Despite the large fiscal deficits, following the sharp fall in oil prices in 2014, the decline in the GCC public foreign assets has been modest. Consolidated gross public foreign assets of the GCC countries, which peaked at $2.6 trillion in 2014, are likely to decline only to $2.3 trillion in 2017 (154 percent of GDP). Almost two-thirds of these assets are managed by sovereign wealth funds with diversified portfolios of public equities and fixed income securities, Institution of International Finance (IIF), noted in its latest report.
IFF’s projections indicate that the region’s public foreign assets will only be 6 percent lower in 2020 from their peak in 2014. The authorities stemmed the tide, in part, through a three-phase fiscal response including sharp reduction in public spending, ongoing gradual removal of fuel subsidies; and mobilization of additional non-oil revenues. Additional fiscal adjustment in the coming years will focus more on mobilisation of non-oil revenues including fees, various charges, introduction of VAT in early 2018 and privatization.
At the same time, gradually rising oil prices and increasing reliance on foreign borrowing to finance the fiscal deficits will limit the decline in foreign assets.
A large portion of the of the fiscal deficit for this year (about $100bn, 7 percent of GDP) is expected to be financed from foreign funding, taking advantage of the low global interest rate environment and seeking to ease liquidity conditions in local banks.
“We expect foreign borrowing to slightly exceed $40bn in 2017, as compared to $37bn in 2016. With the consolidated GCC external current account surplus projected to remain at about 2 percent of GDP, down from 13.6 percent of GDP in 2014, we expect fresh injections into GCC public funds will be limited, with the notable exception of the proceeds from the Saudi state oil company (Aramco)”, IFF report said.
The outlook for funds in the three Gulf countries is brighter. With relatively limited financing requirements, Qatar is not tapping QIA and relying on borrowing instead to take advantage of low global interest rates. Abu Dhabi issued $5bn in Eurobonds last year, but has decided not to tap external markets this year.
Kuwait borrowed $8bn from external markets this year and could continue to do so given the cost of funds remains low versus expected investment returns.
The oil crash has caused increased scrutiny of the management of foreign assets across the GCC.
In Saudi Arabia, the investment objective is shifting toward higher return through an increased risk appetite including by raising the proportion of less liquid foreign assets with the repositioning of PIF as a wealth fund.
Nonetheless, we do not expect a sharp decline in Saudi holdings of securities because these are consistent with the amount required to maintain the dollar peg. The ratio of treasury holdings to broad money (reserves to M2 is a gauge of reserve adequacy) is 24 percent for Saudi Arabia, 25 percent for Kuwait and 18 percent for the UAE