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GCC Foreign Assets Reach $1.47tr by End 2008

The figure, however, falls short of a $2 trillion projected by IIF a year ago. The Washington-based lobby for the world’s major banks and investment institutions, predicted in January 2008 that the total net foreign assets of the six GCC countries would exceed $2 trillion on the back of record oil revenues and economic growth.

In a recent report, IIF predicted that in 2009, GCC’s external and fiscal surpluses would narrow substantially from their record levels in 2008 in the backdrop of the current low oil prices.

“GCC’s budget surpluses will also narrow as a result of the decline in the average oil price to $56 per barrel in 2009,” George Abed, IIF Special Advisor and Director of the Africa-Middle East Department, said. The IIF estimates the break-even oil price that will balance budgets for 2009 as follows: $36 for the UAE, $38 for Qatar, $48 for Kuwait, $51 for Saudi Arabia, $73 for Oman, and $74 for Bahrain.

Soaring oil prices through July 2008 boosted hydrocarbon revenues, contributing to large fiscal and external surpluses, despite strong import and fiscal expansion, he pointed out.

“In terms of foreign assets of governments and banking institutions (excluding corporates), we estimate that for the combined GCC these would have reached $1.47 trillion by the end of 2008. However, our current global projections suggest an average oil price per barrel of around $56 in 2009 and this would probably lead to only a very small net addition to the region’s foreign assets.”

An IIF report, predicting risks to GCC economies, however emphasised that such risk would remain localised and manageable given ample resources and improved macroeconomic fundamentals. According to IIF, after achieving record oil income in 2008 and 5.7 per cent growth, the GCC economies will experience a sharp drop in oil revenues next year and a moderation in growth to a still solid 3.6 per cent.

“Traversing this period of financial turmoil and significant slowdown in the global economy, with sharply lower oil prices as its consequence, is the key near-term policy challenge. To be sure, the GCC region is facing the current situation from a far stronger position than in the past. Nevertheless, the GCC authorities need to take policy measures to address the expected growth slowdown, financial stress in certain segments of the banking sector, and the sharp correction in the property market that has set in,” said Abed,.

According to IIF First Deputy Managing Director and Chief Economist Yusuke Horiguchi , the slump in equities and real estate prices in the US and Europe might have reduced the value of GCC sovereign wealth funds, while pressures have risen on Sovereign Wealth Funds to redirect their investments to the local markets.”

Abed said in a report that while GCC growth was slowing somewhat, there was a probable silver lining given that these economies have been overheating with growth above potential and inflation rising rapidly.

“We expect a notable slowdown of credit growth — from levels that were excessive — during the second half of 2008 and more visibly in 2009. This, combined with the recent strengthening of the dollar and some further decline in commodity prices, would lower average inflation from a peak of 12 per cent in 2008 to about 8.0 per cent in 2009.”