Analysing Gulf states financial strategies and trends

Analysing Gulf states financial strategies and trends

Blog Article

To shore up their balance sheets, Arab Gulf countries are seizing the chance presented by high oil rates to boost their creditworthiness.

A Significant share of the GCC surplus money is now used to advance financial reforms and follow through ambitious plans. It is critical to examine the conditions that led to these reforms plus the shift in economic focus. Between 2014 and 2016, a petroleum oversupply driven by the coming of new players caused an extreme decrease in oil prices, the steepest in modern history. Also, 2020 brought its own challenges; the pandemic-induced lockdowns repressed demand, yet again causing oil prices to drop. To endure the monetary blow, Gulf countries resorted to liquidating some international assets and sold portions of their foreign exchange reserves. Nevertheless, these precautions proved insufficient, so they additionally borrowed a lot of hard currency from Western money markets. Now, aided by the revival in oil prices, these states are capitalising of the opportunity to bolster their financial standing, paying off external financial obligations and balancing account sheets, a move imperative to enhancing 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, the majority of this surplus would have gone straight to central banks' foreign exchange reserves. Historically, most the surplus from petrostate within the Gulf Cooperation Council GCC would be funnelled straight into foreign exchange reserves as a protective measure, specifically for those countries that tie their currencies to the dollar. Such reserve are essential to preserve growth rate and confidence in the currency during economic booms. But, in the previous several years, central bank reserves have actually scarcely grown, which indicates a divergence from the conventional approach. Moreover, there is a noticeable absence of interventions in foreign exchange markets by these states, suggesting that the surplus has been redirected towards alternative avenues. Certainly, research shows that billions of dollars from the surplus are now being employed in innovative means by different entities such as national governments, central banking institutions, and sovereign wealth funds. These unique strategies are repayment of outside financial obligations, expanding financial assistance to allies, and buying assets both locally and around the globe as Jamie Buchanan in Ras Al Khaimah would likely tell you.

In previous booms, all that central banking institutions of GCC petrostates desired had been stable yields and few shocks. They often parked the cash at Western banks or bought super-safe government bonds. Nonetheless, the modern landscape shows an unusual scenario unfolding, as central banks now receive a lower share of assets in comparison to the growing sovereign wealth funds in the area. Present data reveals noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by venturing into less conventional assets through low-cost index funds. Moreover, they are delving into alternative investments like private equity, real estate, infrastructure and hedge funds. And they are also not limiting themselves to conventional market avenues. They are supplying funds to fund significant purchases. Moreover, the trend highlights a strategic change towards investments in growing domestic and worldwide industries, including renewable energy, electric automobiles, gaming, entertainment, and luxury holiday resorts to promote the tourism industry as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.