GCC capital investment linked to global market volatility

To:

Al-Monitor Pro Members

From:

Dr. Karen E. Young 

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

Date:

Sept. 15, 2022

Bottom Line: 

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.

Background Facts:
  • The windfall of oil revenues for the Gulf Arab states in 2022 could amount to $1.4 trillion, according to estimates from The Economist.
  • Domestic spending is a priority in the GCC. Total GCC project awards rose by nearly 12% year on year and over 35% between the first and second quarters of 2022 to $22.8 billion. Saudi Arabia was the largest source of overall GCC awards in the first half of 2022, according to research from Abu Dhabi Commercial Bank.
  • New projects have also come off the ground in Kuwait and Oman, with a focus on local infrastructure in water and power dominant.
  • In each of the Gulf oil exporters, there are now divergent fiscal challenges and spending priorities. Oman is buying back some of its outstanding debt, which will relieve the debt burden in the years to come. Saudi Arabia is creating a nest egg for domestic development projects. The UAE is creating savings to be deployed in investment abroad and in strategic assets in the region. 
  • Overall, fiscal balances across the region are improving significantly, and this relates to fiscal policy as well. Saudi Arabia has made strides in fiscal consolidation on both the expenditure and revenue sides. Other GCC states have used cuts to investment spending to meet their fiscal challenges. Public sector wages still consume between 30% and 50% of total public spending across the GCC. According to some bank analysts, total non-oil revenues remain relatively weak in the GCC, rising on average from 11.4% of non-oil GDP in 2012 to 12.6% in 2021.
  • Energy transition spending is also on the rise inside the Gulf states. There is a regional focus on the development of green hydrogen projects, including in Oman, the UAE and Saudi Arabia. Two solar projects are expected to be awarded in Oman by the end of 2022.
  • Traditional oil and gas spending is also on the rise. Aramco is looking to raise investment to as much as $50 billion in 2022, from $32 billion in 2021. The value of oil and gas awards increased three times over in Saudi Arabia in the first half of 2022. In Qatar, awards for two LNG mega trains linked to the North Field South are expected to be about $5 billion. In Abu Dhabi, projects linked to the Hail and Ghasha sour gas development are expected in early 2023.
  • Sovereign Wealth Funds in the Gulf are allocating toward Europe in traditional destinations like the UK, but also in new security and energy partnerships in Germany and Greece. In Greece, for example, according to the SWF Institute, Abu Dhabi funds are seeking to build on a declaration signed in 2021 seeking cooperation agreement on foreign policy and defense issues with investments in infrastructure, including the Iraklio port in Crete, logistics, airports and roads. ADQ signed a EUR4 billion strategic investment agreement with the Hellenic Development Bank and the Hellenic Development Bank of Investments in May 2022. Masdar, which was established by Mubadala and is now part-owned by ADQ, is considering investments in wind farms as well as green hydrogen, desalination units powered by renewables, and energy storage projects.
Alternative Scenarios:

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.

Conclusion - most likely scenario:

The most likely scenario is a combination of scenarios 1 and 3, a new age of energy price volatility in which fear of a slowdown becomes as disruptive as a slowdown itself. Policymaking in this environment and long-term development and infrastructure planning becomes stilted and disappointing. This would further delay meeting clean energy targets for domestic electricity production and threaten the potential for renewables throughout the MENA region without significant NOC investment in hydrogen from the Gulf states themselves.

Contributor Background:  

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.

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