Dubai: The sovereign wealth funds (SWFs) of Abu Dhabi, Kuwait and Qatar have underpinned the resilience of their sovereign ratings and economies despite lower oil prices and the coronavirus shock, said Fitch Ratings.
The SWF assets of these countries are likely to even increase in 2020 due to supportive market returns, despite governments using SWFs’ foreign assets and other deposits to cover government funding needs in 2020.
The uplift to ratings from SWF assets has been stable or increasing despite larger fiscal and external deficits in 2020.
The UAE, Kuwait and Qatar, SWF assets provide two to six notches of uplift to sovereign ratings by boosting sovereign net external asset positions, fiscal balances, and overall financing flexibility. Estimated sovereign external assets of these countries are sufficient to cover five to eight years of total government spending and six to eight years of non-oil deficits.
“We estimate that SWF assets in Kuwait, Abu Dhabi and Qatar would remain sizeable in the medium term even under adverse oil market scenarios. All three countries stand to substantially deplete their SWF assets in the long term without some combination of recovery in oil prices, growth in production, fiscal adjustment and supportive financial market returns,” said Krisjanis Krustins, an analyst at Fitch.
Managing oil market shift
Fitch estimates that SWF assets in Kuwait, Abu Dhabi and Qatar would remain sizeable in the medium term even under adverse oil market scenarios.
Three leading GCC SWFs, Kuwait Investment Authority (KIA, whose foreign assets under management (AUM) is estimated at more than $560 billion in 2019), the Abu Dhabi Investment Authority (ADIA, with an estimated foreign AUM of $580 billion), and the Qatar Investment Authority (QIA; estimated foreign AUM of $250 billion) report predominantly invest in external assets and are intended to be used directly for government funding.
“SWF assets in the GCC are generally not disclosed, and we estimate them with varying degrees of supporting data. Kuwait and Abu Dhabi offer significantly more transparency than Qatar,” the rating agency said.
Role of public institutional funds
Fitch’s sovereign rating analysis also considers other government owned assets, for example foreign assets held by the Saudi Central Bank (SAMA) or Kuwait’s Public Institution for Social Security (PIFSS). To a lesser degree, it also consider the assets of holding entities with mandates that include local development, such as Saudi Arabia’s Public Investment Fund (PIF), Abu Dhabi’s Mubadala Investment Company or Bahrain’s Mumtalakat Holding Company.
Saudi’s PIF has made international investments, the biggest single investment being a $45 billion commitment to Softbank’s Vision Fund in 2016, which in Fitch’s view would not be liquid in case of an urgent funding need. It also invested internationally after the $40 billion SAMA transfer in early 2020 (although it is not clear whether these investments were strategic or tactical in nature).
“We expect the Saudi government to use the PIF to support economic growth and partly offset the impact of budgetary austerity through its domestic investments,” Cedric Julien Berry, an analyst at Fitch.
Abu Dhabi’s Mubadala Investment Company (MIC), which holds a portfolio of strategic domestic and foreign assets, including in petrochemicals, mining, aerospace and semiconductor manufacturing. MIC reported AUM of Dh853 billion at end-2019 (around $230 billion or 90 per cent of GDP), of which about 72 per cent was reported to be outside of the UAE.
The Investment Corporation of Dubai (ICD), which holds a portfolio of mostly domestic assets on behalf of the Dubai government, including Dubai’s flagship bank, airline and property developer.
ICD’s book value of equity was Dh250 billion at end-2019 (65 per cent of Dubai GDP), of which identifiable local equity holdings were about Dh70 billion.
Bahrain’s Mumtalakat which mostly consists of large domestic entities such as Aluminium Bahrain and the National Bank of Bahrain, but it also has some international holdings such as McLaren. At end-2019, Mumtalakat’s total assets were BHD7.1 billion (around $17 billion or 49 per cent of GDP).