Trophy assets

Arab sovereign wealth fund exodus just beginning

Oil-rich Gulf sheikhdoms are being forced to raid their sovereign wealth funds to shore up their budgets. With US crude oil prices falling below $40 per barrel in December, they have no choice but to reach into these rainy-day savings. For now, they can hold on to some of their trophy assets, like strategic investments in Volkswagen or Barclays. But if crude prices keep tumbling, a fire sale will be hard to avoid.

During the most recent energy boom, the six members of the Gulf Cooperation Council - including Saudi Arabia, Qatar and Kuwait - amassed sovereign funds worth more than $2.3 trillion. These assets have traditionally comprised a mix of debt and other securities, in addition to influential stakes in some of the world's biggest companies such as Glencore, VW and Barclays.

Large chunks of this cash are now being repatriated back to the region to finance widening budget deficits, which this year are expected to be in the region of 13 per cent of gross domestic product in the GCC. Should oil prices average $56 per barrel next year, then GCC states would need to liquidate some $208 billion of their overseas assets, or just below 10 per cent of their sovereign fund holdings, based on a Breakingviews analysis of their fiscal break-even costs.

But if oil prices fall to $20 a barrel, as Goldman Sachs has warned, the GCC states may have to sell $494 billion worth of booty to make up the budgetary shortfalls based on forecast fiscal costs for their oil production in 2016. This is provided they maintain the lavish rates of public spending that the region's populations have become accustomed to.

At that rate of divestment these sheikhdoms - which pump about a fifth of the world's oil - would almost drain their funds entirely by 2020. The Saudi Arabian Monetary Agency - which also acts as the country's central bank - has already started to sell down some of its foreign assets, while money managers are reporting growing redemptions from other funds in the region.

Gulf rulers have so far resisted any temptation to jettison their most treasured assets, which in many cases have granted them board seats atop some of the world's leading companies. As oil keeps falling, even these investment jewels will come up for grabs.