Higher oil prices extend the golden era for Gulf sovereign wealth funds
Sovereign wealth funds' integral role in the region's domestic economic transformation necessitates higher for longer oil prices.
by John Everington
An employee at North Pier Terminal, operated by Saudi Aramco, in Ras Tanura, Saudi Arabia. Image: Simon Dawson/BloombergHigher oil prices in the second half of the year have once again turned the spotlight on the economic priorities of the oil-exporting nations of the Gulf Co-operation Council (GCC) and the increasing influence of their sovereign wealth funds (SWFs).
The unexpected windfall from higher oil revenues in 2022 — following a surge in prices after Russia’s invasion of Ukraine — provided a significant boon to public finances of the GCC’s six member nations, generating little-experienced current account surpluses and helping with the paydown of sovereign debt.
Yet the inflows have also further empowered the GCC’s towering SWFs, which rank as some of the world’s largest (see table below) with around $4tn worth of assets under management (AUM) as of mid-2023.
The prospect of further enhancements to spending power, in the wake of the oil price recovery of the second half of the year, comes as SWFs are taking an increasingly active approach to asset allocation, in contrast to the more opportunistic approach of previous years.
“If you go back 15–20 years ago, the majority of SWFs in the region would work mostly with external managers taking decisions about how to allocate funds, with little visibility as to their overall strategies,” says Tarek Fadlallah, CEO of Nomura Asset Management (Middle East).
“In recent years, however, there has been a definite evolution in the landscape towards a more visible and more active role through the investments they’re making, both domestically and internationally.”
Having made headlines around the world for a series of acquisitions of high-profile distressed assets during the global financial crisis of 2007–2009, the region’s funds have in recent years become more strategic in their investments.
The new approaches are characterised by a preference for assets in key strategic states in the wider Middle East and north Africa (MENA) region; investments in Asian assets as part of a long-running intensification of economic ties with the region; and developments designed to spur economic diversification and transformation in their home countries, with Saudi Arabia’s Public Investment Fund (PIF) the most striking example.
While investments in MENA and Asia are set to continue even in more bearish conditions for energy markets, domestic transformation projects remain heavily reliant on higher oil prices, a factor likely to influence oil exporters’ strategies — especially that of key producer Saudi Arabia — for many years to come.
The return to surplus
Two years after falling into deficit, following a Covid 19-inspired collapse in oil prices, Gulf finances came roaring back in 2022.
With prices surging to more than $120 per barrel in the months following the economic turmoil created by the Ukraine conflict, the GCC’s aggregated current account rose to a 10-year high of $369bn for the year, equivalent to 16.9% of regional gross domestic product (GDP), according to S&P Global Market Intelligence.
As the world’s largest oil exporter, Saudi Arabia was the primary gainer, posting its first budget surplus in nearly a decade in 2022, ending the year as the fastest growing economy in the GCC. Kuwait, perhaps the GCC’s least diversified economy, also recorded a rare budget surplus; while Oman, one of the bloc’s smaller producers, used the windfall to pay down debt, cutting its debt-to-GDP level from around 60% in 2021 to around 40% at end 2022.
While oil prices have since eased from their mid-2022 peak, they remain elevated compared with historical levels, with further unilateral production cuts introduced by Saudi Arabia and Russia in the second half of 2023 sending prices back up to more than $90 per barrel in late-September.
(Prices remain at around $90 per barrel at time of writing.)
“Current account surpluses of GCC countries are therefore expected to moderate, but remain comfortable, at 8.9% of GDP in 2023 and 7.2% of GDP in 2024,” says Jamil Naayem, senior principal economist for MENA at S&P Global Market Intelligence.
“This is expected to lead to further injections of capital into regional SWFs.”
Capital deployment
With the new surpluses coinciding with widespread economic turbulence induced by the Ukraine war and rising inflation worldwide, Gulf SWFs have once again become go-to investors on the global stage, reprising their role during the global financial crisis 15 years ago.
That period saw funds from Kuwait, Abu Dhabi and Qatar acquiring stakes in global names including Citigroup, Daimler, Barclays and Credit Suisse.
The region’s state-owned investors (SWFs and pensions funds) deployed $83bn in 2022 worldwide, led by funds in the UAE, Saudi Arabia and Qatar, compared with just $49bn in 2020.
Assets managed by the region’s SWFs grew by 18% in 2022, rising to just over $4tn by the end of July, according to data platform Global SWF’s analysis quoted by S&P Global Market Intelligence.
Yet, while the large numbers are reminiscent of the global financial crisis, SWFs strategies this time around are sharper in focus.
“SWFs in the GCC today are far more strategic in their approach to investment, compared with the more opportunistic approach they took around the time of the global financial crisis,” says Mr Naayem.
“Over the past 15 years, they have developed increasingly sophisticated asset allocation strategies.”
In its annual report for 2022, released in August, PIF said that 83% of its investment portfolio was internally managed, “in line with best practices in Canada and Singapore”, according to a research note from Global SWF.
Helping the neighbours
In the past two years, SWFs have emerged as a key pillar in the provision of economic aid to Gulf states’ strategic partners in the larger MENA region.
This is exemplified by the UAE and Saudi Arabia investing in Egypt and Turkey, the region’s most populous markets, which have both endured significant economic hardship over the past few years.
In the wake of mounting economic woes in Egypt from late 2021 onwards, the UAE and Saudi Arabia have moved to prop up the north African state’s economy, both by means of cash transfers to the central bank (with a fresh currency swap announced between Egypt and the UAE in October) and via investment in the country’s largest enterprises.
