Sovereign wealth funds are guiding the Middle East through the global economic crisis

Getty/ Nick Donaldson

In a global context of geopolitical, economic and financial uncertainty, sovereign wealth funds (SWFs) from the Middle East are shining more than ever. These government-related entities have broken stereotypes of having hidden agendas and only hunting trophy assets, and have instead become highly sophisticated, flexible and sizeable investors that can move the needle both at home and overseas.

In fact, of the $11.2 trillion in assets that SWFs are estimated to manage worldwide, more than a third hails from the Middle East region. The Gulf alone houses 18 sovereign investors that manage $3.7tn in financial capital and 7,500 personnel in human capital.

For the past two decades, most economies in the GCC have grown multi-fold thanks to the grand visions of their leaderships and to the notable financial weight of their SWFs. In times of economic distress, including the 2008 global financial crisis, the 2015 oil price crash, the Covid-19 pandemic and the current liquidity squeeze, these vehicles have provided the necessary resilience others could not.

But to understand how SWFs can and do help, we need to appreciate the heterogeneity of the industry – no two funds are the same. Every state-linked vehicle is shaped by three distinct characteristics: their source of wealth, their investment mandate and their regional restrictions. Even with a common revenue stream, GCC sovereign investors can be quite diverse because of their mission and geographical preferences.

In no period was this more evident than during the Covid-19 pandemic. When the global economy came to a sudden halt, governments needed to put their SWFs to work. They were economic “first responders” – SWFs that could either be withdrawn from or flexible investors that could rescue local assets, or opportunistic funds that sought bargains overseas.

A good example of the support brought by SWFs to national champions can be found in the aviation industry. Airlines around the world went through a serious struggle in the past two years, and sovereign investors provided them with an estimated $20 billion globally.

The presence of SWFs in the economy and daily life of the Gulf countries extends beyond airlines, though. Many of the largest industrial conglomerates, main financial institutions, most iconic properties and most strategic infrastructure are owned or supported by national investors. If you live in the Gulf, chances are that your daily life is touched by the magic wand of a sovereign wealth fund.

On paper, sovereign wealth funds around the world have endured losses thus far in 2022. For example, Norway’s GPFG, the world’s largest SWF until very recently, lost 18.2 per cent, equivalent to $257bn in value, in the first three quarters of the year. Every single asset class is down, and investors have, simply, nowhere to hide.

However, the war in Ukraine has created some unintended consequences and the Brent crude oil price has averaged $101 this year. For those GCC economies with lower fiscal expenditure, this is translating into significant surpluses, which will be transferred to some of the SWFs. So, those large savings funds that are more liquid and internationally focused, including Abu Dhabi’s Adia, Kuwait’s KIA and Qatar’s QIA will be just fine.

On the other hand, the strategic funds that have large portfolios of domestic assets, such as Mubadala and ADQ in Abu Dhabi, ICD in Dubai or Mumtalakat in Bahrain, are not expecting any capital injection, but will not endure such large losses either, because of the more limited exposure to traditional bonds and stocks. In summary, GCC sovereign investors will emerge even stronger from the current economic scenario.

In this context, Middle Eastern SWFs are readier than ever to shine. Overseas, they have more than doubled their investments in western economies, including the US and Europe, from $20.9bn in all of 2021 to $48bn in the first 10 months of 2022. Of the top 10 most active sovereign investors this year thus far, six are Middle Eastern and most have participated in mega-deals of over $1bn.

Domestically, Gulf SWFs are leading the agenda, too. In Riyadh, PIF is creating a new airline, a national coffee company and an electric vehicle brand, on top of all the giga-projects. In Doha, QIA is enhancing the local stock exchange, launched an ed-tech center and supported the growth linked to the World Cup. And in Abu Dhabi, Mubadala, ADQ and their portfolio companies are driving forces behind major initiatives.

The region is experiencing profound social changes, too. The introduction of the UAE golden visa will allow Abu Dhabi and Dubai to compete with Hong Kong and Singapore as alternatives to New York and London for global talent. The promotion of free zones, entrepreneur visas, foreign investment and venture capital hubs may change the local ecosystems drastically in the next five to 10 years. And SWFs will also be behind those changes.

As always, the Middle East will not be short of challenges and curveballs, but the financial prospects are certainly looking brighter than in other regions of the world – in no small part thanks to sovereign wealth funds.