GCC capital investment linked to global market volatility

Al-Monitor Pro Members

Dr. Karen E. Young 

Senior Research Scholar, Columbia University, Center on Global Energy Policy 

Sept. 15, 2022

The Gulf Arab states are a vital source of capital investment in their surrounding geography across the Middle East, North Africa and Pakistan. In this period of substantial state oil revenue generation, some traditional recipients of Gulf aid and investment will be in need as many are not oil or gas producers, and food and commodity inflation has had drastic impacts on their fiscal balances. We know that Gulf sovereign wealth funds have been actively buying up depressed assets in depreciating currencies in Turkey and Egypt, as well as increasing their holdings of US Treasuries and equities in the United States. What has not been evident is how the deluge of oil revenue in the first half of 2022 has affected capital investment flows from private and state-owned entities from the Gulf. The emerging evidence is that the windfall is accelerating capital flows from the UAE mainly from private firms and a few state-owned entities. Outward capital investment from Saudi Arabia and Qatar has been slower to flow. Domestic investment could be a priority. However, we are seeing significant intra-GCC investment, reversing a trend of financial disaggregation during the 2017-2021 period during the embargo of Qatar. Sovereign wealth fund placements from the Gulf seem to be headed strategically to Europe and the United States, according to new reporting by the SWF Institute.

Scenario 1: Global recession makes a substantial dent in oil demand and the windfall comes to a halt. In this scenario, we could see a sharp decline in domestic contract awards and megaproject spending. Outward investment commitments could be withdrawn or assets sold, challenging some new foreign partnerships on security issues.

Scenario 2: Fiscal consolidation trends could amplify and we could see belt-tightening in an age of oil and gas windfall, as the previous policy implementations of taxes and reduced subsidies have not generated significant popular protest. The pressure to deliver returns on outward SWF investments and local job creation will be high but could demonstrate improved state capacity and fiscal prudence, consolidating legitimacy for some regional young leaders like MBS.

Scenario 3: $100 barrel days may be limited and over by 2023, ushering in a new age of price volatility and competition among OPEC+ producers to undersell each other and creating more appetite for politically induced supply challenges.

Karen E. Young is a senior fellow and founding director of the Program on Economics and Energy at the Middle East Institute. She was a resident scholar at the American Enterprise Institute, and taught courses on the international relations and economy of the Middle East at George Washington University and at the Johns Hopkins School of Advanced International Studies. Before joining AEI, she served as senior resident scholar at the Arab Gulf States Institute, a research and visiting fellow at the Middle East Centre of the London School of Economics and Political Science, and an assistant professor of political science at the American University of Sharjah in the UAE.