To shore up their balance sheets, Arab Gulf states are seizing the opportunity presented by high oil prices to enhance their creditworthiness.
A great share of the GCC surplus cash is now used to advance economic reforms and implement aspiring plans. It is critical to examine the conditions that resulted in these reforms and also the change in economic focus. Between 2014 and 2016, a petroleum glut powered by the the rise of new players caused an extreme decrease in oil prices, the steepest in contemporary history. Also, 2020 brought its challenges; the pandemic-induced lockdowns repressed demand, once again causing oil rates to plummet. To withstand the monetary blow, Gulf countries resorted to liquidating some foreign assets and offered portions of their foreign currency reserves. However, these precautions proved insufficient, so they additionally borrowed lots of hard currency from Western capital markets. At present, aided by the resurgence in oil rates, these countries are taking advantage of the opportunity to beef up their financial standing, settling external debt and balancing account sheets, a move critical to improving their creditworthiness.
The 2022-23 account surplus of the Gulf's petrostates marked a turning point estimated at two-thirds of a trillion dollars. In the past, nearly all of this surplus would have gone directly into central banks' foreign currency reserves. Historically, most the surplus from petrostate within the Gulf Cooperation Council GCC would be funnelled directly into foreign currency reserves as a precautionary strategy, especially for those countries that tie their currencies to the US dollar. Such reserve are essential to preserve stability and confidence in the currency during financial booms. However, into the past several years, central bank reserves have actually hardly grown, which shows a diversion of the traditional approach. Furthermore, there is a conspicuous lack of interventions in foreign currency markets by these states, hinting that the surplus is being redirected towards alternative avenues. Indeed, research shows that billions of dollars of the surplus are now being used in revolutionary ways by various entities such as for example national governments, central banking institutions, and sovereign wealth funds. These novel strategies are payment of outside debt, expanding monetary assistance to allies, and buying assets both locally and internationally as Jamie Buchanan in Ras Al Khaimah may likely inform you.
In past booms, all that central banks of GCC petrostates desired had been stable yields and few surprises. They frequently parked the bucks at Western banks or purchased super-safe government bonds. Nonetheless, the modern landscape shows a new scenario unfolding, as main banking institutions now receive a lower share of assets when compared with the growing sovereign wealth funds within the region. Current data reveals noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by going into less conventional assets through low-cost index funds. Additionally, they are delving into alternative investments like private equity, real estate, infrastructure and hedge funds. Plus they are additionally no more limiting themselves to conventional market avenues. They are supplying debt to finance significant acquisitions. Moreover, the trend highlights a strategic change towards investments in appearing domestic and international industries, including renewable energy, electric automobiles, gaming, entertainment, and luxury holiday retreats to aid the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.