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25 March 2020

UAE to benefit from large sovereign assets amid low oil prices

Foreign currency buffers—including liquid foreign currency assets in sovereign wealth funds—are particularly large in the UAE, Kuwait and Saudi Arabia, which will support the countries’ pegs to the dollar

Oil has plunged more than 60 per cent since the end of 2019 to around $26 per barrel as of March 2020/iStock

by Kudakwashe Muzoriwa

The UAE will benefit from large sovereign assets and to a lesser extent Kuwait and Saudi Arabia, amid a plunge in oil prices by more than 60 per cent since the end of 2019 to around $26 per barrel as of 18 March 2020.

Moody’s said that during periods of higher oil prices, the majority of hydrocarbons-exporting countries accumulated significant assets, which will provide a degree of resilience during a period of lower oil prices.

Kuwait has the largest sovereign assets relative to GDP (278 per cent) and are estimated to be mostly liquid and in foreign currency. However, the government currently has access to only a small portion of them through the General Reserve Fund, which is estimated to be around $47 billion (32 per cent of GDP).

Moody’s also said that lower oil prices are credit negative for oil-exporting countries such as Oman, Bahrain, and Iraq where the capacity to adjust to a deep shock is limited. The majority of lower-rated oil-producing countries have a high external vulnerability to weaker oil prices and will face greater government liquidity risk.

The rating agency expects expenditure cuts and currency depreciation to curb imports and reduce the impact of lower prices on current account positions and external stability.

Lower hydrocarbon prices will directly hit export revenue and current account positions, raising external vulnerability risk, but from very different starting positions and to varying extents, said Moody’s.

According to Moody’s, Bahrain will draw on the financial support committed by stronger GCC sovereigns in October 2018, which will not only support government liquidity but also its balance of payments.

Bahrain received $4.6 billion from the GCC $10 billion aid package in 2019 and the remaining $5.4 billion (15 per cent of GDP) is scheduled to be disbursed during 2020-23.


RELATED STORIES: UAE Bahrain Saudi Arabia Kuwait oil





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