US rate hikes make Gulf sovereign wealth funds go-to source for capital

Al-Monitor Pro Members

Sebastian Castelier

Business journalist covering Gulf economies

Nov. 23, 2022

Cash is no longer cheap. The US Federal Reserve delivered several “jumbo” interest rate hikes in 2022. Major central banks have followed suit and pivoted to ​​quantitative tightening, possibly leading to the “biggest liquidity drain” in history. However, flush with cash from an oil windfall, Gulf sovereign wealth funds — which control more than $3 trillion worth of assets — are back at their 2007-2009 financial crisis playbook: financiers of last resort. The stated goal? Snap up assets across the world to swap part of the “oil rent” for an “assets rent.”

 

Scenario 1: Gulf sovereign wealth funds invest primarily at home. Gulf sovereign wealth funds have a dual role. On the one hand, their mandate is to create a long-term “assets rent” to move away from a dependence on oil revenues. As of Dec. 31, 2021, Abu Dhabi Investment Authority’s 30-year annualized rate of return was 7.3%.

On the other hand, they are tasked with financing Gulf states’ top-down strategies to jumpstart local economies that remain highly correlated to oil prices. The involvement of the PIF in the Saudi economy — data suggests the PIF have taken over the capital expenditure role from governments — illustrates this dynamic. As of June 2022, 77% of the PIF’s total assets were in Saudi Arabia, raising fears that the fund is overcrowding the private sector. The fund is now pushing ahead with plans to reduce its stakes in some companies to recycle capital into new industries. In Oman, Pratt said 62% of OIA’s assets are located in the sultanate.

Still, the Gulf's current economic structures can only absorb a limited inflow of sovereign investments. As of 2022, the six GCC countries’ cumulated GDP stands at $2 trillion, roughly the size of the Italian economy, or only about 2% of the world economy.

Scenario 2: Geopolitics drives allocations abroad, not economics. Yes, but not always. Gulf states have established a framework that “guides” sovereign wealth funds’ investment allocations “without fully determining” them, Pratt said. Yet the analyst highlights instances when geopolitical interests influence the investment thesis, such as OIA’s “overtly politicized” engagement with the UAE and Saudi Arabia in 2022. “This serves as a means of embedding ties that have recently been disrupted by areas of mutual suspicion (Qatar crisis, Iran tensions), solidifying the prospects of future financial support,” he said.

The Gulf states’ sovereign wealth is “a vital source of capital investment in their surrounding geography,” as well as to reverse a trend of intra-GCC financial disaggregation during the 2017-2021 GCC crisis. For instance, Saudi Arabia’s PIF considers bidding for network towers sold by Qatari telecommunications firm Ooredoo. Read Karen Young’s September 2022 Memo on this.

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.