Sovereign wealth funds (SWFs) are underpinning the financial stability of Gulf states as government use the funds to invest the windfall from record oil revenues, Standard & Poor’s said in a report on Wednesday.
The ratings agency said the current run of high oil prices, which last week hit an all-time high above $139 a barrel, were being managed much more prudently than the previous oil booms of the 1970s and 1980s.
S&P said SWFs were playing a vital role in this and as such had become key to Gulf states’ sovereign creditworthiness.
"...a notable difference between the current oil boom and previous booms in the 1970s and 1980s has been the comparatively prudent management of windfalls during the current oil price surge,” S&P credit analyst Ben Faulks said in a statement.
“Indeed, SWFs play an integral part in this more long-sighted fiscal and economic planning."
Since 2002, the cumulative current account surplus of the Gulf Cooperation Council is estimated to have reached almost $1 trillion in 2008, most of which is stored in SWFs, S&P said.
In the report S&P breaks SWFs down into two categories - those funds that invest in marketable securities abroad (Type I) and those that own equity stakes in domestic and regional companies (Type II).
It said Type I funds focused on providing an adequate return on capital, preserving wealth for future generations, diversifying revenue streams and buffering against fiscal shocks.
It said Type II funds focused on diversifying the local economy through the expansion of domestic industry, and help the local economy integrate more fully with the global economy.
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