Sovereign Funds Own Nearly 40% of Total Capitalization of MENA Stock Markets 1

The oil slide weighing on fiscal balances in the GCC

As discussed in Part 1 of this series, the decline in oil (OIL) (USO) prices since mid-2014 through 2015, weighed down fiscal balances of most  Gulf Cooperation Council (GCC) economies, whose major revenue is derived from oil exports. Further, the strengthening US dollar (UUP) coupled with rate hikes by the US Federal Reserve, have been adversely affecting the GCC economies (GULF) (GAF) (KSA), whose currencies have been appreciating, making exports expensive. Consequently, GCC economies are finding it more difficult to attract foreign capital into the Gulf.

Sovereign wealth funds have gained prominence

Meanwhile, the markets have seen a decline in IPO activity, while sovereign borrowing has been rising at unprecedented rates. Governments in the GCC region are already big players in the public equity markets, as a result of previous privatizations as well as active investments made through sovereign wealth funds. Sovereign investors own roughly 40% of overall MENA (Middle-East and North Africa) markets’ total capitalization. According to a GOVERN analysis, of the 100 largest listed firms in the MENA region, 89 have government stakes, and over a third of the largest listed firms have the state as a shareholder

Falling oil prices have definitely lent more importance to sovereign wealth funds (SWF). Low oil prices have hurt most Gulf governments’ budgets. As revenues from oil exports have declined considerably, these governments are now looking for alternative ways to boost returns.

The EBRD to jointly invest with the GCC

Certain Gulf sovereign wealth funds are already in talks with the EBRD (European Bank for Reconstruction and Development) to invest jointly, hoping to complete a round of fund-raising by year end. On February 13, the bank’s president Suma Chakrabarti confirmed, “We are talking to a range of sovereign funds in the Gulf region….We are having extremely positive discussions.”

- Advertisement -

The fund, an Equity Participation Fund, would give long-term institutional investors exposure to EBRD equity investments above 10 million euros ($10.6 million), explained Chakrabarti.

- Advertisement -