The strength of sovereign wealth funds (SWFs) has helped Gulf Cooperation Council (GCC) states weather the immediate economic impact of Covid-19 and retain their sovereign ratings, according to ratings agency, Fitch.
But “exceptionally strong balance sheets” will be needed to support their ratings in the longer-term.
Fitch’s recently published report, ‘Sovereign Wealth Funds in the GCC’, states that some funds may even see their assets increase during 2020, despite the pandemic and falling oil prices and despite a number of GCC governments using these assets to cover state funding needs.
The report forecasts that SWF assets in Kuwait, Abu Dhabi and Qatar would be sufficient to cover five to eight years of total government spending and six to eight years of non-oil deficits.
However Fitch also warns that all three countries stand to substantially deplete their SWF assets in the long term without some combination of recovery in oil prices, growth in production, fiscal adjustment and supportive financial market returns.
The rating agency consequently states that “exceptionally strong balance sheets” will be required to support ratings at current levels given structural constraints including a lack of economic diversification.
“Erosion of fiscal and external balance sheets, for example, due to an inability to adjust to lower-for-longer oil prices, is a negative rating sensitivity for all GCC sovereigns,” states the report.
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