EU crisis to hit GCC SWFs: analyst

State funds in Gulf hydrocarbon producers could suffer from a fresh bout of losses because of the European Union debt crisis following a sharp decline in their assets in the wake of the 2008 global fiscal distress, a well known Gulf economist has said.

While the EU economic slowdown means slackening oil demand and consequently lower crude prices, Gulf countries and other OPEC members have taken measures to offset the crisis and keep prices strong, said Mohammed al Asumi, a former adviser at the Dubai Executive Office and head of economic research at the state-run Emirates Industrial Bank.

But Asumi said such measures would not apply to sovereign wealth funds (SWFs) in the six-nation Gulf Cooperation Council (GCC) as an expected fall in the shares of many EU banks would inflict heavy losses on those SWFs.

“There were fears that Gulf banks and financial institutions might also be exposed to the debt of these non-performing loans. Fortunately, the amount of Gulf exposure in this regard is limited and could be tackled, as most of the entailing obligations have been covered,” he said in an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research.

“However, some GCC institutional investors, including SWFs and investment banks, have suffered losses resulting from investments in distressed European banks. The EU seeks to write-off half of Greece's debt, which would entail the allocation of large amount of money to rescue operations, which in turn could bring down share prices of these banks, a loss which will have to be borne by some Gulf institutional shareholders from their annual turnover.”

Following the 2008 crisis in September, the Abu Dhabi Investment Authority (ADIA) and other SWFs in the GCC reeled under massive losses, prompting some of them to rethink investment strategies.

Adia alone was reported to have lost around $183 billion at the end of 2008 compared with its assets at the end of 2007 while those of the SWFs of Kuwait and Qatar dipped by about $94 billion and $27bn respectively.

But according to the Washington-based Institute for International Finance (IIF), the strong recovery in oil prices boosted the combined assets of those funds by nearly $81bn through 2010 and they could swell further this year barring large losses because of the EU debt crisis.

“Despite the comprehensiveness of the euro crisis, its spillover effects and implications on the world’s various countries and economic blocs vary, depending on the location of each economic bloc or country on the one hand, and their economic, financial and trade relations with the EU on the other……regarding the implications of the crisis on GCC countries, there are undoubtedly many possible ramifications that require immediate action in order to check the risks to Gulf economies,” Asumi said.

Asumi said oil is at the forefront of the issues that may likely be affected by the developments as the euro crisis has led to a slowdown in domestic economies and growth rates have been revised down.

“This in turn has led to reduced expectations regarding global demand for oil, which has been relatively balanced, thanks to growing demand in Asia.

As is known, oil remains an important priority for GCC states because it lends stability to economic conditions and for financing their annual budgets that still derive 70 to 80 per cent of their revenues from oil,” he said.

“However, the impact of the euro crisis on oil prices has been limited especially as OPEC, one-third of whose membership is comprised of GCC states—has adopted flexible policies that have strengthened oil prices in general, thus limiting the adverse impact of the euro crisis on GCC economies.”

Citing local market data, Asumi said GCC stocks have suffered from heavy losses in the wake of the euro crisis.

During the first nine months of this year, GCC markets have dropped by nearly 12 per cent, losing about $70bn in market value, a decline exceeding the European money markets in relative terms.

“This trend has puzzled financial analysts and market experts, especially as GCC economies are in a stronger position than their European counterparts, and rates of growth in the GCC countries have been high over the past nine months, supported by oil prices and the strong performance of non-oil sectors,” he said.

“It can be concluded from the above that GCC countries have so far been able to exercise a great deal of flexibility in offsetting the effects of the eurozone crisis on their economies. However, it is important to continue monitoring developments in this regard because the situation is still beset with uncertainty.”

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