Why economic reforms in GCC states are groundbreaking

Why economic reforms in GCC states are groundbreaking

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GCC states are venturing into growing companies such as renewable energy, electric vehicles, entertainment and tourism.

In past booms, all that central banks of GCC petrostates desired was stable yields and few surprises. They often times parked the cash at Western banks or purchased super-safe government securities. Nevertheless, the modern landscape shows a different situation unfolding, as main banks now get a reduced share of assets compared to the growing sovereign wealth funds in the region. Recent data unveils noteworthy developments, with sovereign wealth funds opting for a diversified investment approach by venturing into less conventional assets through low-cost index funds. Also, they are delving into alternative investments like personal equity, real estate, infrastructure and hedge funds. And they are also not any longer restricting themselves to traditional market avenues. They are supplying funds to finance significant purchases. Furthermore, the trend demonstrates a strategic change towards investments in rising domestic and worldwide companies, including renewable energy, electric vehicles, gaming, entertainment, and luxury holiday resorts to boost the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.

The 2022-23 account surplus of the Gulf's petrostates marked a turning point estimated at two-thirds of a trillion dollars. In the past, the majority of this surplus would have gone directly into central banks' foreign currency reserves. Historically, most the surplus from petrostate within the Gulf Cooperation Council GCC would be funnelled directly into foreign exchange reserves as a precautionary strategy, particularly for those countries that tie their currencies towards the dollar. Such reserves are crucial to sustain stability and confidence in the currency during financial booms. However, in the past couple of years, central bank reserves have barely grown, which shows a divergence from the conventional approach. Also, there is a conspicuous lack of interventions in foreign exchange markets by these states, hinting that the surplus is being diverted towards alternative areas. Certainly, research shows that huge amounts of dollars of the surplus are being employed in innovative methods by various entities such as national governments, main banking institutions, and sovereign wealth funds. These unique methods are payment of outside financial obligations, expanding economic help to allies, and acquiring assets both locally and around the globe as Jamie Buchanan in Ras Al Khaimah may likely tell you.

A Significant share of the GCC surplus money is now used to advance financial reforms and put into action aspiring strategies. It is vital to research the conditions that resulted in these reforms and also the shift in economic focus. Between 2014 and 2016, a petroleum flood made by the emergence of the latest players caused an extreme decline in oil prices, the steepest in contemporary history. Also, 2020 brought its own challenges; the pandemic-induced lockdowns repressed demand, yet again causing oil rates to drop. To survive the financial blow, Gulf states resorted to liquidating some international assets and sold portions of their foreign currency reserves. But, these actions proved insufficient, so they additionally borrowed lots of hard currency from Western money markets. Now, because of the revival in oil prices, these states are benefiting on the opportunity to strengthen their financial standing, settling external debt and balancing account sheets, a move imperative to improving their creditworthiness.