Pandemic could hit some Middle East funds even harder

While executives expect governments to continue to tap sovereign wealth funds to help plug holes left in their finances by the coronavirus pandemic, a number of countries in the Middle East are facing a particularly difficult time.

"Absolutely, there will be several additional withdrawals, especially in the (Gulf Cooperation Council region), where most economies are oil-based and are being hit twice given oil price levels," said Diego Lopez, New York-based managing director at Global SWF, a firm that tracks sovereign wealth funds and public pension funds.

Just as the coronavirus pandemic began to dominate headlines in early March, oil prices also collapsed following a spat among producers and a drop in demand. U.S. crude oil fell into negative territory for the first time.

For Persian Gulf countries in the GCC, the "oil price shock really dwarfs the impact of the coronavirus," although the pandemic is not helping things, said Krisjanis Krustins, a director on Fitch Ratings Inc.'s sovereign team, based in Hong Kong.

The ratings agency expects wide fiscal deficits across the GCC region of between 10% and 20% of gross domestic product this year.

In some of those countries, the sovereign wealth funds will be expected to plug deficits. In Abu Dhabi, where the deficit is forecast to be 12% of GDP, Fitch analysts expect a drawdown of $20 billion from the emirate's sovereign savings.

In Oman, where the deficit is expected to hit 19% of GDP, that would draw down about $8 billion of the wealth fund. "There is a real risk that Oman could deplete its wealth fund in the next year as it's a very high deficit and it has a lot of debt maturities coming up," Mr. Krustins said.

It was announced in June that Oman's two sovereign wealth funds, the State General Reserve fund and the Oman Investment Fund, both based in Muscat, would be combined under a new single entity. The Oman Investment Authority brings together about $17 billion in assets.And in Kuwait, where the government does not currently have authority to borrow on capital markets, "we expect a deficit of 23% of GDP, with a wealth fund drawdown of $38 billion," Mr. Krustins said.

Other countries in the GCC region are not using their sovereign wealth funds to explicitly plug their deficits. In Qatar, deposits that have built up in the Ministry of Finance reserve account are being used to fund the budget and to repay debt, Mr. Krustins said. And the Qatar Investment Authority, Doha, which has $295.2 billion in assets according to the Sovereign Wealth Fund Institute, "is buying shares in the local market as a means of supporting asset prices," he added.

All of the GCC region's sovereign wealth funds are "sensitive to global market fluctuations," Mr. Krustins said. Although they had a "great run" in 2019, after a difficult first quarter this year and even though things have improved in recent months, "if there is another big correction then the wealth funds of the region will be severely hit. A wealth fund that is 200% of GDP … can quickly shrink in size through market fluctuations alone," he warned.

However, higher-rated sovereign countries could sustain deficits "for a good number of years by drawing down on wealth fund assets," Mr. Krustins added.