Gulf funds could shift focus home

Dubai: Gulf-based sovereign wealth funds, which have been instrumental in bailing out a number of Wall Street banks in the recent weeks, are likely to shift their investment focus to their own home markets in the medium term, according to Antonina Antonova, an economist with Societe Generale Asset Management.

During the recent market turmoil, SWFs provided $59 billion in much-needed liquidity to the Wall Street banks battered by more than $130 billion in writedowns from the declining values of mortgage-related assets.

While a significant share of this liquidity came from GCC-based sovereign funds, economists said that the massive economic diversification and infrastructure development under way in the Gulf countries have substantially increased the chance of reverse investment flows.

According to Societe Generale analysts, the availability of future funds (for investment abroad) from the oil-exporting nations would increasingly depend on what share of oil revenue is taken for in their domestic economies.

Currently, investors from oil-exporting nations collectively own between estimated $2.5 to $3.8 trillion in foreign financial assets and GCC countries led by the UAE account for the largest share in this aggregate.

Domestic economies

"The future volume of overseas investments (by SWFs) will depend on the amount GCC states would dedicate to domestic economies, which have consistently suffered from under-investment, lagging behind China, India and Brazil. In addition, regional leaders are also facing the urgent need to create four million jobs over the next decade for its growing population, 40 per cent of whom are below 15 years old and need to be educated and employed," said Antonova.

Among the external factors, oil price will be a key element in determining the Gulf surpluses. The oil price will be influenced to some extent by the upcoming demand slowdown from the US as well as European economies. Depending on the degree of this adjustment, this could result in a notable reduction of the Gulf's overall oil surplus.

Although the Gulf countries' international reserves have quadrupled from $90.5 billion in 2003 to $365 billion in 2007 and are forecast to touch $455 billion in 2008, leading economists from the region believe that there could be a reverse investment flow into the region due to the high rate of returns and the growing opportunities.

"The cumulative current account surpluses for the GCC countries are expected to grow to $954.6 billion by 2008. Currently, Gulf countries are recycling surpluses back into the region leading to greater diversification of local economies and regional economic integration," said Dr. Nasser H. Saidi chief economist of the Dubai International Financial Centre (DIFC).

In 2008 GCC is forecast to grow close to six per cent.