Energy-rich Middle Eastern states are set to reap up to $1.3 billion in extra oil revenues over the next four years, IMF says, as they enjoy a firepower-boosting boon sovereign wealth funds in the region at a time when global asset prices have soared.
The fund’s projections underscore how high energy prices driven by Russia’s war in Ukraine are supporting the absolute monarchies in the Gulf while much of the rest of the world grapples with runaway inflation and fears of recession.
Jihad Azour, the IMF’s director for the Middle East and North Africa, told the Financial Times that compared to pre-war expectations in Ukraine, oil and gas exporters in the region, particularly the states of the Gulf, “will see an additional cumulative oil revenue of $1.3 billion through 2026.” ” .
The Gulf is home to some of the world’s largest oil and gas exporters, and several of its largest and most active sovereign wealth funds. These include Saudi Arabia Public Investment Fund, Qatar Investment Authority, Abu Dhabi Vehicle Stable including Abu Dhabi Investment Authority, Mubadala and ADQ, and the Kuwait Investment Authority.
The $620 billion PIF, chaired by Saudi Crown Prince Mohammed bin Salman, invested more than $7.5 billion in US stocks in the second quarter, including Amazon, PayPal and BlackRock, as it sought to take advantage of falling stock prices, according to Market Filings.
Gulf sovereign wealth funds have also been active during the coronavirus outbreak as they seek to take advantage of market volatility triggered by the pandemic. During the global financial crisis of 2009, they took advantage of the turmoil to take stakes in struggling Western companies.
In recent years, many funds have focused on sectors such as technology, healthcare, life sciences and clean energy as governments seek returns on investments, but also seek to diversify economies and develop new industries.
Jihad Azour, IMF director for the Middle East and Central Asia © Karim Sahib/AFP/Getty Images
Azour said it was important for Gulf states to use the latest windfall to “invest in the future”, including preparations for the global energy transition.
“It’s an important moment for them. . . accelerate in sectors such as technology [domestically] because it is something that will allow them to increase their productivity,” he said. “Furthermore, their investment strategy could benefit as asset prices have improved for new investors, and the ability to increase market share in certain areas are also opportunities.”
But he added that it was essential that they maintain fiscal discipline and the momentum for reforms aimed at reducing states’ dependence on oil.
Traditionally, the health of Gulf states’ economies has tracked oil price volatility with state spending fueled by petrodollars, the main driver of business activity. As a result, booms have often been followed by downturns.
The windfall comes after years of subdued growth in the Gulf that have pushed governments into debt, dip into reserves and slow state projects.
But Saudi Arabia, the world’s biggest oil exporter and the region’s largest economy, has embarked on a massive spending spree led by the PIF, which has been tasked with developing a series of megaprojects aimed at modernizing the conservative kingdom while by looking for investments abroad.
The PIF should be one of the main beneficiaries of the oil boom, as Saudi Arabia is on track to record a budget surplus of 5.5% of GDP this year — its first surplus since 2013 — and should produce economic growth of 7.6 percent, its fastest pace in a decade.
The IMF estimates that for the second consecutive year, the PIF should undertake more investments in 2022 than the government. In a report released this week, the fund cites “pressures to spend oil windfalls and deviate from fiscal prudence”, including through the PIF, as one of the downside risks to the kingdom.
“What’s going to be really important is how they [Gulf states] manage this new cycle and how they maintain, at the same time, the benefits of additional liquidity and policies that will not lead them to procyclicality,” Azour said.
The IMF predicts that economic growth in the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar and Oman, will increase from 2.7% in 2021 to 6.4% this year.
