DUBAI (Khaleej Times) -- The Persian Gulf Cooperation Council (PGCC) countries, riding the crest of unprecedented economic prosperity underpinned by soaring oil revenues, have surpassed even China's mammoth $1,100 billion of foreign reserves to register a record $1,600 billion in foreign assets, a new report from the Institute of International Finance said.

According to financial experts, given the huge inflow of cash due to higher crude prices in the global markets, the current account surplus of the six Persian Gulf countries will soon touch the $3 trillion mark.

"The most formidable challenge facing the PGCC states is dynamic management of their reserves, which are likely to soar to an astronomical $3 trillion, larger than all of Asia, by the end of the decade. However, handling the massive wealth in a prudent way poses a big challenge," said Mohsen Fahmi, from the U.S.-based Moore Capital Management, while addressing a conference on “Enriching the Middle East's Economic Future” in Doha recently.

While the Institute of International Finance (IIF) report attempted to assess how the PGCC countries had deployed their "oil windfall" in recent years, Fahmi urged PGCC countries to use these reserves productively within the region and globally. "To invest this much money ($3 trillion), you have to be a leader. So, try and invest in avenues like education," Fahmi said.

Citing an International Monetary Fund (IMF) report on the region, he said with the oil income of the PGCC states increasing due to higher crude prices, their spending also increases. However, before you invest in setting up centers of higher learning like a university, invest in primary and secondary education, since universities would be requiring qualified teachers and quality students, he said.

Making a comparison between the earlier oil booms in the 1970s and 80s and the current one, Koch-Weser, a former German deputy finance minister and presently vice-chairman of Deutsche Bank, said that the former did not have any lasting impact on the region since they were short-lived. "The current boom is radically different in the sense that the PGCC states are investing in crucial assets like social, financial, and physical infrastructure and creating a social safety net. And a noticeable shift in investment is being witnessed and it is flowing eastwards and not westwards, as has been the case earlier."

Koch-Weser said that it is expected that over the next five years, Persian Gulf investors will pump close to $250 billion worth of investments in Asian nations.

The IIF report noted an "extraordinary deficiency" of information on the capital flows and foreign asset holdings of the PGCC's members, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. As well as traditional dollar investments, the IIF said evidence also suggested the six countries had "a strong interest in investments in emerging markets, particularly in the Middle East region and east Asia." The UAE, Saudi Arabia, and Kuwait account for the bulk of the PGCC's $1,550 billion of foreign asset holdings, according to the IIF. The overall holdings represented 225 percent of the PGCC's gross domestic product while China's foreign reserves represented 42 percent of gross domestic product (GDP). More generally, the IIF said that private capital flows to emerging markets were on track to match last year's record of more than $550 billion, a sign of a generally positive economic environment.

Josef Ackermann, chairman of the IIF's board of directors and of Deutsche Bank's management board, said there were vulnerabilities in the economic outlook.

"There are risks and uncertainties and it is especially important at this time that borrowers and investors alike pursue prudent risk management," he said. William Rhodes, senior vice chairman of the IIF and of Citigroup, added: "Due to high levels of liquidity and the chasing of yield, we are seeing a lack of differentiation in the pricing of various financial assets in global markets Wednesday. The time has assuredly come when investors need to differentiate much more carefully between various types of risks, and to price risks according to fundamentals."

Ackermann said the scale of the private sector's investment in emerging markets meant it had a major role to play in crisis prevention.

The IMF estimates that annual current account surpluses could rise above $300 billion as long as crude oil prices average $60 a barrel, meaning that almost a trillion dollars of Arab petrodollars could well “seep” into the global markets. "Yet, unlike the situation in the 1970’s, petrodollars will not be passively recycled via international money center banks into Latin America," said Matein Khalid, an investment banker based in Dubai.

"Persian Gulf petrodollars have stimulated an asset bubble in the PGCC and peripheral. Arab stock markets and reinvented property finance in the PGCC have led to a proliferation of new funds, merchant banks, mergers, and acquisitions in blue chip listed Western companies (as Dubai Ports World (DP World) proves, along with all their attendant political fallout). They are increasingly deployed in Asian emerging markets such as India, Pakistan, Malaysia, and China," he said.