Fitch Ratings-Hong Kong: The sovereign wealth funds (SWFs) of Abu Dhabi, Kuwait and Qatar provide two-to-five notches of uplift to their sovereign ratings, Fitch Ratings says in a new report on SWFs in the Gulf Cooperation Council (GCC).
The three SWFs that are the main focus of Fitch's report predominantly invest fiscal reserves in external assets but offer limited public disclosures: the Kuwait Investment Authority (KIA, whose foreign assets under management (AUM) Fitch estimates at over USD560 billion in 2019), the Abu Dhabi Investment Authority (ADIA; estimated foreign AUM of USD500 billion), and the Qatar Investment Authority (QIA; estimated foreign AUM of USD230 billion).
These SWFs are among the largest in the world both in absolute terms and relative to the size of their economies, ranging from around 120% of GDP in Qatar to more than 400% in Kuwait.
The ratio of assets to GDP varies significantly with oil prices, but more stable indicators also point to the strong buffer provided by SWFs, while accounting for the political economy of GCC states, which demands extensive public employment, direct transfers to citizens and state-supported non-oil activity. The foreign assets of the KIA are 8x the country's total government spending, non-oil GDP, or the government non-oil primary deficit. The foreign assets of QIA and ADIA are 2x-3x non-oil GDP, 4x-6x government spending and 12x government non-oil primary deficits.
SWF assets in the GCC are generally not disclosed, and Fitch estimates their value by compounding estimated historical net inflows using assumptions about returns and asset allocations. Supporting data for such estimates is available to varying degrees, with Kuwait and Abu Dhabi offering significantly more transparency than Qatar. Fitch applies no specific penalty for lack of transparency, but its estimates are conservative.
Fitch estimates that SWF assets in Kuwait, Abu Dhabi and Qatar would remain large even under an adverse scenario involving a combination of significant further declines in oil prices, continued pressure on hydrocarbon production volumes, and weak financial returns. Favourable asset market returns could allow SWF assets to be maintained even amid persistent fiscal deficits. Although financial market returns are uncertain and could lead to sudden valuation losses, they could generally be expected to offset a drawdown rate of 1%-3% of assets (which Fitch forecasts for Abu Dhabi and Kuwait).
Kuwait, Abu Dhabi and Qatar have chosen to issue debt despite their large SWFs. This reflects a desire to preserve wealth for future generations and expected returns on assets exceeding the cost of debt. Fitch expects around USD35 billion of gross foreign issuance from these countries in 2020-2021, against a GCC total of USD85 billion. This would be accompanied by drawdown of wealth funds, deposits and other sovereign assets of around USD55 billion (half of the GCC total, with the rest mostly relating to Saudi Arabia).
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Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
Additional information is available on www.fitchratings.com
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