Private capital flows in GCC

In the past few decades, the UAE has emerged as the only net importer of private capital in the GCC countries, mainly because of its amongst many things diversified economy.  And it does carry on the same, a significant finding in the context of low global oil prices and declining government surpluses in all GCC countries, according to Invesco’s sixth annual Middle East Asset Management Study.

This study that was based on a close review of almost all GCC’s banking and financial institutions interviews concluded that the fall in the oil price expected to reduce funding and increase withdrawal risk of Middle East sovereign investors, somehow managed to make many of these investors stand better placed to manage these challenges than in the past

There has been some noticeable drop in stocks with the sudden lowering of oil price but it was quickly alleviated by the opening of the Saudi Stock Exchange to foreign institutional investors in June 2015.  It contributed significantly to the direction of private capital flows into the GCC region.  However as put in the study of Invesco :

“Our conversations in the region show that whilst there has been optimism surrounding the regional economy and capital markets, concerns such as the oil price and government finances persist,” said the Head of Invesco Middle East.

As a matter of fact, it looks as if those declines in inflows from emerging markets such as Western countries and Russia, were offset by growth in imports from the MENA and the GCC countries.

There is also consensus among participants that Middle East governments will struggle to cut expenses, given high welfare expectations from Middle East locals and underlying political instability in the wider region.  The study also finds that currency management is becoming an important concern for both sovereign investors and regional central banks.

Stability and governance appear to be a greater challenge for Middle East sovereigns than for peers in international markets.  These concerns are driven by oil price falls and the view that withdrawals will justify conservative strategies within sovereigns and reduce reform.  And despite the fear of withdrawals, nearly half of Middle East sovereign investors say they will be able to increase funding from new sources.

The study finds that emerging market infrastructure could be an interesting asset for the established Middle East sovereign funds resulting in many established regional sovereigns moving towards external active management.