TEXT-S&P: Sovereign wealth funds support Gulf credit quality

(The following statement was released by the ratings agency)

June 11 - Unlike the previous oil booms of the 1970s and 1980s, the current run of high oil prices has seen producing nations such as the Gulf Cooperation Council (GCC) countries manage their increased revenues more prudently, including through their Sovereign Wealth Funds (SWFs).

According to a report from Standard & Poor's Ratings Services, titled "How Sovereign Wealth Funds Are Underpinning Gulf States' Credit Quality," SWFs underpin fiscal and external stability for their sponsoring nations, and have become integral to their sovereign creditworthiness. Since 2002, the cumulative current account surplus of the GCC countries is estimated to have reached almost $1 trillion in 2008, most of which is stored in SWFs.

SWFs can be classed into two main categories, each of which underpins sovereign support in different ways. Type I funds invest in marketable securities, mostly abroad, with the goal of providing an adequate return on capital, preserving wealth for future generations, diversifying revenue streams, and buffering against fiscal shocks. Type II funds own equity stakes in domestic and regional companies, with the goal of diversifying the local economy through the expansion of domestic industry, and help the local economy integrate more fully with the global economy.

"Type II Sovereign Wealth Funds are central to GCC governments' aim to establish a broader foundation for economic growth beyond energy-intensive industries," Standard & Poor's credit analyst Ben Faulks said. "On this point, a notable difference between the current oil boom and previous booms in the 1970s and 1980s has been the comparatively prudent management of windfalls during the current oil price surge. Indeed, SWFs play an integral part in this more long-sighted fiscal and economic planning."