The Gulf's sovereign wealth funds 'need to be deployed' amid coronavirus crisis, expert says
- The Gulf region's twin shock of the coronavirus pandemic and severely weakened oil prices continues to pressure its economies, with new forecasts over the weekend painting a grim picture.
- "Sovereign wealth funds have multiple objectives, but one of them is that they are rainy day funds, and this is a rainy day," Tarek Fadlallah told CNBC.
The Gulf region's twin shock of the coronavirus pandemic and severely weakened oil prices continues to pressure its economies, with new forecasts over the weekend painting a grim picture.
As governments around the world roll out stimulus measures and rescue plans in an effort to save their hard-hit private sectors and most hard-hit industries, some have called for sovereign wealth funds — which are particularly large in the Gulf — to step in.
"I think sovereign wealth funds — and by all accounts there are about two trillion dollars of assets at these regional sovereign wealth funds — these need to be deployed," Tarek Fadlallah, CEO at Nomura Asset Management Middle East, told CNBC's Capital Connection on Monday.
"Sovereign wealth funds have multiple objectives, but one of them is that they are rainy day funds, and this is a rainy day. So the argument is that in the same way that the Federal Reserve and the government of the U.S. have stepped in to correct some of the market inefficiencies and market dislocations, there is a role for sovereign wealth funds to do exactly the same in the region."
The call is the latest in a line of similar suggestions from economists and experts, as the Middle East's oil-dependent economies face dire contractions in business activity and economic growth.
S&P Global over the weekend issued its forecast for Abu Dhabi, warning that "lower oil production and COVID-19 will reduce economic output by about 7.5% in 2020," with a gradual recovery beginning in 2021.
The International Monetary Fund forecast Saudi gross domestic product (GDP) to fall by 2.3% in April, but Oxford Economics more recently forecast a decline of just under 8% this year for overall GDP and an 8.2% decline for the non-oil economy.
Gulf wealth funds making 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 the Saudi economic recovery, Fadlallah says.
The kingdom's fund has recently been on a spending spree, buying substantial stakes in major Western businesses currently trading at multi-year lows as a result of the pandemic. They include roughly half-billion-dollar stakes in companies including 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 central bank transferred $40 billion of its foreign reserves to the kingdom's wealth fund, which the Saudi finance minister called an "exceptional one-off transaction that came after a lot of deliberation."
Thus far, however, there haven't been any large-scale programs to address the coronavirus crisis announced by GCC (or Gulf Cooperation Council) regional wealth funds.
The IMF has also called on state leaders to use their wealth funds to help boost growth during the downturn.
"Sovereign wealth funds can play a role, regional institutions can play a role," the IMF's Middle East and Central Asia director, Jihad Azour, said during an online conference in late April.
And Turkey's wealth fund chief Zafer Sonmez told CNBC in May that "In terms of debt, the equity response should come from the sovereign wealth funds … This is new for Turkey, but we will be more active, we will offset these volatile periods to help as an equity solutions provider of the sovereign."
Current stimulus measures not enough?
The Gulf monarchies have already deployed tens of billions of dollars to help their banks and private sectors since the outbreak of the coronavirus, while some have also introduced unprecedented austerity measures. Saudi Arabia in May tripled its value-added tax rate to 15% while cutting cost-of-living subsidies for government employees.
But Fadlallah said the current raft of stimulus isn't enough, and while countries' central banks have sent capital to local banks, these aren't lending to many of the businesses that need funds.
"Sovereign wealth fund action can save thousands of jobs, support corporate profits, maintain non-oil revenues, avoid deflationary spiral in property and lift stock markets by 10% to 20%," he said.
He noted that although the Covid-19 pandemic was a global phenomenon, the Gulf region had additional issues.
"Specifically the lower oil prices which is very important, and what is expected to be an exodus of millions of expats which clearly will affect the demand side of the equation across the economies," he said.
"So when you consider the significant factors, it's very difficult to argue that the policy responses have been sufficient to deal with these events."