The Saudis and the Dollar

A mutual dependency, tended by financial hajjis to the Gulf

Following the path that pious Muslims have trod for centuries, more than a million hajjis (pilgrims) have flooded through Saudi Arabia in the past few weeks for annual rites celebrated in the last month of the Islamic year. Observing ancient ritual, they circled the sacred Black Stone in Mecca's Kaaba, a cube-shaped shrine, and, on Nov. 11, slaughtered sheep in the valley of Mina to commemorate Abraham's willingness to sacrifice his son. Now the last of them are departing--and on their heels has come a financial hajji, W. Michael Blumenthal. As U.S. Treasury Secretaries have done since 1973, Blumenthal over the weekend made his annual visit to the desert kingdom, where he paid his respects to the moneymen who hold more of his nation's currency than any other government officials in the world.

The Saudi hoard has by now expanded to the point where it is almost beyond counting. European and American bankers estimate the nation's net foreign assets --i.e., the total amount in cash and various investments at the disposal of the Saudi Arabian Monetary Agency (SAMA), the country's central bank, and other government bodies--at $70 billion to $75 billion. The sum grows by several hundred million dollars each month, as the Saudis take in more money from sales of their oil than they can spend.

Lately, the Saudis have been trying harder to spend. After some false starts, they have settled on a coherent development program. Unlike the Iranis, who plunged into hurried development of a broad range of industries and severely strained their country's social fabric in the process, the Saudis plan to focus on just two fields, metals and petrochemicals, although on a colossal scale. For instance, at Jubail, a Persian Gulf fishing town 230 miles from Riyadh, the capital, $20 billion is being lavished on construction of a port that will be the hub of a large industrial complex that will absorb another $50 billion by the time it is completed.

While such projects will absorb more and more of the

Saudis' excess wealth, the management of the country's cash will always have vital implications for the health of the dollar and the U.S. economy. At present, about 85% of the Saudi holdings is put into dollar investments--bonds issued by the U.S. Government and American corporations, shares of stock in U.S. companies, interest-bearing dollar deposits in U.S., European and Japanese banks. And that is perhaps the main reason why the dollar retains what value it has on international money exchanges. Should the Saudis ever decide to switch any substantial part of their investments out of dollars into, say, deutsche marks or Japanese yen, the value of the dollar would plunge disastrously. The pile of dollars that the Saudis in theory could sell is more than twice as large as the $30 billion war chest of foreign money that the U.S. is amassing in order to buy up unwanted dollars and thus prop the price.

So it is wise for Treasury Secretaries to check in regularly with the Saudis and discuss politely whatever financial problems may come up. On his weekend visit, Blumenthal pleaded with the Saudis to hold down any increase in oil prices that OPEC may decree next month. The U.S. is resigned to a 5% to 10% boost, but fears that a larger raise would damage a fragile world economy. The Saudis have been muttering about how nice it would be if the U.S. would sell them bonds with an exchange-rate guarantee that could be redeemed for more than their face value if the price of the dollar in other currencies continues to fall. The U.S. reply: Washington cannot offer the Saudis bonds more attractive than those sold to U.S. citizens.

What neither side ever says is that they cannot afford to anger each other. If the U.S. is dependent on Saudi good will, the Saudis are also inescapably tied to the U.S.--and the dollar. One tie is emotional: so many Saudi officials attended college on the U.S. West Coast that they are often referred to by Americans as "the California Mafia." At a desert feast during Blumenthal's visit last year, one sheikh wearing flowing robes and looking as if he had just returned from a raid on camelback leaned over to a member of the Secretary's party and whispered: "How did U.S.C. make out last night in the football game?"

Beyond that, Saudi Arabia is a huge land with a population too small (about 5 million) to raise an effective army. Its first line of defense in a turbulent Middle East is the diplomatic and military support of the U.S., which it will jeopardize if it plays games with the dollar. Anyway, the Saudis are stuck with the buck; by now they could get out of dollars only at ruinous cost to themselves. There just are not enough marks, yen or Swiss francs available for them to buy with their dollars. Long before they converted any large portion, their sales would have driven the value of their remaining dollars down so much as to make their own reserves worth much less.

