Energy-rich Middle East states are set to reap up to $1.3tn in additional oil revenues over the next four years, according to the IMF, as they enjoy a windfall that will bolster the firepower of the region’s sovereign wealth funds at a time when global asset prices have sold off.

The IMF’s projections underscore how high energy prices driven by Russia’s war in Ukraine are buoying the Gulf’s absolute monarchies while much of the rest of the world grapples with soaring inflation and fears of recession.

Jihad Azour, IMF director for the Middle East and north Africa, told the Financial Times that relative to expectations before the war in Ukraine, the region’s oil and gas exporters, particularly Gulf states, “will see additional cumulative oil revenues of $1.3tn through 2026”.

The Gulf is home to some of the world’s biggest oil and gas exporters, and several of its largest and most active SWFs. These include Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority, Abu Dhabi’s stable of vehicles, including the Abu Dhabi Investment Authority, Mubadala and ADQ, and the Kuwait Investment Authority.

The $620bn PIF, which is chaired by Saudi Crown Prince Mohammed bin Salman, invested more than $7.5bn in US stocks in the second quarter, including in Amazon, PayPal and BlackRock, as it sought to take advantage of falling stock prices, according to market filings.

Gulf SWFs were similarly active during the pandemic as they looked to capitalise on the market volatility triggered by the Covid-19 crisis. During the global financial crisis in 2009, they took advantage of the turmoil to snap up stakes in distressed western companies.

In recent years, many of the funds have been focusing on sectors such as technology, healthcare, life sciences and clean energy as governments pursue returns on investments, but also seek to diversify economies and develop new industries.

Azour said it was important that the Gulf states used the latest windfall to “invest in the future”, including preparations for the global energy transition.

“It’s an important moment for them to . . . accelerate in sectors like technology [domestically] as this is something that will allow them to increase productivity,” he said. “In addition, their investment strategy could benefit from the fact that asset prices have improved for new investors, and the capacity to increase their market share in certain areas are also opportunities.”

Jihad Azour
The IMF’s Jihad Azour said Gulf states should use the windfall to ‘invest in the future’ © Karim Sahib/AFP/Getty Images

But he added that it was critical that they maintained fiscal discipline and momentum on reforms designed to reduce their countries’ dependence on oil.

Traditionally, the health of the Gulf states’ economies has tracked the volatility of oil prices with state spending, fuelled by petrodollars, the main driver of business activity. As a consequence, booms have often been followed by downturns.

The bonanza comes after years of subdued growth across the Gulf that caused governments to raise debts, tap into their reserves and slow state projects.

But Saudi Arabia, the world’s top oil exporter and the region’s biggest economy, has been on a massive spending spree led by the PIF, which has been tasked with developing a raft of megaprojects intended to modernise the conservative kingdom while seeking out investments overseas.

The PIF is expected to be one of the main beneficiaries of the oil boom as Saudi Arabia is on course to record a budget surplus of 5.5 per cent of gross domestic product this year — its first surplus since 2013 — and forecast to produce economic growth of 7.6 per cent, its fastest pace in a decade.

The IMF estimates that for the second consecutive year the PIF is expected to undertake more investment in 2022 than the government. In a report this week, the fund cites “pressures to spend oil windfalls and deviate from fiscal prudence” including through the PIF, as one of the kingdom’s downside risks.

“What is going to be really important is how they [Gulf states] manage this new cycle and how they maintain, at the same time, the benefits of the additional liquidity and the policies that will not lead them into procyclicality,” Azour said.

The IMF forecasts that economic growth in the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar and Oman, will accelerate from 2.7 per cent in 2021 to 6.4 per cent this year.

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