Home is where the heart is for GCC wealth funds

Joan Cros via Reuters Connect

While GCC sovereign wealth funds (SWFs) remain heavily invested in overseas markets, they are increasingly shifting their cash closer to home to support domestic economic diversification.

A case in point is Saudi Arabia, which increased its “Saudi sector development” assets from 21 percent to 33 percent in 2023.

Globally, state-owned investors including SWFs, public pension funds and central banks, are massive players in financial markets, managing $49.7 trillion in 2023. GCC SWFs’ assets touched a peak of $4.1 trillion in 2023, representing 40 percent of all investments deployed by sovereign investors last year.

Five GCC funds are among the top 10 most active dealmakers globally: Saudi’s PIF, Abu Dhabi’s Adia, Mubadala and ADQ, and Qatar’s QIA. These regional SWFs have all been buoyed by the recovery of markets and higher oil prices post-Covid. 

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There are three main factors driving increased domestic asset allocation in the region. Firstly, Cold War II is unfolding with growing global economic, trade and investment fragmentation and dislocation. 

The looming worldwide change is born of deglobalisation trends and the economic shift over the past two decades towards an emerging Asia. 

Global economic political risks are increasing, fuelled by historically high government levels, regional wars and volatile interest rates.

What’s more, sovereigns are contending with growing US dollar weaponisation, along with potential sanctions and a freezing and confiscation of assets that undermine the rule of law and global financial markets. 

Against this fraught backdrop, GCC countries must look to de-risk Western financial markets and assets to protect their wealth. Given the risks inherent in the SWIFT payment system, we will likely see the BRICS+ and GCC develop alternative multilateral payment platforms.

Such systems would utilise national currencies for bilateral payments and the PetroYuan for energy.

The era of free flowing GCC petrodollars is ending. 

Secondly, national security considerations are increasingly dominating global and regional economic policy.

Naturally, this informs the GCC’s decision to shift focus and address regional opportunities and challenges, such as economic diversification, food security, AI, clean energy, and climate risk mitigation.

For glaring proof of this one only needs to look at PIF’s investments in Saudi airlines and giga-projects and the ADQ investing $35 billion in Egypt’s Ras El-Hekma this year.  

PIF’s Annual Report 2023 highlights the realities of the changing investment objectives. While its assets under management have grown massively (from SAR563 billion in 2015 to SAR2.9 trillion in 2023), the share of international investments is down.

PIF’s domestic economic objectives are increasingly aligned with Saudi Arabia’s Vision 2030 and the broad goal of economic diversification, transformation and modernisation, necessitating an inward-focused agenda. 

Accordingly, the PIF aims to increase assets under management to approximately SAR4 trillion by 2025, raising the non-oil GDP and job creation contribution of PIF and subsidiaries to a cumulative SAR1.2 trillion and to SAR7.5 trillion by 2030.

To support Saudi’s maturing economy PIF has launched 95 companies since 2017, spanning 13 strategic sectors ranging from EVs to sports and tourism, injecting about SAR150 billion into the local economy annually. 

Complementing Saudi Arabia’s pro-private sector policies, PIF has been supporting SMEs and innovative companies in new and emerging sectors. It has also been instrumental in attracting companies to set up in the kingdom, such as Lucid’s advanced EV manufacturing plant now located in Jeddah.

• PIF-backed Saudi companies increase dividends
• The bullish case for the GCC’s sovereign bonds and sukuk
• Oman sovereign fund’s assets rise 12% to $50bn in 2023

Thirdly, Saudi Arabia is a developing economy with massive investment opportunities for foreign investment and technologies.

PIF’s engagement in supporting capital market development, developing the country's vast unexplored and unexploited mineral wealth and supporting Saudi industrial policy all aim to attract FDI and PPP. 

Ahead of 2030 PIF may become more like Temasek, Singapore’s public wealth fund, and appoint itself responsible for improving the management, performance and productivity of Saudi Arabia’s vast public assets, including infrastructure and commercial assets. 

If Saudi Arabia were to adopt a robust Public Investment Management framework it would increase its financial returns, maximise the value of its public assets, improve productivity growth and support fiscal sustainability. 

Accountability is another building block PIF must consider. With this in mind, PIF has already chosen to take the lead in promoting transparency: it is currently placed joint second globally and first in the Middle East for Governance, Sustainability and Transparency in a ranking of the top 100 SWFs.

Overall, it’s clear that GCC SWFs, along with the BRICS+, are gradually redrawing their financial architecture to better serve regional and domestic economic objectives.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon