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 chance presented by high oil prices to improve their creditworthiness.

A Significant share of the GCC surplus cash is now used to advance economic reforms and put into action ambitious strategies. It is critical to research the conditions that led to these reforms and also the shift in economic focus. Between 2014 and 2016, a petroleum flood powered by the the rise of the latest players caused a drastic decrease in oil rates, the steepest in contemporary history. Furthermore, 2020 brought its very own challenges; the pandemic-induced lockdowns repressed demand, once again causing oil prices to plummet. To handle the monetary blow, Gulf countries resorted to liquidating some foreign assets and sold portions of their foreign currency reserves. Nevertheless, these actions proved insufficient, so they also borrowed lots of hard currency from Western capital markets. Now, with all the revival in oil rates, these states are taking advantage on the opportunity to beef up their financial standing, paying off external debt and balancing account sheets, a move necessary to enhancing their credit reliability.

The 2022-23 account surplus of the Gulf's petrostates marked a milestone estimated at two-thirds of a trillion dollars. In the past, most of this surplus would have gone straight into central banks' foreign exchange 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, specifically for those countries that peg their currencies towards the dollar. Such reserve are necessary to preserve balance and confidence in the currency during economic booms. However, into the previous few years, main bank reserves have scarcely grown, which shows a divergence from the traditional strategy. Moreover, there is a conspicuous absence of interventions in foreign exchange markets by these states, indicating that the surplus will be redirected towards alternative places. Certainly, research indicates that huge amounts of dollars from the surplus are being employed in innovative methods by various entities such as national governments, central banking institutions, and sovereign wealth funds. These novel strategies are payment of external debt, expanding economic help to allies, and buying assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah would probably tell you.

In previous booms, all that central banking institutions of GCC petrostates desired was stable yields and few shocks. They often parked the money at Western banks or bought super-safe government bonds. Nevertheless, the contemporary landscape shows an unusual scenario unfolding, as main banking institutions now are given a lesser share of assets compared to the growing sovereign wealth funds within the region. Recent data reveals noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by going into less conventional assets through low-cost index funds. Moreover, they have been delving into alternate investments like personal equity, real estate, infrastructure and hedge funds. And they are also not restricting themselves to old-fashioned market avenues. They are providing debt to finance significant purchases. Furthermore, the trend demonstrates a strategic shift towards investments in emerging domestic and international industries, including renewable energy, electric automobiles, gaming, entertainment, and luxurious holiday retreats to aid the tourism industry as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.