GCC countries' gross foreign assets will swell to $4.4 trillion by next year, IIF says

Total foreign liabilities of the six-member regional bloc will be much smaller at around $1 trillion, leading to a net foreign assets position of $3.4 trillion

GCC SWFs, led in large part by Saudi Arabia, have turned towards investing more in global equities and FDI, according to the Institute of International Finance. EPA

The gross foreign assets of the six GCC countries are expected to swell to around $4.4 trillion in 2024, supported by oil export-driven current account surpluses, projected at $146 billion, according to a new report.

The total foreign liabilities of the region will be much smaller at around $1 trillion, leading to a net foreign assets position of $3.4 trillion, the Institute of International Finance said.

“Almost two-thirds of the gross foreign assets are managed by sovereign wealth funds, with diversified portfolios of public equities and fixed income securities,” said Garbis Iradian, chief economist, Mena, at the IIF.

“The other third is in the form of official reserves and foreign assets of commercial banks invested in liquid assets.”

The IIF estimated the GCC’s external investments based on data from multiple sources such as the US Treasury International Capital data on holders of US government securities; Bank for International Settlements data on cross-border assets and liabilities of international banks; Unctad data on source and destination of foreign direct investment; and information from national authorities where available.

“Our estimates are not precise, but they are indicative,” said Mr Iradian.

“The main conclusion is that GCC investments are well diversified across asset classes.”

According to the IIF estimates, about 35 per cent of GCC investments are in equity, 22 per cent in bank deposits, 17 per cent in foreign direct investment abroad, 7 per cent in US Treasuries, 10 per cent in bonds, and the remaining 9 per cent, in a range of less liquid investments, including non-US bonds, mergers and acquisitions, and hedge funds.

By region, 65 per cent of the investments are in North America and Europe, 20 per cent in Asia Pacific, 10 per cent in other Mena countries, and 5 per cent in Sub-Saharan Africa and Latin America.

The report shows that in recent years GCC SWFs, led in large part by Saudi Arabia, have turned towards investing more in global equities and FDI and away from more traditional safe assets.

“Since the unveiling of Vision 2030 in 2015, Crown Prince Mohammed bin Salman has pushed the Public Investment Fund into investing in riskier assets,” the report said.

Since then, investments in foreign equities and FDI have grown from 20 per cent of total foreign assets to over 40 per cent in the second quarter of 2023, it added.

To finance these riskier investments, Saudi Arabia has been gradually reducing its foreign reserve assets.

Data shows GCC holdings of US Treasury securities have been on a decline in recent times. From February 2020 to September 2023 Saudi holdings of US debt fell nearly 40 per cent, the report said.

According to the IIF, the kingdom's push away from safer investment assets is driven by three goals. First, the returns on riskier assets will help PIF reach its goal of managing $2 trillion in assets by 2030.

Second, it allows Saudi Arabia to diversify away from oil and acts as a potential hedge against declines in the price of crude oil. Third, riskier investments would help fund many of the projects envisioned in Vision 2030.

The report also notes that GCC countries have begun to slowly diversify away from the US dollar as bilateral trade with other countries, most notably China and India, increases.

“While trade is still mostly conducted in US dollars, GCC countries have slowly started to sign bilateral trade agreements that would allow them to settle trade in other currencies,” the report said.

“However, we foresee this shift to be limited in scope as all GCC currencies are pegged to the dollar, which provides an anchor for financial stability in the region. Furthermore, the currency composition of GCC assets held by BIS banks has remained stable at around 80 per cent, indicating that no drastic change has occurred.”