To shore up their balance sheets, Arab Gulf countries are seizing the chance presented by high oil prices to improve their creditworthiness.
In previous booms, all that central banks of GCC petrostates wanted was stable yields and few surprises. They often parked the bucks at Western banks or bought super-safe government bonds. But, the modern landscape shows a new scenario unfolding, as main banking institutions now receive a lesser share of assets compared to the growing sovereign wealth funds within the region. Present data uncover 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 personal equity, real estate, infrastructure and hedge funds. And they are additionally no further restricting themselves to conventional market avenues. They are supplying funds to fund significant purchases. Moreover, the trend demonstrates a strategic shift towards investments in growing domestic and international companies, including renewable energy, electric automobiles, gaming, entertainment, and luxury holiday resorts to support the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.
A great share of the GCC surplus cash is now used to advance financial reforms and follow through ambitious plans. It is important to research the circumstances that led to these reforms plus the shift in economic focus. Between 2014 and 2016, a petroleum oversupply powered by the emergence of the latest players caused a drastic decrease in oil prices, the steepest in contemporary history. Also, 2020 brought its challenges; the pandemic-induced lockdowns repressed demand, yet again causing oil rates to plummet. To hold up against the economic blow, Gulf nations resorted to liquidating some foreign assets and offered portions of their foreign currency reserves. But, these actions were insufficient, so they also borrowed lots of hard currency from Western money markets. Today, because of the resurgence in oil rates, these states are capitalising on the opportunity to strengthen their financial standing, paying off external financial obligations and balancing account sheets, a move critical to improving their creditworthiness.
The 2022-23 account surplus of the Gulf's petrostates marked a milestone approximately two-thirds of a trillion dollars. In the past, most of this surplus would have gone directly into central banks' foreign currency reserves. Historically, most the surplus from petrostate in the Gulf Cooperation Council GCC would be funnelled straight into foreign currency reserves as a precautionary measure, particularly for those countries that peg their currencies towards the US dollar. Such reserves are crucial to maintain balance and confidence in the currency during financial booms. However, within the previous few years, central bank reserves have actually hardly grown, which shows a divergence from the conventional system. Furthermore, there has been a conspicuous lack of interventions in foreign currency markets by these states, indicating that the surplus will be redirected towards alternative avenues. Indeed, research indicates that huge amounts of dollars of the surplus are now being employed in innovative means by various entities such as for instance nationwide governments, main banking institutions, and sovereign wealth funds. These novel strategies are repayment of external financial obligations, expanding monetary assistance to allies, and acquiring assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah would likely tell you.