Ambrose Evans-Pritchard
World asset markets have lost their fairy godmother. Vast global flows of recycled petrodollars and investment capital from the Gulf are drying up.
The Gulf states and Saudi Arabia have accumulated $US6 trillion ($8.8 trillion) of assets in 11 different sovereign wealth funds. They have built up a further $US1.7 trillion of foreign exchange reserves held by their central banks.
This source of global capital is twice the size of China’s declared reserves and wealth funds combined. It has acted as a sort of giant carry trade for years, juicing sharemarkets, holding down international borrowing costs, helping Westerners live beyond their means and turbocharging excesses in US private credit.
“It is almost certain they will now be pouring less funds into the global system, and it’s entirely possible that some countries will need to draw down wealth if things get much worse,” said Ken Rogoff, a Harvard professor and former chief economist at the International Monetary Fund.
A slowdown in outflows is one thing; a sudden reversal and panic-driven outflows would be quite another, sending tremors through the global investment universe at a time when bond markets are already under stress and the US is pushing its luck with runaway fiscal deficits near 8 per cent of GDP as far out as the 2030s.
US President Donald Trump can kiss goodbye to $US1.4 trillion of investment in US semiconductors, quantum computing, biotech, energy, defence and AI infrastructure promised by the United Arab Emirates. Saudi Arabia’s trumpeted $US1 trillion of protection money is not going to materialise either.
Right now, the bailouts are going the other way. Scott Bessent, the US treasury secretary, says he backs an emergency dollar swap line (the ability to swap currencies at minimal cost for US dollars) for the uber-rich Emirates – to the consternation of MAGA and the America First movement.
He revealed that several states in the Gulf and Asia had been looking for a liquidity backstop. This is a bizarre and unsettling development on multiple levels.
“The UAE says they have over $US2 trillion of assets so why can’t they cover their own needs?” said Brad Setser, a former crisis firefighter at the US Treasury who now tracks global capital flows at the Council on Foreign Relations.
Bessent said intervention would safeguard the currency markets and avert a disorderly sale of US assets as the UAE scrambles to raise funds quickly.
The tragedy for the Gulf is that the fast-growing and diversified economy built with such success on what was mostly empty sand in the 1990s has been so carelessly set back a generation by Trump’s global vandalism.
He is himself a former wolf-pack speculator, the ultimate poacher turned gamekeeper, now serving a White House where nothing is ever true, so it is difficult to know what is spin, dark art, and legerdemain.
But the implication seems to be that lost foreign earnings and capital flight in the Gulf are together starting to threaten dollar currency pegs and the stability of the regional banking system. Qatar, Abu Dhabi and Kuwait have all been issuing dollar bonds quietly in private placements in recent days.
The UAE’s central bank has been caught flatfooted because it has cut its liquid holdings of foreign bank deposits since late 2004, and rotated much of its reserves into illiquid foreign investments to gain higher yield.
The Gulf’s sovereign wealth funds are even less liquid. You cannot cash in a chunk of Canary Wharf, the Empire State Building or a Virginia data centre to raise instant money.
Any attempt to do so at scale would risk detonating the simmering crisis in US private credit and cause it to ricochet back into a US banking system that looks safe on superficial metrics but is in reality exposed via incestuous linkages.
Qatar and the UAE both have big stakes in Blue Owl Capital, currently facing a redemption crisis. Gulf finance is inextricably commingled with the whole $US1.7 trillion nexus of US dark-book lending (private credit).
Jason Tuvey, from Capital Economics, said the war’s sledgehammer blow to the booming tourist and transport hubs of the Emirates – worth 25 per cent of GDP – is even larger than the hit to its oil and gas revenues, greatly compounding the loss of foreign earnings.
Hotel occupancy rates in Dubai have dropped to 20 per cent. Flight traffic through the Emirates has dropped by almost half. The large re-export trade in non-oil goods has been paralysed. The aggregate effect is akin to an economic heart attack.
Bessent said the lifelines could come either from a dollar swap line from the Federal Reserve, or from the US Treasury’s exchange stabilisation fund – two very different things. The comments are astonishing.
“The stated foreign exchange reserves of the UAE’s central bank are larger than the US Treasury’s entire stabilisation fund,” said Setser.
“These are swap lines for opaque sheikdoms that are not democracies, don’t have transparent figures, don’t sign up to common Basle frameworks on bank regulation and were, until recently, promising all these projects in the US. There are very serious issues here,” he said.
Well, indeed. Apart from the dangers of a liquidity crisis at the epicentre of petrodollar finance, this is tantamount to rotating US taxpayer loans through known money-laundering hubs back into what has been alleged to be shady sweetheart deals for the Trump clan and his wider syndicate.
Setser said that, if pressure on the US dollar funding markets is really so serious that Washington fears a repeat of the Lehman crisis in 2008, which he struggled to believe, then the foundations of the dollar system as we know it were in question.
Saudi Arabia, increasingly the Gulf’s poor relation, is going to face a reckoning whatever happens. “They were in budget trouble even before the war began. They’ll have to borrow up to the wazoo, even more than they are doing already,” he said.
Once the war is finally over and traffic through the Strait of Hormuz returns to normal – elusive as long as Trump still thinks he is winning – the Gulf states will have to spend a chunk of their wealth rebuilding ports, plants and about 60 oil and gas facilities damaged by Iranian attacks.
They will have to build long and well-defended pipelines and freight infrastructure to break reliance on Iran’s Hormuz tollbooth, sinking yet more money into what may become stranded energy assets as Asian and European economies race to free themselves from geopolitically toxic oil and gas.
They will have to replenish their depleted munitions, invest in an anti-drone wall and frantically rearm, having learnt that the US cannot defend them, all too aware that Trump will probably cut and run, as he did in Afghanistan and Ukraine, leaving allies in the lurch.
They will have to go back to the drawing board and rethink their shattered business model. “It is the reputation of the Gulf states as a global hub and a fulcrum of the world economy that is under threat,” said Rohan Advani, from the Arab Centre in Washington.
Advani said these states had discovered how little purchase they really have over this White House, which treats them chiefly as “a piggy bank to draw from at will”.
Others go further. Professor Abdulkhaleq Abdulla, a political scientist at Emirates University, says his country should jettison the US defence umbrella before it does more harm.
“It is time to think about closing the American bases: they are a burden, not a strategic asset,” he said.
The tragedy for the Gulf is that the fast-growing and diversified economy built with such success on what was mostly empty sand in the 1990s has been so carelessly set back a generation by Trump’s global vandalism.
