The Succession of Sovereign Wealth Funds
By Gray Farris
Sovereign Wealth Funds
Middle East and North African (MENA) countries have historically been immensely tied to the need for oil and the global oil market. These markets are driven by demand, and in the era of COVID-19, that demand is called into question more than ever before. With the recent widespread global economic strain, economic models have majorly shifted and the need for alternative energies has increased. This will call for the MENA region to flex and adapt in novel ways.
The longstanding unwavering demand for oil exportation has led the MENA region to develop sovereign wealth funds, which are state-owned investment funds or entities. While these funds can be established from a variety of sources, many MENA nations’ sovereign wealth funds derive the majority of their funding from the exportation of oil. Oil is the chief export of 14 of the 23 MENA countries, with Saudi Arabia, Iraq, the United Arab Emirates (UAE), and Kuwait rounding out the top five. With the economic crisis of 2020 and the shift to global stay-at-home orders, oil demand has hit an unprecedented low. While sovereign wealth funds have the ability to invest in sectors beyond oil, capital in the MENA region overall remains largely bound to the export of oil, making for difficult circumstances in light of this recent drop-off in demand. For many nations, this has created an expedited transition away from oil. .
Most notably leading this transition is Saudi Arabia’s desire to diversify its state-owned oil company, Saudi Aramco. This diversification includes a vision to expand the company into chemicals, renewable energy, and to create new technologies through R&D efforts and develop new lines of business through investments and acquisitions. This pivot coincides with the company listing a portion of its ownership in the public markets as a new way to raise more capital for the company, and by extension, the government. Saudi Aramco’s shift beyond oil now allows Saudi Arabia to fund its sovereign wealth fund through more diversified means, and therefore increases its stability for unforeseen factors like a global lockdown. Saudi Arabia’s action and stark realization that oil is no longer an unwavering path of wealth may serve as a template for other heavy-oil invested countries in the region to adapt beyond reliance on one primary export.
Following suit, the UAE has also made a shift focus to the service sector through investments in tourism and financial services. Both Saudi Arabia and the UAE have expanded their investments in tourism thanks to airlines and airport hubs, servicing the globe from home-bases in the MENA region. Both nations have used commerce and travel to further bolster themselves into the global economy. Through these increasingly diversified economic models, Saudi Arabia and the UAE have been able to organically grow and attract a workforce to propel their economies forward, which may be an increasingly utilized template for other countries. With a broad base of production in multiple industries, nations rely less on funds entrenched in one sole product and are able to more securely support their economies.
Further complicating many MENA nations’ reliance on oil importation are Intergovernmental Organizations, such as the Organization of the Petroleum Exporting Countries, or OPEC. The MENA region’s OPEC members are Iran, Iraq, Kuwait, Qatar, the UAE, Algeria, and Saudi Arabia. This structure inherently benefits OPEC member countries at the expense of the global market as a whole. However, COVID-19 has unexpectedly reduced global demand, which OPEC was not prepared for. This means that oil profits and sovereign wealth funds in OPEC’s control may not be as protected as was anticipated pre-pandemic.
While the global economic crisis sparked by the pandemic has forced many oil-export reliant nations to adapt their economic models, this urgent call for diversification may have been the forceful nudge needed for the region in the long-term. OPEC and private oil firms have consistently pressured and exploited MENA countries for oil as a means to quickly inject funds into state accounts, and now their role may become even more complex with less global reliance on oil. UAE and Saudi Arabia’s economic flexing away from the oil market has shown that diversification is necessary as the world continues to move toward renewable resources and reliance on organizations like OPEC becomes increasingly risky .
By nature, sovereign wealth funds are dependent on both the publicly traded market and also commodities such as oil--however, economic shifts, the movement toward more green technology, as well as investments in sectors like service industries and tourism will help enable MENA countries to chart out a long-term game of resilience that lends itself well to an ever-evolving economic landscape. As demonstrated by the UAE and Saudi Arabia, the shift away from oil-driven sovereign wealth funds has been a successful means of diversification, and is likely to continue throughout the region as diverse investments increase in industries and nations continue to broaden their economic reach beyond one primary commodity. .