Budget surpluses to bolster SWFs in the long term

Mammoth budget surpluses spawned by soaring crude prices are expected to largely bolster the sovereign wealth funds (SWFs) controlled by Gulf oil producers and give them access to stable income in the long term.

With the sharp erosion of debt by most member states, the six Gulf Co-operation Council (GCC) countries have started to concentrate on rebuilding their foreign currency reserves and consolidating their SWFs as part of an ongoing drive to diversify their oil reliant economies and ensure fixed revenues in the long run.

Such efforts, which have gained momentum over the past seven years because of widening fiscal surpluses, have hugely paid off, with the combined SWF resources of the six members leaping by at least 50 per cent at the end of 2007.

While there have been no official figures on their exact size, independent Gulf banking estimates put the combined assets of three SWFs in the GCC at more than $1.15 trillion (Dh4.2trn) compared with less than $700 billion

in 2000.

More than 75 per cent of those assets are controlled by the Abu Dhabi Investment Authority (Adia), which is independently classified as the world's largest government-controlled fund, with an estimated asset size of $875bn.

Kuwait's SWF controlled nearly $215bn at the end of 2007, while Qatar's wealth was estimated at $60bn.

But according to the Saudi British Bank, massive budget surpluses caused by high oil prices and surging LNG exports are expected to push up Qatar's SWF assets by nearly $35bn in just three years. Abu Dhabi and Kuwait SWFs are also expected to swell in the next two years because of accumulating interest on their existing investments and growing budget surpluses, most of which are believed to be transferred abroad.

"The GCC's SWFS have largely grown over the past few years because of high oil prices and I think they will continue to grow in the coming years as oil prices are expected to remain high and these countries are recording huge surpluses in their budgets," said Mohammed Al Asumi, a Gulf economist.

"Although most of them are overshooting budgeted spending, the sharp increase in revenues has more than offset higher expenditure… for this reason, their budgets are having record surpluses and it is normal that part of them are used to support their overseas investments. It is a wise move because these SWFs will strengthen the GCC's role in the global economy, and at the same time support their diversification programmes, ensure stable income in the long run, and allow them to finance any budget deficit in the future."

The surge in petrodollar revenues has prompted Oman to join the UAE, Kuwait and Qatar in setting up a SWF, which is still in its infant stage. Bahrain, which has relatively low oil reserves, has launched informal wealth fund through its finance ministry pending the completion of legal procedures.

Saudi Arabia, the world's dominant oil exporter, said last month it would launch an investment fund to tap the local market, but there has been speculation the Kingdom might opt for a SWF at a later stage.

Although it has no SWF, Saudi Arabia possesses more than $350bn in assets controlled by its central bank, the Saudi Arabian Monetary Agency (Sama).

In a recent study, the state-run Emirates Industrial Bank (EIB) urged the GCC states without formal SWF to create such institutions, which it said would strengthen their influence in the global financial markets. It cited their role in injecting nearly $50bn into the global financial system in January and February through acquisitions in key US financial institutions to reduce the impact of the sub-prime crisis that jolted global markets.

"Given the success of such funds in the region, mainly the UAE fund, it is now likely that Saudi Arabia and Bahrain will create such funds to exploit the surplus oil income as was the case with Qatar and Oman, which have created similar funds in the past few years," EIB said.

"It is now important for these countries to devise the right administrative and legal frameworks to utilise their oil revenues and invest them in a proper institutional manner that will ensure them profitable returns."

Estimates by the International Monetary Fund showed the combined assets of the GCC funds and other international SWFs stood at between $2trn-$3trn at the end of 2007 and are expected to soar to $6trn-$10trn within five years. The investments could jump to $15trn after eight years.

"SWFs held by the GCC countries are forecast to reach $3trn by 2010 – almost double the current size and accounting for around 50 per cent of the total global SWFs – if current oil prices prevail," the IMF said. GCC states are heavily reliant on oil exports and the surge in crude prices has sharply boosted economic growth rates, slashed their debt and turned persistent budget and current account deficits into massive surpluses.

