Sovereign wealth funds in Arabian Gulf sell off assets to plug fiscal deficits

Arabian Gulf states have been hit by the oil price collapse from about $110 per barrel in July last year to below $50 a barrel on Friday.

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Sovereign wealth funds (SWFs) across the Arabian Gulf are selling financial assets as the low oil price hits the region’s economies.

The Saudi Arabian Monetary Authority (Sama) and the Qatar Investment Authority (QIA) are selling stakes in European companies, as the oil price slump forces Gulf states to run major fiscal deficits for the first time since 2009, and encourages SWFs to plug the gap.

Sama has withdrawn US$1.3 billion from European equities this year, according to Nasdaq estimates.

The QIA said last week that it was selling its 10 per cent stake, valued at $615 million, in the German construction company Hochtief, the QIA’s third divestment in three months. Sama and QIA did not respond to requests for comment.

Sama has withdrawn up to $70bn from international fund managers, while the QIA is said to have suffered a paper loss of up to US$12bn on its equity stakes in Volkswagen, Glencore and the Agricultural Bank of China, according to the Financial Times of London.

The QIA has since announced stake sales in the French construction conglomerate Vinci and two London office buildings, and is reported to be in talks to sell the film studio Miramax.

The Kuwait Investment Authority is reported to have sold $30bn of assets, according to Kuwait media reports. Overall, SWFs including those outside the Gulf will dispose of around $1.2 trillion of assets by the end of the year, according to UBS.

Sama had about $671.8bn in assets under management as of the middle of this year, up from about $29bn in 2004, according to estimates from the Sovereign Wealth Fund Institute. The QIA held $256bn as of the middle of this year, according to the institute. That figure is up from $2.9bn in 2004, according to a statement from the Qatar Central Bank.

But Gulf states have been hit by the oil price collapse from about $110 per barrel in July last year to below $50 a barrel at the weekend.

Collectively, Gulf countries have lost more than $300bn in export earnings from lost hydrocarbons revenues this year, the IMF said. That is leading to budget deficits across the region. Saudi Arabia and Kuwait earn more than three-quarters of government revenues from oil, and the UAE earns more than half, according to IMF data.

Saudi Arabia and Kuwait, and Qatar and the UAE, are in contrasting positions. With a deficit of 19.5 per cent of GDP, and reserves equivalent to 100 per cent of GDP, the kingdom has an urgent need for cash to plug the gap. Saudi Arabia has tapped local bond markets with a $27bn issue, and has proposed a reported $10bn spending cut in its forthcoming budget, according to reports and central bank data. Kuwait is set to run an even bigger budget deficit of 22 per cent of GDP.

The UAE and Qatar are less vulnerable. The UAE holds reserves equivalent to about 275 per cent of GDP, and is set to run a deficit of 2.3 per cent, meaning that its fiscal shortfall is considerably less urgent. It has announced plans to cut Dh20bn from its spending on subsidies. Qatar is expected to run a deficit of just 0.5 per cent of GDP, according to the credit ratings agency Fitch.

“The decline in oil prices is putting pressure on the oil-dependent SWFs, and that is causing them to exit their European equity holdings,” said Alexander Free, an analyst at Nasdaq.

Michael Maduell, the president of the Sovereign Wealth Fund Institute, said: “The issue for Sama is liquidity and a level of capital preservation”.

Many SWFs are moving away from equities due to increased volatility in the run-up to expected interest rate hikes, and they might also be moving away from Europe, he said.

Mubadala is selling most of the assets of its commercial finance joint venture with General Electric, Mubadala GE Capital. GE this month announced the sale of several of its North American financing businesses to Wells Fargo, the US lender.

“[For Mubadala], the winding down of the joint venture is related to General Electric getting out of the financing business,” said Mr Maduell.

“Many of these assets have been prepped for sale, waiting for the right price. These entities know that many private equity funds have dry powder, while corporations have plenty of cash.”

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