Libya Shunning the Dollar?

This post is by Rachel Ziemba, filling in for Brad Setser. I want to thank Brad for giving me the chance to guest blog again.

With oil futures staying above $130 a barrel - the links between dollar and oil are under the microscope. Overall, some recent evidence seems to indicate that despite protests to the contrary, oil exporters are still buying dollar assets and that dollar weakness may have delayed ongoing diversification away from the dollar. But a number of oil exporters including QIA and ADIA might have a dollar share of less than 40%. All of which makes some speculation about Libya’s dollar assets rather interesting. Libya alone is a relatively small oil producer - it is among a group of countries producing between 1.5-2 million barrels of oil a day but its investment decisions are indicative of broader trends.

Note: The latter part of this post was truncated - it has now been replaced.

Collectively four African countries (Algeria, Libya, Nigeria and Angola) produce under 8 million barrels a day of oil - somewhat less than Russia or a bit more than that produced by GCC countries aside from Saudi Arabia.

So far African oil exporters have had amongst the most conservative asset allocations. For the most part this was of necessity, Nigeria and Algeria had a lot of debt to pay off. And sanctioned Libya kept most of its wealth in very short-term bank deposits though it had some equity stakes, mostly in Europe. So far only Libya has made the move to higher yielding assets, creating the Libya’s Investment Authority (profile here), grouping together six pre-existing funds. The legacy funds had assets totaling around $16 billion including the Libyan Africa fund, Although its asset allocation was never disclosed, it likely takes equity stakes and otherwise invests in higher yielding assets than the deposits that dominate the holdings of the Central Bank.

About a week ago, an article by Jay Solomon in the Wall Street Journal suggested that Libya was cutting trade in US dollars, preferring the Euro or yen. If that’s the case, this would make it the second country after Iran to ask its trading partners to reduce dollar use in oil transactions (for now at least Libya’s non-hydrocarbon exports are pretty minimal). But its the currency where oil wealth is saved that is more significant that what currency is used for invoicing. Solomon also suggested that Libya’s investment fund (AUM ~ $50 billion) was halting investments in the U.S.

But its not clear that Libya ever really started investing in the U.S. (it did have some indirect stakes even in 2000/01 and a lot of its bank deposits may be in dollars). Like many sovereign funds, Libya’s investment plans have been relatively opaque. While initial statements suggested Libya might choose its foreign investments with an eye to Libyan economic development - that is, investing in companies (especially U.S. ones) that might invest in Libya, there haven’t been any noticeable stakes - to my knowledge.

Ties with the U.S. have been cooling for some time. Libyan officials suggested back in February that they were wary of investing in the US given the investment review process. Shokri Ghanem : It’s a very active market, but it is full of politics and unpleasant actions. In Europe, politics is not very much interfering in trade.’’

The Libyans have been unhappy about U.S. law allowing American victims of state-sponsored terrorism to seize Libyan assets in the U.S. and the assets of companies doing business with Tripoli.

Historically, most of Libya’s equity was in Europe. In 2001, equity stakes of the Libyan government were thought to reach $8 billion (stakes included 5% of Banca di Roma, $1 billion in U.K. real estate and stakes in 72 companies in some forty countries).

Furthermore, Libya is among those chasing investments opportunities in Asia and forging ties with GCC funds.

Until 2006, the central bank saved most of its foreign assets - its reserve growth was almost that of its current account surplus (net savings). Now the gap has widened. Deposits roughly equaled reserve growth and very little showed up in the U.S. data (which covers African oil exporters not Libya alone).

Data: IMF, US Treasury, BIS, my calculations

Most of its savings were in very liquid assets - short term deposits primarily. With the exception of the first quarter of 2006 when reserves fell (perhaps due to some payment?) Libyan reserve growth has closely tracked its deposits with banks reporting to the Bank of International settlements (BIS). In 2007, this shifted. Libya’s deposits with BIS banks grew much slower in the last three quarters of 2007 (on average) than in quarter since 2004. This could indicate a shift to different assets, or fewer savings. The central bank too might be changing its asset allocation. A decrease in growth of Libyan deposits would be consistent with a shift away from bank deposits to longer-term bonds or equity.

Source: IMF, Central Bank of Libya, EIA, my calculations (note the Q1 reserves figure is an estimate).

While Libya has begun borrowing from foreign banks, so far net borrowings are relatively low, they doubled to 1 billion between Q3 and Q4 of 2007.

Despite its large population and relatively small oil output (oil output/capita ratio is relatively similar to Oman which is the highest of GCC countries, Libya has been more conservative in scaling up domestic spending. About half of its oil revenues being saved rather than spent.

But Libya is now spending more, saving a smaller share of its oil revenue. Like some other sovereign funds, especially that have an economic development mandate, Libya’s fund has invested at home as well as abroad. Libya is partnering with several foreign oil companies to double its output to 3million barrels per day.

The following shows what share of each barrel of oil produced is required to pay for imports (broadly defined). The remainder is saved.

If trends continue, Libya may be spending at a faster pace than Kuwait, the most conservative of GCC countries. Though its import bill remains far less than the UAE. After all, Tripoli is not sprouting new buildings at the pace of Dubai or Abu Dhabi.

The Libyan government has only just started to invest in infrastructure projects and most investment has focused on the energy sectors. It plans though to invest as much as $155 billion over the next five years in a variety of sectors. to develop the non-oil sector. President Qaddafi also suggested some of the wealth might be redistributed to the population – already government wages have risen. Redistributing wealth might mean both less investments abroad and more foreign investment in private hands. It might though help reduce some of the domestic imbalances.

Overall, where global markets are concerned, the Libyan Investment Authority is still small. $50 billion dollars places it near the bottom of the top 10 sovereign wealth funds. But its decisions are reflective of broader trends. While the LIA may be wary of taking direct equity stakes in the U.S. for a variety of reasons, Libya’s holdings of U.S. assets are still probably significant, though they are likely slowing on a flow basis. In more ways than one, Libya is trying to catch up in the investment game.