For decades, sovereign wealth funds in the Gulf have preserved and amplified their wealth from oil and gas, invested in foreign assets and international markets, and built up $5 trillion in rainy day reserves.
That moment may be approaching.
Iranian attacks across the Gulf in response to Israeli and US attacks could cause a fiscal shock.
Oil prices have risen 20% since last Friday, but the attack has reduced vital hydrocarbon exports through the Strait of Hormuz and halted production at facilities including Saudi Aramco’s largest refinery in the country and an LNG facility in Qatar.
Analysts say a prolonged conflict could grip the finance ministries of Riyadh, Abu Dhabi, Doha and Kuwait, as governments face further pressure from rising defense spending, disruptions to supplies from food to medicine and a resulting broader economic slowdown.
“SWFs (sovereign wealth funds) give countries like the UAE a strong fiscal buffer, and local governments will rely on the deep pool of sovereign wealth if needed,” said Paris-based Robert Mogielnicki, who runs an investment and geopolitical advisory firm and is a non-resident scholar at the Arab Gulf States Institute.
Continued disruptions to the Strait of Hormuz, which handles about a fifth of the world’s oil consumption, will impact major Saudi Aramco and Abu Dhabi National Oil Company (ADNOC), which have historically transported the majority of their crude oil exports through the Strait of Hormuz. Both have alternative routes, but neither has enough production capacity to make up for the volumes typically shipped from the Gulf.
“The impact of the current Iran-related crisis will depend on how energy flows and prices evolve,” research group Global SWF said in a report on Wednesday.
Officials at the six Treasury departments could not immediately be reached outside of normal business hours.
Challenge to raise funds
Although the economies of the Gulf states are aiming to shift away from dependence on natural resources, their finances remain largely dependent on hydrocarbons, and their finances are in a complex situation. The UAE is projected to record a budget surplus of nearly 5% of GDP in 2025 and 2026, but huge Saudi spending led to a budget deficit of 276 billion riyals ($73.54 billion) last year, and deficits are expected for years to come.
JPMorgan analysts have already lowered their growth forecasts for sectors other than oil and gas. Across the Gulf Cooperation Council countries of Saudi Arabia, the United Arab Emirates, Oman, Bahrain, Kuwait and Qatar, a decline of 1.2 percentage points from previous growth forecasts is expected, with the UAE expected to see the sharpest revision of 2.3 percentage points, they said in a note on Thursday. JPMorgan said the hydrocarbon sector could recover later this year, depending on the duration of the conflict.
For the non-hydrocarbon sector, JPMorgan warned that some damage could also be long-lasting, with risks to broader diversification challenges such as domestic investment, foreign direct investment and talent attraction being higher than before.
Raising funds through the sale of international bonds can also be costly.
In January, Saudi Arabia approved a 217 billion riyal ($57.86 billion) borrowing plan this year. JPMorgan announced on February 2 that its sovereign wealth fund, the Public Investment Fund (PIF), Aramco, banks and other companies have raised about $27 billion so far this year, one of its most active starts to date.
“PIFs are not only global investors, but also the main financing force for Vision 2030, so they may face more (financial and operational) constraints (than their purely portfolio-oriented peers),” said Ana Nakhvaroveit, an Oxford University academic who specializes in sovereign wealth funds.
The PIF has already shifted inward, with Saudi Arabia seeking to attract capital amid mounting fiscal pressures and the need to fund the government’s Vision 2030. The plan calls for hundreds of billions of dollars in government investment in areas such as tourism to reduce economic dependence on hydrocarbons.
strategic pivot
In the aftermath of the global financial crisis, the region’s funds became a go-to source of relief for investors, helping to support financial firms from Barclays to Credit Suisse. Not all bets paid off, and funds have become more strategic in recent years.
They are investing heavily in technology and AI, making these areas central to their efforts to move the economy away from oil.
PIF has committed tens of billions of dollars to domestic and international technology investments, including an investment in SoftBank’s Vision Fund. Mubadala has poured money into robotics and AI infrastructure, and Abu Dhabi’s MGX, which he launched last year with Mubadala as a founding partner, partnered with BlackRock on a $30 billion AI infrastructure fund.
It is also making high-profile forays into media, entertainment and sports as part of its efforts to project soft power and capture growth in consumer industries. PIF acquired a majority stake in Electronic Arts and has invested billions of dollars in professional golf through LIV Golf, boxing and esports.
Last December, a Saudi fund, Abu Dhabi’s Limad and the Qatar Investment Authority joined forces to support Paramount Skydance’s $108 billion bid for Warner Bros. Discovery. The one-time three-way alliance, a rare event, revealed the Gulf states’ appetite for assets ranging from production to content and their growing influence in global trade.
However, Nakbaroveit said there was a risk that investments would be suspended if military escalation continues and domestic demand increases.
“The priority is the people and the supply chain, including food security and drinking water security,” she said.
Regional examples in Kuwait
The $1 trillion Kuwait Investment Authority (KIA), the world’s first sovereign wealth fund established in 1953, demonstrated the role that SWFs can play. When Iraqi forces invaded in 1990, the London-based KIA division effectively became the country’s Treasury and organized the transfer to the government-in-exile.
Since then, all major Gulf funds have maintained a similar logic of accumulating surpluses and deploying them in case of crisis, even though they operate under very different missions and strategies. For example, PIF is the domestic investment engine for realizing Saudi Vision 2030, while KIA and Abu Dhabi Investment Authority can only invest internationally.
Sovereign funds have options
To be sure, not all sovereign capital can be easily mobilized in the event of a more severe crisis. Some funds, like Mubadala, have a focus on private equity, infrastructure assets and illiquid alternatives, which can make divestment more difficult.
U.S. Treasuries and publicly traded stocks may be your first, easier choice. Abu Dhabi’s ADIA was one of the investors who sold a large stake in US company Medline this week.
“Public markets are the easiest source of liquidity, but they’re also the most visible and can be costly to exit during times of high volatility,” said Sam Bourge, financial analyst at Investors Observer.
“The basic case is that Gulf SWFs are not forced sellers.”
Some investments are continuing for now.
Mubadala is one of a group of investors who have invested about $4 billion in life insurance group Atla Holding, according to a statement on Friday, and whose ADIA and QIA units this week were named core investors in Japanese payments company PayPay’s U.S. IPO.
He said the more likely scenario was a slowdown in foreign investment and a quiet portfolio rebalancing rather than an emergency sale.
Qatar’s QIA chose to inject sovereign capital into the country to stabilize the banking system in response to the 2008 financial crisis, purchasing assets from the balance sheets of local banks to restore confidence.
Peter Yedelsten, chief executive of fundraising advisory firm Jade Advisors, said the focus would be on restoring confidence quickly, although he cautioned that it may take time.
“SWF portfolios will be reset in the short term, but so will other long-term investors around the world, such as endowments and pension funds. I don’t think that will impact the long-term portfolios of SWFs in the region,” he said.
(1 dollar = 3.7530 riyals)
(1 dollar = 0.8653 euro)
(Reporting by Hadeel Al Sayegh and Federico Maccioni in Dubai, Rachna Uppal in Abu Dhabi and Nahi Oseilan in Lebanon; Additional reporting by Mark Jones and Karin Strawhecker in London; Editing by Elisa Martinuzzi and Susan Fenton)
