Business: The Saudis and the Dollar

• Share

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.