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 improve their creditworthiness.

A huge share of the GCC surplus cash is now utilized to advance economic reforms and implement ambitious plans. It is critical to analyse the conditions that resulted in these reforms and the change in financial focus. Between 2014 and 2016, a petroleum glut made by the emergence of the latest players caused a drastic decrease in oil prices, the steepest in modern history. Furthermore, 2020 brought its unique challenges; the pandemic-induced lockdowns repressed demand, once again causing oil prices to drop. To handle the economic blow, Gulf states resorted to liquidating some international assets and sold portions of their foreign currency reserves. But, these actions proved insufficient, so they additionally borrowed lots of hard currency from Western capital markets. Currently, with all the revival in oil prices, these states are taking advantage on the opportunity to strengthen their financial standing, settling external debt and balancing account sheets, a move necessary to improving 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, most of this surplus would have gone directly into central banks' foreign exchange reserves. Historically, most the surplus from petrostate in the Gulf Cooperation Council GCC would be funnelled straight into foreign exchange reserves as a protective measure, particularly for those countries that peg their currencies towards the dollar. Such reserves are necessary to preserve stability and confidence in the currency during economic booms. However, into the past several years, central bank reserves have scarcely grown, which indicates a change from the conventional system. Furthermore, there has been a conspicuous absence of interventions in foreign exchange markets by these states, hinting that the surplus is being redirected towards alternative avenues. Certainly, research shows that billions of dollars from the surplus are increasingly being utilized in innovative means by different entities such as national governments, main banks, and sovereign wealth funds. These novel strategies are payment of outside debt, extending economic help to allies, and buying 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 wanted was stable yields and few surprises. They often times parked the cash at Western banks or purchased super-safe government securities. However, the contemporary landscape shows an unusual scenario unfolding, as central banking institutions now are given a lesser share of assets in comparison to the growing sovereign wealth funds within the area. Present data uncover 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 have been delving into alternative investments like private equity, real estate, infrastructure and hedge funds. Plus they are additionally no longer limiting themselves to conventional market avenues. They are supplying funds to fund significant acquisitions. Moreover, the trend highlights a strategic shift towards investments in growing domestic and worldwide companies, including renewable energy, electric vehicles, gaming, entertainment, and luxury holiday resorts to promote the tourism industry as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.