What the Saudis could do, however, is put a growing share of their monthly income from oil sales--and/or part of the interest from their present greenback holdings--into nondollar investments. So far, they have not shifted enough to hurt the dollar, though at times they have been tempted. At the height of the dollar-selling panic last month, stories floated around the currency exchanges that the Saudis were considering heavier nondollar investments. Then Jimmy Carter announced his Nov. 1 save-the-dollar program of price-bolstering purchases and high interest rates, and the reassured Saudis rushed to help out. In Paris, their buying of dollars is credited with helping raise the greenback's price from less than 4 French francs to about 4.4 now.

While the Saudis' loyalty to the dollar for the moment is firm, much mystery still surrounds their investment policy. World attention has been caught by the exploits of rich individual Saudis like Ghaith Pharaon, who bought control of the National Bank of Georgia from Bert Lance.

But the custodians of the government's money are far more conservative--and secretive. Their guiding principles:

1) No real estate. Speaking to American bankers in the U.S. last year, SAMA Governor Abdel Aziz Qoreishi explained that realty investment "raises sensitive national concerns in most host countries and has not been, we judge, welcome even in so free an economy as yours."

2) No gold. Other investors may look on the yellow metal as the ultimate safe haven for capital, but the Saudi government realizes that since gold supplies are small any buys on the scale it would make would send prices into the stratosphere.

3) No purchases of more than 5% of the stock in any foreign company. If the

Saudis did buy a bigger chunk of an American firm, they would have to report to the U.S. Securities and Exchange Commission. Since they have not, no one knows what companies they have bought into.

What then do the Saudis buy? They are known to gobble up U.S. Treasury securities, and have bought the bonds of such corporate giants as AT&T, General Motors and U.S. Steel. SAMA also puts deposits into 23 blue-chip American banks and some top foreign banks, though it limits these deposits so that they never exceed the bank's capital (in Citibank's case, the formula works out to about $2.8 billion). Overall, the Saudis told Blumenthal's delegation last year, their investments have an average maturity of only seven years, and bankers figure they are getting about an average 8% return, vs. the 11% that Kuwait is said to collect on its more adventurous investments.

One reason for the superconservative policy is that the Saudis acquired their oil wealth almost overnight--the megabucks started rolling in only after oil prices quintupled in 1973-74--and sometimes give the impression that they think it will not last. Finance Minister Mohamed Aboul-Kheil, a diminutive bureaucrat who talks as if Saudi Arabia were in need of foreign aid, argues that the surpluses will soon be eaten up by the costs of building an industrial society at home. Meanwhile, he insists, the country must keep its money in short-term investments so that it can bring it home as soon as it is needed. Many Western experts doubt that Saudi Arabia will ever find productive domestic uses for all its oil revenues, but Aboul-Kheil seems genuinely to believe that it will.

The Saudis are also painfully aware that they lack experience investing gigantic sums of money. As recently as 1974, SAMA was headed by a Pakistani. The first Saudi to hold the post, Qoreishi is a graduate of U.S.C., but he had no previous banking experience. Western diplomats who deal with them say the Saudis fear that if they go into long-term investments they will be conned by fast-talking flimflam artists. Richard Erb, an economist who once watched Saudi policy for the U.S. Treasury, adds that the Saudis will not buy gold because they are afraid of being seen as "dumb Arabs" who do not know what else to do with then" wealth.

In fact, the Saudis are greeted with extreme respect by Western bankers, and they are acquiring financial expertise fast. So far, their investment policy has been so favorable to the U.S. that one London banker exclaims: "Saudi Arabia is the 51st state of the Union." A more accurate metaphor for Saudi-U.S. financial dealings would be the relationship of a banker to an improvident borrower. The banker knows he can force the borrower into bankruptcy by calling his loans, but he would get little or none of his money back. Still, the borrower had better make sure that the banker stays friendly. So Secretaries of the Treasury will continue to make an annual pilgrimage to Saudi Arabia, their fingers crossed.

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