GCC states are venturing into growing companies such as for example renewable energy, electric vehicles, entertainment and tourism.
A great share of the GCC surplus cash is now used to advance financial reforms and carry out ambitious plans. It is critical to examine the circumstances that led to these reforms plus the shift in economic focus. Between 2014 and 2016, a petroleum oversupply driven by the the rise of new players caused a drastic decrease in oil rates, the steepest in modern history. Furthermore, 2020 brought its challenges; the pandemic-induced lockdowns repressed demand, once again causing oil prices to drop. To survive the economic blow, Gulf countries resorted to liquidating some foreign assets and sold portions of their foreign exchange reserves. Nevertheless, these measures were insufficient, so they also borrowed plenty of hard currency from Western money markets. At present, aided by the resurgence in oil rates, these countries are taking advantage on the opportunity to strengthen their financial standing, paying off external debt and balancing account sheets, a move imperative to strengthening their credit reliability.
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, the majority of this surplus would have gone straight into central banks' foreign currency reserves. Historically, most the surplus from petrostate within the Gulf Cooperation Council GCC would be funnelled straight into foreign exchange reserves as a protective strategy, particularly for those countries that tie their currencies to the dollar. Such reserve are essential to preserve growth rate and confidence in the currency during economic booms. Nevertheless, into the past couple of years, main bank reserves have actually hardly grown, which shows a divergence from the traditional strategy. Additionally, there has been a noticeable lack of interventions in foreign exchange markets by these states, suggesting that the surplus has been redirected towards alternative areas. Indeed, research has shown that vast amounts of dollars of the surplus are now being employed in innovative means by different entities such as for example national governments, central banks, and sovereign wealth funds. These unique methods are payment of outside debt, extending economic help to allies, and buying assets both locally and around the globe as Jamie Buchanan in Ras Al Khaimah would likely tell you.
In past booms, all that central banks of GCC petrostates desired had been stable yields and few shocks. They often times parked the cash at Western banks or bought super-safe government bonds. Nevertheless, the modern landscape shows an unusual scenario unfolding, as central banks now receive a lower share of assets in comparison to the burgeoning sovereign wealth funds in the area. Current data reveals noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by venturing into less conventional assets through low-cost index funds. Furthermore, they are delving into alternative investments like private equity, real estate, infrastructure and hedge funds. And they are also no more limiting themselves to traditional market avenues. They are providing debt to finance significant acquisitions. Moreover, the trend showcases a strategic change towards investments in appearing domestic and worldwide companies, including renewable energy, electric cars, gaming, entertainment, and luxurious holiday retreats to boost the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.