Plunging oil prices could prompt Gulf Arab sovereign wealth funds to pull tens of billions of dollars out of global markets this year, with much of the money expected to come out of US dollar debt and deposits with banks abroad.
But - in a crucial balancing act for funds tasked with diversifying their economies away from hydrocarbons - many are expected to remain active in making long-term investments such as infrastructure and real estate, with an increasing focus on developing nations as opposed to sluggish European economies.
For over a decade, the funds of the six-nation Gulf Cooperation Council (GCC) have been big players in the securities markets of the developed world, buyers of stakes in high-profile companies such as Total and Volkswagen , and investors in European real estate.
They have grown rapidly; including the foreign assets of Saudi Arabia's central bank, the GCC's sovereign funds now total about $2.43 trillion, according to the International Monetary Fund. Most of that is invested overseas.
But the growth is set to falter as oil's 60 percent tumble over the past seven months slashes governments' energy export revenues - "petrodollars" - the main source of new money for the funds.
Capital Economics estimates if Brent crude averages $60 a barrel this year, the GCC will run a current account deficit of $60 billion, its first deficit since 1998. That could halt net flows of fresh petrodollars into the funds entirely.
In fact, flows could reverse. Governments will probably liquidate some of their fund assets to cover budget deficits as their revenues fall; if Brent stays at its current level around $50, all GCC governments are likely to run deficits.
The projected deficits are small compared with the size of the funds, so in contrast to crisis-hit oil exporters such as Russia, Gulf states will avoid any mass sell-off of assets, say bankers and analysts familiar with the funds' operations.
But even before oil began tumbling, there was a trend for some sovereign funds to bring more money home to support domestic economic growth, said Michael Maduell, president of the US-based Sovereign Wealth Fund Institute, which tracks the industry. That trend could strengthen, he said.
Diego Lopez, an Abu Dhabi-based director at the sovereign wealth fund unit of consultants PwC, said funds were looking to invest in assets such as infrastructure and real estate, but as opportunities dried up in developed countries, were increasingly seeking investments in emerging economies.
The Qatar Investment Authority, for example, recently announced a big push into Asia, aiming to invest $15-$20 billion over five years to diversify away from its Europe-focused portfolio.
The Abu Dhabi Investment Authority, Qatar Investment Authority and Oman's State General Reserve Fund all declined to comment. Bahrain's Mumtalakat, the Kuwait Investment Authority, Saudi Arabia's ministry of finance and the Saudi Arabian Monetary Agency did not immediately respond to requests for comment.
Saudi Arabia may withdraw the most from global markets. The central bank had the equivalent of $732 billion of net foreign assets in November, including $545 billion of securities and $131 billion of deposits with banks abroad. The vast majority is believed to be in U.S. dollars, especially U.S. Treasury bonds.
The government has projected a record budget deficit of $38.7 billion for 2015. Analysts believe that estimate assumed an average oil price of around $60, so if Brent stays around $50, Riyadh could face a deficit in the order of $50-60 billion.
It could cover that by borrowing or running down some domestic assets - it has the equivalent of $96 billion deposited with Saudi commercial banks. But Saudi policymakers tend to avoid debt, and they will not want to hurt the economy by tightening liquidity in the banking system.
So much, or all, of the burden of covering the deficit is likely to fall on the central bank's foreign assets. This is what happened when Riyadh last posted a big budget deficit, a $12 billion shortfall in 2009 due to a collapse in oil prices.
In that year, the central bank's investments abroad dropped 7 percent and its deposits abroad fell 12 percent, before resuming their growth in 2010 after prices recovered.
Elsewhere in the Gulf, Oman and Bahrain may face heavy pressure to liquidate fund assets because they have the weakest budget positions; Oman has projected a $6.5 billion deficit for 2015 at an average oil price of $75. But their funds are tiny by international standards: $19 billion for Oman and $11 billion for Bahrain, according to the IMF.
The United Arab Emirates, Qatar and Kuwait are believed to need much lower oil prices than Saudi Arabia to break even on their budgets, so they would face smaller deficits with oil at $50, and less pressure to sell assets.
Annual returns from existing fund assets might be enough to cover their deficits. In any case, the funds may be reluctant to sell trophy assets in real estate or private equity, given the loss of prestige this would entail - something anathema to Gulf business culture.
As they plot strategies for 2015, sovereign funds are expected to react differently to the new environment. A few may become more conservative in investment decisions, Maduell said, citing the Kuwait Investment Authority as a possible example.
But bankers noted even as oil's decline pressured governments' finances, it was making it more urgent for them to develop financial bases that were not so vulnerable to oil swings - so the funds' activities were vital.
A senior Doha banker said the funds had grown so much in recent years that they were becoming less reliant on receiving huge quantities of new petrodollars every year.
"There is still enough liquidity to ensure that deals happen, even ones in the $3 billion to $4 billion bracket," he said. "If you have a $500 billion to $600 billion fund, even just deploying the income from returns gives you maybe $20 billion a year to spend."For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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