Why economic reforms in GCC states are groundbreaking

Why economic reforms in GCC states are groundbreaking

Blog Article

To shore up their balance sheets, Arab Gulf countries are seizing the opportunity presented by high oil prices to enhance their creditworthiness.

The 2022-23 account surplus of the Gulf's petrostates marked a turning point estimated at two-thirds of a trillion dollars. In the past, nearly all of this surplus would have gone straight into central banks' foreign currency reserves. Historically, most the surplus from petrostate in the Gulf Cooperation Council GCC would be funnelled straight into foreign exchange reserves as a protective strategy, specifically for those countries that tie their currencies to the US dollar. Such reserves are necessary to maintain growth rate and confidence in the currency during financial booms. Nevertheless, into the past couple of years, main bank reserves have actually scarcely grown, which indicates a diversion of the traditional strategy. Furthermore, there has been a conspicuous lack of interventions in foreign currency markets by these states, indicating that the surplus is being redirected towards alternative avenues. Certainly, research has shown that vast amounts of dollars of the surplus are being utilized in innovative ways by various entities such as for instance national governments, main banking institutions, and sovereign wealth funds. These novel strategies are payment of external debt, extending financial help to allies, and acquiring assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah may likely inform you.

In previous booms, all that central banks of GCC petrostates desired had been stable yields and few shocks. They often parked the cash at Western banks or bought super-safe government bonds. Nonetheless, the modern landscape shows a new scenario unfolding, as central banks now are given a smaller share of assets compared to the burgeoning sovereign wealth funds in the region. Recent data demonstrates noteworthy developments, with sovereign wealth funds deciding on a diversified investment approach by venturing into less main-stream assets through low-cost index funds. Also, they are delving into alternate investments like private equity, real estate, infrastructure and hedge funds. Plus they are also no more limiting themselves to old-fashioned market avenues. They are supplying funds to fund significant purchases. Moreover, the trend showcases a strategic shift towards investments in rising domestic and international industries, including renewable energy, electric vehicles, gaming, entertainment, and luxury holiday resorts to support the tourism industry as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.

A huge share of the GCC surplus money is now used to advance financial reforms and follow through bold strategies. It is important to examine the conditions that resulted in these reforms and also the shift in financial focus. Between 2014 and 2016, a petroleum oversupply driven by the emergence of the latest players caused an extreme decline in oil prices, the steepest in modern history. Additionally, 2020 brought its very own challenges; the pandemic-induced lockdowns repressed demand, once again causing oil prices to drop. To hold up against the financial blow, Gulf countries resorted to liquidating some foreign assets and sold portions of their foreign currency reserves. However, these precautions were insufficient, so they also borrowed plenty of hard currency from Western money markets. Now, because of the revival in oil rates, these states are taking advantage on the opportunity to beef up their financial standing, paying off external financial obligations and balancing account sheets, a move imperative to strengthening their credit reliability.