Gulf Sovereign Funds Seen Shedding $300 Billion in Market Mayhem

(Bloomberg) -- The Gulf region’s rainy day funds are bracing for the deluge.

On top of the collapse of oil prices and meltdown in global markets, Gulf sovereign wealth funds are channeling some of their billions back to counter the recession triggered by the coronavirus pandemic. The decline in assets could exceed $300 billion this year, according to the Institute of International Finance, the industry’s global association.

The impact will echo all the way to Wall Street, where asset managers count on capital from the funds sponsored by Abu Dhabi, Kuwait, Qatar and Saudi Arabia. Now that these countries need the cash back home, hedge funds and private-equity firms risk losing a substantial piece of business.

“These interlinked shocks - an oil supply shock and covid19 demand shock - are weakening oil revenues, a source of new capital for sovereign funds, and significantly increasing spending needs,” said Rachel Ziemba, founder of advisory firm Ziemba Insights. “These funds were already barely receiving new capital in the last few years, now there will likely be drawdowns.”

$2 Trillion Assets

Middle East wealth funds built up assets in excess of $2 trillion during the past few decades, building a cushion for when oil runs out or revenues drop. They have stakes in Uber Technologies Inc., Barclays Plc, and swathes of European and U.S. property.

Saudi Arabia’s Public Investment Fund has also committed giant sums to a Blackstone Group Inc.’s U.S. infrastructure fund and Softbank Group Corp.’s $100 billion Vision Fund. Other funds in the region also have significant placements with Carlyle Group Inc., BlackRock Inc. and KKR & Co. Inc.

Exactly how much the funds have placed and with whom remain undisclosed. Most don’t even report the value of assets they manage. Abu Dhabi Investment Authority is one of the few that publishes an annual report, and that only includes broad guidance on strategy and performance. ADIA’s 20-year annualized returns were 5.4% in 2018, the lowest since it began reporting in 2008. Developed market equities, which have crashed as a result of measures to contain the coronavirus, constitute up to 42% of its portfolio.

Related: China Wealth Fund Is Said to Slash Risk-Parity Assets by 50%

It’s not just the wealth funds in the Middle East that are suffering. Norway looks set to withdraw a record $13 billion from its giant sovereign wealth fund to help pay for stimulus measures. Russia is also likely to draw down on its reserves as it wages an oil price war with Saudi Arabia.

Overblown Fears

Still, some analysts say fears of a large withdrawal of cash from markets are overblown, and dealing with crises like this is what sovereign funds were established for.

“It is important to remember that most sovereign wealth funds are designed to act as buffers against budget deficits, and withdrawals do happen often even if they do not make the headlines,” said Diego Lopez, managing director of Global SWF, an advisory boutique specialized in Sovereign Wealth Funds and Institutional Investors. Most funds won’t make immediate changes to how they invest, Lopez said, but “investment activity may slow down in some of the asset classes and may increase in others.”

The decline in asset values of the Gulf funds is set to be deeper than the drop in 2015, the last time crude prices collapsed, according to IIF estimates. Back then, it was just an oil price shock. This time the funds face a combination of a slump in the value of their investments, coupled with a need to spend cash at home now.

Sovereign funds in Abu Dhabi, Kuwait and Qatar will account for the bulk of the declines this year, with the assets of each set to drop by around $100 billion, according to the IIF.

Saudi Borrowing

In contrast to 2015, Saudi Arabia will likely focus on borrowing rather than drawing down PIF reserves, according to Garbis Iradian, chief economist for the Middle East and North Africa at IIF. Five years ago, the Saudi Arabian Monetary Authority pulled as much as $70 billion from global asset managers to help plug the kingdom’s deficit that year.

Last week, Finance Minister Mohammed Al Jadaan said Saudi Arabia would fund an expected larger deficit through borrowing more rather than drawing down reserves.

Related: Saudi Arabia Raises Debt Ceiling to Borrow More As Oil Plummets

The last time oil prices sank global sovereign fund and central bank assets were expected to shrink by about $1.2 trillion in 2015, according to estimates at the time by UBS Group AG. How much ends up being withdrawn this time will depend on how deep the economic slowdown created by coronavirus and the oil slump turns out to be. That will not become clear for several more months.

Either way, asset managers may not be able to rely on large allocations of Gulf petrodollars much longer. That $2 trillion of savings could be gone in 15 years if governments in the region don’t diversify their economies and trim wasteful spending, the International Monetary Fund warned in February, before the latest oil price slump.

©2020 Bloomberg L.P.

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