The Gulf Cooperation Council (GCC) countries are among the 22 sovereigns with liquid assets exceeding 25% of GDP, and three of them have liquid assets worth more than 100% of GDP, S&P Global Ratings said in its report titled “Government Liquid Assets And Sovereign Ratings: Size Matters” released Monday.
The seven sovereigns rated by S&P Global Ratings have liquid government assets totaling more than 100% of GDP; notably, three are members of the Gulf Cooperation Council.
Of the seven sovereigns whose assets exceed 100% of GDP, more than half are hydrocarbon producers: Kuwait, Norway, Abu Dhabi, and Qatar. Combined, the seven have accumulated $3 trillion in assets (200% of GDP on average) to date. Such assets, which are typically managed by sovereign wealth funds, represent the largest component of our estimates. The majority of these assets are invested externally, the report noted.
“In our opinion, when a stock of government assets is that large, a sufficient portion will very likely be available for use in combatting the effects of pronounced economic cycles, without materially impairing the sovereign's balance sheet.”
S&P Global Ratings considers all of a sovereign's external general government assets to be liquid if the amount exceeds 100% of GDP when calculating net general government debt and narrow net external debt ratios. “We believe that the sovereign will be able to utilize a significant portion of its assets in the event of financial distress to support its creditworthiness.”
The report added that the average rating on the seven sovereigns is 'AA', compared with an average of 'BBB-' on all sovereigns S&P rated globally.
“Our ratings on Kuwait and Abu Dhabi remained stable at 'AA' throughout the recent slump in oil prices, underlining the rating stability provided by having large liquid assets,” it said, adding that “our rating on Qatar moved to 'AA-' from 'AA' in August 2017.”
It noted that Bahrain, Oman, and Saudi Arabia felt the drop in prices more keenly and their stock of liquid assets is below 100% of GDP.
“We estimate that the nominal value of overall GCC government liquid assets fell by roughly $90 billion in 2015, although Kuwait, Abu Dhabi, Qatar and, at that time, Saudi Arabia's liquid-assets-to-GDP ratios stayed well above 100%. The decline was mainly because governments used their assets, or the investment returns they generated, to finance fiscal deficits caused by the drop in oil prices,” the report noted.
However, Kuwait and Abu Dhabi were the exceptions, “where we estimate nominal asset growth.”
In Kuwait's case, this resulted from a legal requirement for the government to transfer 10% of revenues to the country's Future Generations Fund, a high nominal stock of assets that provided significant annual returns, and relatively low fiscal break-even levels, the report further said.
Similarly, Abu Dhabi has a huge amount of nominal government assets and was largely able to contain its fiscal deficits.
“Excluding Kuwait, we expect the average liquid-asset-to-GDP ratio for all GCC members will remain flat at about 110% of GDP until 2021. However, on average, we expect the ratios will decline by about 8% (or 14% of GDP) in 2018 versus 2017.”
Key to the deterioration this year is a strong denominator effect.
S&P Global Ratings expects GDP to recover faster than asset growth, in line with oil price assumptions for 2018, and as continued government spending maintains fiscal deficits but boosts economic activity. When an economy relies heavily on oil, nominal GDP plummets alongside oil prices (all other factors remaining unchanged), as they did in 2014. This leads to an increase in the ratio of general government assets to GDP despite a nominal decline in assets (because nominal GDP declined more than assets), as illustrated in Kuwait's 2015 data, the report explained.