To shore up their balance sheets, Arab Gulf countries are seizing the chance presented by high oil rates to boost their creditworthiness.
In past booms, all that central banks of GCC petrostates desired was stable yields and few shocks. They often parked the money at Western banks or bought super-safe government bonds. But, the contemporary landscape shows an unusual scenario unfolding, as main banks now get a reduced share of assets in comparison to the growing sovereign wealth funds within the region. Present data demonstrates noteworthy developments, with sovereign wealth funds deciding on a diversified investment approach by going into less conventional assets through low-cost index funds. Also, they have been delving into alternative investments like personal equity, real estate, infrastructure and hedge funds. Plus they are also not restricting themselves to traditional market avenues. They are providing funds to fund significant acquisitions. Moreover, the trend demonstrates a strategic change towards investments in emerging domestic and international companies, including renewable energy, electric cars, gaming, entertainment, and luxury holiday resorts to aid the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.
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, most 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 exchange reserves as a precautionary measure, particularly for those countries that tie their currencies towards the dollar. Such reserves are crucial to preserve growth rate and confidence in the currency during financial booms. But, in the past couple of years, central bank reserves have actually scarcely grown, which suggests a deviation from the conventional strategy. Additionally, there is a conspicuous lack of interventions in foreign currency markets by these states, suggesting that the surplus has been redirected towards alternative areas. Certainly, research has shown that vast amounts of dollars of the surplus are now being utilized in revolutionary means by various entities such as for example nationwide governments, central banking institutions, and sovereign wealth funds. These novel methods are repayment of outside financial obligations, expanding monetary help to allies, and buying assets both locally and internationally as Jamie Buchanan in Ras Al Khaimah may likely tell you.
A huge share of the GCC surplus money is now used to advance economic reforms and execute bold strategies. It is important to examine the circumstances that led to these reforms plus the change in economic focus. Between 2014 and 2016, a petroleum oversupply made by the coming of new players caused a drastic decrease in oil rates, the steepest in contemporary history. Also, 2020 brought its challenges; the pandemic-induced lockdowns repressed demand, again causing oil prices to drop. To hold up against the monetary blow, Gulf countries resorted to liquidating some foreign assets and sold portions of their foreign exchange reserves. Nonetheless, these actions proved insufficient, so they also borrowed plenty of hard currency from Western money markets. Currently, aided by the revival in oil rates, these countries are capitalising on the opportunity to bolster their financial standing, settling external financial obligations and balancing account sheets, a move critical to strengthening their creditworthiness.