Gulf governments will be spending more money on the home front this year, as they try to placate their populations with job creation and infrastructure projects.
Depending on the oil price, that may mean less investment overseas or a more focused approach to foreign investment, analysts say.
It is difficult to generalise about sovereign wealth funds in the region. The Qatar Investment Authority spends quite differently from the one in Abu Dhabi, while Saudi Arabia invests the majority of its sovereign funds through its central bank.
But two factors affect governments’ spending plans: the need to provide for their people; and the oil price.
“The most significant effect of the Arab spring is that the increase in government spending limits the surplus of GCC governments, which means there are fewer resources to invest abroad,” says Rachel Ziemba, a sovereign wealth fund expert at Roubini Global Economics.
“Instead, the governments and the funds themselves, especially the sovereign development funds, have come under more pressure to invest in projects at home.”
Saudi Arabia, the largest Arab economy, is leading the charge in state spending with plans to exceed this year’s budget by about 40 per cent.
In other Gulf countries, political and social unrest has pushed governments including Bahrain, Kuwait and Oman to grant more to their people.
Most recently, Qatar’s government gave public sector workers salary and pensions rises of between 50 and 120 per cent. Furthermore, the government may spend $57bn over the next decade to create the infrastructure for the 2022 World Cup, according to Moody’s estimates. Qatar has also used its sovereign funds to prop up the banking sector.
In Abu Dhabi, government investment arms such as Mubadala Development Company have been deployed to support local entities, including Aldar Properties, a local real estate developer and Tabreed, a district cooling company.
All that spending at home does not mean that sovereign funds mandated to invest abroad will suddenly change track. It just means there may be less allocated to them. The Gulf states have also promised billions of dollars to countries such as Egypt and Tunisia.
“Gulf SWFs are scanning the region for investment opportunities in post-revolution economies. Because they know the regional economies so well, they may be better poised to take advantage of opportunities as they arise,” says Ann Wyman, head of emerging markets research Europe at Nomura.
Despite debt woes in Europe and the downgrade of the US’s credit rating, funds are still highly active abroad.
Last month, Qatar’s fund announced a €500m ($680m) capital injection into the merger of two Greek banks. In the same month a Qatar-backed consortium invested £557m ($872m) in London’s Olympic Village.
Furthermore, despite its vast spending plans, Saudi Arabia is still amassing foreign assets. These passed the $500bn mark for the first time in July.
Saudi Arabia is thought to be an important holder of US treasuries.
“The continued growth is probably caused by higher government revenues rather than a slowdown in spending,” says Paul Gamble, head of research at Riyadh-based Jadwa Investment.
The kingdom’s oil production was close to an all-time high in June and independent estimates put it higher in the following months, according to Mr Gamble. Saudi Arabia increased oil production, as unrest spread across the Middle East.
Meanwhile, in Abu Dhabi, the emirate’s International Petroleum Investment Company bought Cepsa, a Spanish oil company, for €3.7bn in February, indicating that overseas investments are not off the table.
Despite the new bout of dollar volatility, analysts say the Gulf states are unlikely to diversify their investments away from the greenback in the near term.
“All funds have already diversified a fair amount – where they can – but the problem is: Where do you diversify to?
“The euro has its problems too, even more so in some ways, given the rising risk of a split over the medium term and weak economic growth, Emerging market currencies tend not to be convertible. The Swiss franc, and Canadian and Australian dollars are insufficiently large,” says Ms Ziemba.
The currencies of the Gulf states, except Kuwait’s, are pegged to the US dollar. This means they are have an incentive to support the currency for the sake of their own economies.
So, despite increasing investment at home, international investments are still taking place, albeit at a slower pace than during the boom years.
Source: www.ft.com
Depending on the oil price, that may mean less investment overseas or a more focused approach to foreign investment, analysts say.
It is difficult to generalise about sovereign wealth funds in the region. The Qatar Investment Authority spends quite differently from the one in Abu Dhabi, while Saudi Arabia invests the majority of its sovereign funds through its central bank.
But two factors affect governments’ spending plans: the need to provide for their people; and the oil price.
“The most significant effect of the Arab spring is that the increase in government spending limits the surplus of GCC governments, which means there are fewer resources to invest abroad,” says Rachel Ziemba, a sovereign wealth fund expert at Roubini Global Economics.
“Instead, the governments and the funds themselves, especially the sovereign development funds, have come under more pressure to invest in projects at home.”
Saudi Arabia, the largest Arab economy, is leading the charge in state spending with plans to exceed this year’s budget by about 40 per cent.
In other Gulf countries, political and social unrest has pushed governments including Bahrain, Kuwait and Oman to grant more to their people.
Most recently, Qatar’s government gave public sector workers salary and pensions rises of between 50 and 120 per cent. Furthermore, the government may spend $57bn over the next decade to create the infrastructure for the 2022 World Cup, according to Moody’s estimates. Qatar has also used its sovereign funds to prop up the banking sector.
In Abu Dhabi, government investment arms such as Mubadala Development Company have been deployed to support local entities, including Aldar Properties, a local real estate developer and Tabreed, a district cooling company.
All that spending at home does not mean that sovereign funds mandated to invest abroad will suddenly change track. It just means there may be less allocated to them. The Gulf states have also promised billions of dollars to countries such as Egypt and Tunisia.
“Gulf SWFs are scanning the region for investment opportunities in post-revolution economies. Because they know the regional economies so well, they may be better poised to take advantage of opportunities as they arise,” says Ann Wyman, head of emerging markets research Europe at Nomura.
Despite debt woes in Europe and the downgrade of the US’s credit rating, funds are still highly active abroad.
Last month, Qatar’s fund announced a €500m ($680m) capital injection into the merger of two Greek banks. In the same month a Qatar-backed consortium invested £557m ($872m) in London’s Olympic Village.
Furthermore, despite its vast spending plans, Saudi Arabia is still amassing foreign assets. These passed the $500bn mark for the first time in July.
Saudi Arabia is thought to be an important holder of US treasuries.
“The continued growth is probably caused by higher government revenues rather than a slowdown in spending,” says Paul Gamble, head of research at Riyadh-based Jadwa Investment.
The kingdom’s oil production was close to an all-time high in June and independent estimates put it higher in the following months, according to Mr Gamble. Saudi Arabia increased oil production, as unrest spread across the Middle East.
Meanwhile, in Abu Dhabi, the emirate’s International Petroleum Investment Company bought Cepsa, a Spanish oil company, for €3.7bn in February, indicating that overseas investments are not off the table.
Despite the new bout of dollar volatility, analysts say the Gulf states are unlikely to diversify their investments away from the greenback in the near term.
“All funds have already diversified a fair amount – where they can – but the problem is: Where do you diversify to?
“The euro has its problems too, even more so in some ways, given the rising risk of a split over the medium term and weak economic growth, Emerging market currencies tend not to be convertible. The Swiss franc, and Canadian and Australian dollars are insufficiently large,” says Ms Ziemba.
The currencies of the Gulf states, except Kuwait’s, are pegged to the US dollar. This means they are have an incentive to support the currency for the sake of their own economies.
So, despite increasing investment at home, international investments are still taking place, albeit at a slower pace than during the boom years.
Source: www.ft.com
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