Their income is projected to climb to a record high level this year as crude prices have approached an historic $140 mark and are expected to average nearly $100 through the year.

Although the GCC's revenues could ease in 2009 and 2010, they are expected to remain as high as five times their 1998 level.

Given its massive oil output, which accounts for nearly a third of Opec's total production, Saudi Arabia has recorded the largest budget surplus in the GCC, peaking at SAR280bn (Dh278bn) in 2006 before receding to SAR170bn last year.

But the Kingdom's cumulative budget surplus over the past six years could smash through the SAR1trn mark by the end of 2008 after nearly 20 years of painful deficit and swelling public debt, according to official figures. Between 2003 and 2007, the actual cumulative surplus in the Saudi budget totalled SAR827bn compared with a deficit of nearly SR138 billion in the previous five-year period, Sama figures showed.

Although the government has assumed a relatively low surplus of SAR40bn in this year's budget, independent Saudi estimates expect the actual surplus to climb to SAR187bn on the grounds the Kingdom has projected low oil prices of nearly half their present actual level. With that level, the country's cumulative budget surplus could soar to SAR1.014trn during 2003-2008, its highest six-year fiscal surplus since the country began pumping oil more than 70 years ago.

A breakdown showed the surplus stood at SAR36bn in 2003, when crude prices began their rapid climb. The surplus shot up to SAR107bn in 2004 and SAR217bn in 2005. It climbed to an all-time high of SAR289bn in 2006 before easing to around SAR178bn in 2007.

The accumulating surpluses allowed Sama to sharply boost its assets, which gained a staggering SAR1trn between 2002 and 2007. From SAR197bn at the end of 2002, Sama's foreign assets leaped to a record SAR1.19trn at the end of 2007 and continued their rapid climb to peak at around SAR1.39trn.

In the UAE, the surplus in the consolidated financial account (CFA), which covers the federal budget and local spending by each emirate, climbed to an all time high of Dh72.4bn in 2006 compared with Dh39.5bn in 2005. Although the UAE has not released 2007 CFA figures, bankers expect the surplus to have remained as high as in 2006 despite a surge in actual spending.

Kuwait has reported budget surpluses during all fiscal years since 2001, with the cumulative balance reaching around $19.8bn (Dh237bn) until 2007. In Qatar, a persistent deficit turned into a surplus in 2002 and the budget remained in a positive balance through all the following years. Central Bank figures showed the cumulative surplus stood at QR61.3bn (Dh62bn).

Oman's budget has also recorded successive surpluses since 2002, totalling around RO2.8bn (Dh27bn) until 2007.

Bahrain has also reported fiscal surpluses as high oil prices boosted its income from the nearly 140,000 bpd of oil it pumps from its own fields and one jointly owned with Saudi Arabia.

Besides SWFs, the fiscal surpluses have also allowed the six members to consolidate their foreign currency reserves with the IMF and this has strengthened their financial and economic credibility. IMF figures showed such reserves jumped to $317bn at the end of 2007 from $276bn at the end of 2006 and $195billion at the end of 2005. They were as low as $70bn in 1998, when oil prices collapsed below $10 a barrel.

Saudi Arabia recorded the biggest increase and accounted for about 80 per cent of the GCC's total gross financial reserves at the end of 2007, when its assets jumped to $255bn from only $45bn at the end of 2002.

The UAE was second, with its financial reserves soaring to $32.5bn from $12.7bn. Kuwait's reserves surged to $16.9bn from $7.1bn and those of Qatar to $6.5bn from only $1.3bn.

The reserves of Oman and Bahrain swelled to $4.4bn and $2bn from $2.6bn and $1.2bn respectively.

The GCC's combined oil export earnings were estimated at around $315bn in 2007, their highest ever level. No forecasts for their 2008 individual revenues have been provided yet but according to the Energy Information Administration of the US Department of Energy, Opec's total income is expected to climb above $1trn this year for the first time. Since GCC states pump nearly half of Opec's oil supplies, their revenues could be as high as $500bn.

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