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Gulf sovereign wealth funds “must be deployed” in times of pandemic

The Kingdom Tower (center) looms on the horizon above the King Fahd Highway in Riyadh, Saudi Arabia.

Simon Dawson | Bloomberg | Getty Images

The Gulf region’s dual shock from the coronavirus pandemic and severely weakened oil prices continue to put pressure on its economies, the new weekend forecast paints a grim picture.

As governments around the world roll out stimulus and bailouts in a bid to save their hard-hit private sectors and hardest-hit industries, some have called for the intervention of sovereign wealth funds – which are especially important in the Gulf.

“I think sovereign wealth funds – and by all accounts there are around $ 2 trillion in assets in these regional sovereign wealth funds – they need to be deployed,” Tarek Fadlallah, CEO of Nomura Asset, said on Monday. Management Middle East at CNBC’s Capital Connection. .

“Sovereign wealth funds have multiple purposes, but one of them is that they are rainy day funds, and it’s a rainy day. The argument, then, is that, just as the Federal Reserve and the United States government have stepped in to correct some of the market inefficiencies and dislocations, SWFs have a role to play in doing the exact same thing in the region. “

The call is the latest in a series of similar suggestions from economists and experts, as the oil-dependent economies of the Middle East face severe contractions in trade activity and economic growth.

S&P Global released its forecast for Abu Dhabi this weekend, warning that “lower oil production and COVID-19 will reduce economic output by about 7.5% in 2020”, with a gradual recovery from from 2021.

The International Monetary Fund forecast a decline in Saudi gross domestic product (GDP) of 2.3% in April, but Oxford Economics more recently forecast a decline of just under 8% this year in overall GDP and a decline of 8.2% for the non-oil economy.

Gulf funds make strategic foreign investments

Saudi Arabia’s Public Investment Fund, with more than $ 300 billion in assets under management, is well positioned to step in and support Saudi Arabia’s economic recovery, Fadlallah said.

The kingdom fund recently embarked on a spending frenzy, buying substantial stakes in large Western companies that are currently trading at multi-year lows due to the pandemic. They include approximately half a billion dollars in stakes in companies such as Carnival Corp, Live Nation, Walt Disney, Marriott International, Bank of America and Facebook, among others, as well as a $ 714 million stake in Boeing.

At the end of May, the Saudi Arabian central bank transferred 40 billion dollars of its foreign exchange reserves to the investment fund of the kingdom, what the Saudi Minister of Finance called “an exceptional one-off transaction that took place after much deliberation”.

Sovereign wealth fund action can save thousands of jobs, bolster corporate profits, maintain non-oil revenues, prevent a deflationary spiral in real estate, and push stock markets up 10-20%.

Tarek Fadlallah

CEO, Nomura Asset Management Middle East

So far, however, there has been no large-scale program to deal with the coronavirus crisis announced by the GCC (or Gulf Cooperation Council) regional wealth funds.

The IMF has also called on heads of state to use their legacy funds to boost growth during the recession.

“Sovereign wealth funds can play a role, regional institutions can play a role,” IMF Middle East and Central Asia Director Jihad Azour told an online conference in late April.

And Turkish investment fund chief Zafer Sonmez told CNBC in May that “In terms of debt, equities response should come from sovereign wealth funds… This is new for Turkey, but we will be more active, we will compensate for these volatile times to help as a provider of equities solutions of the sovereign. ”

Are the current stimulus measures not enough?

Gulf monarchies have already deployed tens of billions of dollars to help their banks and private sectors since the coronavirus outbreak, while some have also implemented unprecedented austerity measures. Saudi Arabia tripled its value-added tax rate to 15% in May while cutting cost-of-living subsidies for government employees.

But Fadlallah said the current stimulus package was not enough, and although countries’ central banks have sent capital to local banks, the latter are not lending to many companies that need the funds.

“The action of sovereign wealth funds can save thousands of jobs, support corporate profits, maintain non-oil revenues, prevent a deflationary spiral in real estate and drive stock markets up 10-20%,” a- he declared.

He noted that although the Covid-19 pandemic is a global phenomenon, the Gulf region has additional problems.

“In particular, the drop in oil prices which is very significant, and what is expected to be an exodus of millions of expatriates which will clearly affect the demand side of the equation in the economies,” he said.

“So when you consider the important factors, it is very difficult to say that the political responses have been sufficient to deal with these events.”

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