In April 2022, ADQ, a comparatively new Abu Dhabi-based SWF with around $157bn of AUM, announced $1.85bn worth of investments in publicly traded Egyptian firms, including the acquisition of a stake in the country’s largest private lender, Commercial International Bank.
This was followed in July of this year by $800m worth of stake acquisitions in three Egyptian government-owned oil and petrochemical companies.
ADQ has plans to invest up to $20bn into a wide range of sectors in the coming decade, in partnership with the Sovereign Fund of Egypt.
Such a commitment is set to be matched by Saudi Arabia.
In August 2022, PIF launched the Saudi Egyptian Investment Company (SEIC), with a view to investing in sectors including infrastructure, real estate development, healthcare and financial services.
The newly created entity started with $1.3bn worth of investments in four publicly listed companies.
While such investments symbolise Emirati and Saudi support for the Egyptian economy, such support is not unconditional.
The PIF paused negotiations with Egyptian authorities in February over the potential acquisition of United Bank of Egypt by SEIC, with Reuters reporting a disagreement between PIF and Egyptian authorities over the bank’s valuation, relating to the devaluation of the Egyptian pound.
Turkey, which has seen a strengthening of ties in recent years with the UAE and Saudi Arabia, has also been the recipient of the largesse of their SWFs.
In July of this year, ADQ announced the financing of $8.5bn worth of relief bonds, following the February earthquake that claimed more than 55,000 lives and caused around $48bn worth of damage.
Eastern promise
One of the hallmarks of Gulf SWF’s recent investment forays has been an intensified focus on Asian markets, in line with deepening diplomatic and trade ties between the Gulf and Asia’s largest economies.
Relations with India in particular have deepened significantly.
One of the major initiatives stemming from September’s G20 summit in New Delhi was the announcement of the India–Middle East–Europe Economic Corridor, announced by Saudi crown prince Mohammed bin Salman, designed to bolster transportation and communication links between Europe and Asia through rail and shipping networks, with the UAE and Saudi Arabia acting as key staging points.
“India’s trade ties with Saudi Arabia and the UAE are already substantial, and this corridor could further strengthen their economic integration,” Mohammed Soliman, strategic technologies director at the Middle East Institute in Washington, DC, told the local press in the wake of the agreement.
“For Saudi Arabia and the UAE, it represents a diversification of partnerships beyond their roles as energy producers.”
Questions remain over the immediate future of the project — which contains a rail link between the port cities of Fujairah in the UAE and Haifa in Israel — amid the conflict between Israel and Gaza, which was ongoing as The Banker went to press.
The Abu Dhabi Investment Authority, the Gulf’s largest sovereign wealth fund by AUM, took a 20% share in India’s IIFL Home Finance through a subsidiary mid-2022, and earlier this year acquired a stake in Indian multinational Adani Enterprises via the company’s $2.5bn secondary share offering.
In April, fellow Abu Dhabi-based SWF Mubadala became an anchor investor in a $630m listing of India-based Cube Highways Trust, an infrastructure investment trust.
During a state visit by Prince bin Salman to India in September, Saudi’s PIF announced plans to open an office in India, as part of plans to invest $100bn in the country.
The Qatar Investment Authority (QIA) also heavily invested in the country, with the acquisition of a minor stake in Indian renewable energy company, Adani Green Energy, for $474m, followed by a $1bn investment in India’s largest retailer, Reliance Retail, in the same month.
Transforming economies
Domestic economic development and diversification has been a common goal among GCC SWFs for decades, with a view to recycling hydrocarbon revenues into domestic non-energy industries.
Domestic investments of Abu Dhabi’s Mubadala include aerospace manufacturer Strata and Emirates Global Aluminium, with the QIA being a key investor in local real estate developer Qatari Diar and Qatar National Bank, the Middle East’s largest bank by assets.
Yet, it is the transformation of Saudi Arabia’s PIF — initially founded in 1971 — in the past decade into the state’s primary tool for economic diversification and growth that has been arguably the most striking change within the Gulf’s SWF landscape in recent years.
Previously a small organisation charged with managing the Saudi government’s investment, the PIF was reborn as part of Saudi Arabia’s Vision 2030 economic transformation programme as the country’s primary sovereign wealth fund.
With $700bn AUM, it is now the world’s seventh largest SWF, according to Global SWF.
Beyond its headline-grabbing investments in professional golf tour LIV Golf and video game companies, such as Nintendo, Ubisoft and Activision Blizzard, are its arguably more important investments in the local Saudi economy.
Over the past five years, the PIF has established more than 80 new companies and helped create half a million jobs in Saudi Arabia, according to management consultants Kearney.
It is also an anchor investor in megaprojects such as the Red Sea Development Company, futuristic city Neom — investing $6.8bn in the project in 2022 alone — and entertainment complex Qiddiya.
The scope of such investments is only set to increase in coming years, with Saudi Arabia’s economic diversification — set in motion in 2016 with the launch of Vision 2030 — happening at breath-taking speed.
After originally having envisaged a budget surplus for 2023, in early October the country announced it would run annual budget deficits until 2026 at the earliest, with spending for 2023 and 2024 expected to be 34% and 32% higher than 2022 figures, according to Capital Economics.
Such plans are thus reliant on oil revenues remaining higher for longer, a consideration that is likely to continue to influence Saudi Arabia’s oil production strategy for some time to come.
“Transforming economies costs money, and you’re not going to get that if oil is trading at $40 per barrel,” says Mr Fadlallah.
“You need it to be at a much higher level.
This golden era needs to persist until at least 2030 in order to fund the grand ambitions that Saudi Arabia and other GCC states have.”
PIF, Mubadala and ADQ were approached for comment but did not respond in time for publication.
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