The IMF estimates that oil revenues in the energy-rich Middle East will increase by up to $1.3 trillion over the next four years. This windfall will strengthen the power of the region's sovereign wealth funds at a time when asset prices around the world are falling.
The IMF's estimates highlight how the Gulf region's absolute monarchies are benefiting from high oil costs brought on by Russia's war in Ukraine, while the majority of the rest of the world is struggling with skyrocketing inflation and worries about a coming recession.
According to Jihad Azour, the IMF's head for the Middle East and North Africa, the region's oil and gas exporters, mainly Gulf states, "will see additional cumulative oil revenues of $1.3tn through 2026" compared to expectations before the war in Ukraine,"
The Gulf is home to several of the largest and most active SWFs as well as some of the largest and most prolific oil and gas exporters in the world. These include the Public Investment Fund of Saudi Arabia, the Qatar Investment Authority, the Abu Dhabi Investment Authority, Mubadala, and ADQ, as well as the Kuwait Investment Authority.
According to market records, the $620 billion PIF, which is led by Saudi Crown Prince Mohammed bin Salman, invested more than $7.5 billion in US equities in the second quarter, including Amazon, PayPal, and BlackRock, in an effort to profit from declining stock prices.
Similar to other SWFs, Gulf SWFs were active during the pandemic as they sought to profit on the market turbulence brought by by the Covid-19 issue. They profited from the unrest in 2009's global financial crisis to buy shares in Western companies that were in trouble.
As governments look for returns on investments while also trying to diversify their economies and create new industries, many of the funds have recently been concentrating on industries including technology, healthcare, life sciences, and clean energy.
Azour emphasized the need for the Gulf nations to "invest in the future" by making the necessary preparations for the world's impending energy transition.
According to him, "it’s an important moment for them to . . . accelerate in sectors like technology [domestically] as this is something that will allow them to increase productivity. In addition, their investment strategy could benefit from the fact that asset prices have improved for new investors, and the capacity to increase their market share in certain areas are also opportunities."
He did, however, emphasize that it was crucial that they uphold fiscal restraint and momentum for changes meant to lessen their nations' reliance on oil.
State spending, fueled by petrodollars, the main driver of economic activity, has historically paralleled the volatility of oil prices in the Gulf states' economies. Therefore, booms have frequently been followed by downturns.
The boom follows years of weak development in the Gulf, which forced governments to issue more debt, eat up their reserves, and postpone state projects.
But Saudi Arabia, the largest economy in the region and the world's top oil exporter, has been on a spending binge under the direction of the PIF, which has been entrusted with creating a number of megaprojects meant to modernize the traditional kingdom while looking for foreign investments.
The PIF is anticipated to be one of the primary beneficiaries of the oil boom as Saudi Arabia is on track to post its first budget surplus since 2013 this year with a surplus of 5.5% of GDP and economic growth predicted to reach 7.6%, the fastest rate in ten years.
According to the IMF, the PIF is anticipated to make more investments in 2022 than the government for the second year in a row. The fund lists one of the kingdom's downside risks as "pressures to spend oil windfalls and deviate from fiscal prudence," including through the PIF.
What will be crucial, according to Azour, is how the Gulf states handle this new cycle while simultaneously maintaining the advantages of the extra liquidity and the policies that will not make them procyclical.
According to the IMF, the Gulf Cooperation Council, which consists of Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar, and Oman, would experience an increase in economic growth from 2.7% in 2021 to 6.4% this year.
By fLEXI tEAM