Market and product

ADD one more thing likely to fuel market paroxysms in the months and years ahead: Oil exporters liquidating their rainy-day funds to buffer their economies against anaemic crude prices.

The International Monetary Fund estimates oil exporters holding $4.2-trillion in global equities, bonds and currencies may be forced to shed nearly $1-trillion of their assets over the next five years to fill emptying government coffers.

Given weak global growth, gains in energy efficiency and a massive gap between the available supply of oil and demand, economists are predicting a long period of soft oil prices.

Although some of those oil-fund sales will likely be offset by oil-importing countries buying assets, those mass liquidations could foment turbulence in markets across the globe."

A substantial change in the path of asset accumulation by sovereign wealth funds will likely have a direct effect on financial markets," say economists Rabah Arezki, Adnan Mazarei, and Ananthakrishnan Prasad in a new IMF blog post.

Markets are already on edge amid tectonic shifts in the global economy. Major emerging market economies, including the world’s number two economy, China, are slowing or shrinking. The US Federal Reserve is preparing to raise rates for the first time in almost a decade. Market bottlenecks, rising risk aversion and falling reserve holdings are inflaming investor jitters and fuelling volatility.

That’s why any big moves can amplify sell-offs. The IMF estimates oil exporters’ sovereign wealth funds will have to sell off roughly $250bn in assets this year alone.

Even though the US has the deepest markets and the American economy is expanding at the fastest rate in nearly a decade, mass oil-fund liquidations could create havoc in the US.

Oil-exporters are the fourth-largest owners of US debt and private equities, holding nearly $300bn of US Treasuries alone. Fed economists estimate that if net foreign official inflows fell by $100bn in a month, it could immediately drive up five-year Treasury rates by up to 0.6 percentage point.

While oil-exporting countries might resist the temptation to raid their wealth-fund piggy banks to cover rising budget deficits, the IMF economists aren’t betting on it.

"The low-price environment is likely to test the relationship between governments in oil-exporting countries and their sovereign wealth funds," they said. "Pressures to draw down on sovereign wealth funds’ assets will probably rise."