The European single currency plunged to an 11-year low against the dollar on Monday after the anti-austerity, neo-Marxist party Syriza won the Greek election. The possibility of the country defaulting on its debt repayments sparked renewed fears Greece could be forced to leave the eurozone.
Here’s the important question: What is at stake for the Gulf?
All the Gulf Co-operation Council (GCC) countries, except Kuwait, have their currencies pegged to the US dollar. The eurozone crisis, Japan’s stagnation and the expected rise in US interest rates have worked to strengthen the greenback against the euro of late. As the European Union and Japan together account for an estimated 50% of the total GCC imports, a strong-dollar-weak-euro regime can work in GCC’s favour in cheaper imported goods. A weakening euro is also good news for GCC holidaymakers in Europe, who will get more euros/pounds for their dollars. In a wider sense, a weaker euro can make European assets look cheaper for GCC investors.
But here are the larger issues.
Riding on the back of consistently higher oil prices over the last decade, Gulf countries have built massive fiscal reserves estimated at $2.45tn by the International Institute of Finance. This financial cushion has allowed GCC sovereign wealth funds (SWFs) to invest heavily in Europe.
The peculiar investment pattern of Gulf SWFs makes it difficult to take updated stocks of the assets under their management. But between 2002 and 2006, close to $100bn of the $642bn surplus in these funds was invested in EU countries, especially in the financial sector, according to a December 2012 estimate. Gulf SWFs provided emergency financing with a number of European banks after the crisis in 2008. Between 1995 and 2010, an estimated 30% of their cross-border investment was made in the EU. As per latest available data, the total assets acquired by GCC private investors and SWFs in the EU is estimated at more than €400bn, making them one of the largest foreign investor groups in Europe.
The Gulf investments in Europe are mainly keeping line with the futuristic strategy of economic diversification. GCC policy makers are envisaging a non-oil scenario for future generations and returns from overseas assets are meant to sustain their economies during the rainy days. Longer term, to be sure, a consistently weaker euro, will weigh on the valuation of Gulf assets in Europe as well as capital returns.
Oil, the main stay of Gulf economies, has fallen over 40% since the Organisation of Petroleum Exporting Countries maintained its production target at the November 27 meeting. The Gulf’s fiscal cover will start shrinking if oil stays low for long, a most likely scenario.
The Syriza party’s victory in Greek elections is seen by some experts as a welcome snub for the EU and successive governments in Athens for the way they mishandled the country’s $240bn debt crisis. Despite growing fears of a worst-case crisis, it may be too early to conclude that the country will opt out of the euro. The Syriza does not have a mandate to leave the euro as three quarters of the Greeks still want to stay within the currency union.
Whether Greece does it or not, stakes are already high for the Gulf. And GCC policy makers need to plan for any crisis arising out of Europe/eurozone to protect their investments and trade interests.
