big holders of current account deficits can continue to count on financing help from abroad in the post-crisis world. It's a question worth keeping in mind.