Global Fixed Income

A New Era of Gulf Aid: Potential Winners and Losers

August 10 2023

My name is Razan Nasser. I'm a sovereign analyst at T. Rowe Price. So I look at the Middle East and North Africa, among other parts of emerging markets. And for me, the Middle East is really a fascinating region to cover. It's nuanced, it's complex, and it has a very big role as a global energy provider, as a key source of capital for the world.

And that's only grown more important since the Russia invasion of Ukraine.

One piece of research that I've worked on recently on the region is looking at the financial assistance that the Gulf provides to other countries in the Middle East and beyond, and that can be loans, grants, and investments that are provided to countries that are facing economic shock or are in need. This is quite important in looking at sovereign credit, particularly in distressed situations, trying to assess whether a country is going to receive financial assistance or not can really have a big impact on the investment outlook.

So in undertaking this research, I looked at four areas. I went through the history of Gulf assistance over recent decades, and I tried to identify different eras and what made them different and unique. And then I looked at what methods of assistance were used: grants, loans, investment. I also looked at what was the driver of assistance at different points of time, was it ideological, political, commercial? And finally, I took all of that together and examining the situation in the Gulf now I tried to assess how financial assistance from the Gulf could look like in the future.

Well, there are a few key takeaways from this research. One is that we should not assume that if a country had received aid regularly in the past, that doesn't mean that they will continue receiving financial assistance from the Gulf. This economic driver, it really puts a lot more onus on the country to deliver attractive investment opportunities. And there's also a lot more conditionality around the financial assistance that is coming.

So countries have to deliver on certain conditions to in order to receive it. Generally, economic reforms that the Gulf hopes would lead to these countries requiring less support from them. So again, countries have to do their work in order to get that support.

Another key conclusion I had is that it's almost difficult to really call this funding aid anymore, given its commercial nature, it's really more a commercial transaction. And with that, the way it flows into these economies is quite different. It comes in much more slowly. These assets have to be prepared to be sold. And it's very different than when you get a loan or a grant, for example.

So I've framed it through categorizing the countries in buckets based on the probability that they will receive financial assistance. And for one on the top of the list, I put Oman and Bahrain, for example, and these are countries that are in the Gulf. They are there both the economic and the political motivation is quite well aligned. They don't need this assistance now. But should they, then they are more likely to get it than many other countries. Down the list are big countries, important countries like Egypt, Turkey, and Pakistan that offer some very interesting opportunities for the Gulf.

But again, the onus is on these countries to deliver on providing attractive opportunities, on delivering on economic reforms to really get the Gulf to provide the funding. And further down the list would be smaller countries in the region, like Jordan, Tunisia, who even in recent years, have relied much more on Western allies and international financial institutions like the IMF for financial assistance.

And that should be an ongoing trend. Lastly, with the lower probability would be a country like Lebanon, where both economic and political incentives are just not there.

There are a few things that I am looking at next, which I'm quite excited about. One is geopolitical risk, and particularly what I see as a downward cyclical trend in geopolitical risks in the Middle East. Another area I'm interested in is green hydrogen as a source of renewable energy, and I think that could potentially be a new economic driver for the region in the post-hydrocarbon world.

Key Insights

  • Whether or not a country may receive financial assistance from the Gulf in a distressed situation will likely have important implications for their investment outlook.
  • Gulf aid has evolved over time, and a clear trend is the rise of conditionality, which means that countries have to implement reforms in order to receive support.
  • A framework developed to determine the likelihood of a country receiving financial aid shows that Bahrain and Oman are most likely, while Lebanon is least likely.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of July 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any estimates or forward-looking statements made.

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