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 states are seizing the ability presented by high oil rates to boost their creditworthiness.

In past booms, all that central banking institutions of GCC petrostates wanted was stable yields and few shocks. They frequently parked the cash at Western banks or purchased super-safe government bonds. However, the modern landscape shows yet another scenario unfolding, as main banking institutions now receive a reduced share of assets in comparison to the burgeoning sovereign wealth funds in the region. Present data clearly shows noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by venturing into less main-stream assets through low-cost index funds. Moreover, they have been delving into alternative investments like personal equity, real estate, infrastructure and hedge funds. Plus they are also not any longer limiting themselves to old-fashioned market avenues. They are supplying debt to fund significant acquisitions. Furthermore, the trend showcases a strategic change towards investments in growing domestic and international companies, including renewable energy, electric vehicles, gaming, entertainment, and luxurious holiday retreats to support the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.

A great share of the GCC surplus cash is now used to advance economic reforms and implement impressive strategies. It is vital to examine the conditions that led to these reforms as well as the change in financial focus. Between 2014 and 2016, a petroleum flood driven by the coming of the latest players caused a drastic decrease in oil prices, the steepest in modern history. Furthermore, 2020 brought its challenges; the pandemic-induced lockdowns repressed demand, yet again causing oil prices to drop. To hold up against the economic blow, Gulf nations resorted to liquidating some foreign assets and sold portions of their foreign exchange reserves. However, these actions were insufficient, so they also borrowed lots of hard currency from Western money markets. Now, with all the revival in oil rates, these countries are taking advantage of the opportunity to bolster their financial standing, paying off external financial obligations and balancing account sheets, a move critical 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 directly into central banks' foreign currency reserves. Historically, most the surplus from petrostate in the Gulf Cooperation Council GCC would be funnelled directly into foreign exchange reserves as a protective strategy, especially for those countries that peg their currencies to the US dollar. Such reserves are essential to preserve growth rate and confidence in the currency during economic booms. Nevertheless, within the previous several years, central bank reserves have barely grown, which shows a divergence of the traditional approach. Moreover, there is a conspicuous lack of interventions in foreign exchange markets by these states, hinting that the surplus will be redirected towards alternative avenues. Indeed, research has shown that vast amounts of dollars from the surplus are increasingly being used in revolutionary methods by various entities such as national governments, central banks, and sovereign wealth funds. These novel strategies are repayment of external debt, extending economic assistance to allies, and acquiring assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah may likely tell you.