The Middle East sovereign wealth funds can play an important role in stabilizing regional economies amid the global financial crisis, the International Monetary Fund said Sunday. “In times of financial stress in the domestic economy, SWFs domestic investments may temporarily deviate from pure profit maximization to support broader macroeconomic financial stabilization objectives,” the organization said in its regional economic outlook. Two of the region's largest funds, the Kuwait Investment Authority, or KIA, and the Abu Dhabi Investment Authority have repatriated funds and deposited them in local banks in an effort to boost liquidity in recent months, according to the IMF. Meanwhile, the Qatar Investment Authority and the KIA have bought local bank shares to prop up confidence, the fund said. “Going forward, SWFs need to ensure that they hold sufficient liquid assets to take on their stabilization role without realizing losses,” the IMF said. The IMF added that while the sharp economic downturn has resulted in likely losses for SWFs, their relative size and influence in global markets will remain significant. “They are also likely to continue to maintain a longer-term investment strategy than most other investors,” the organization added. One likely challenge for SWFs in the months ahead comes in the form increased regulation and a demand for greater accountability and transparency. “SWFs could be affected by requirements that all financial institutions and investment vehicles improve transparency and disclose more financial information,” the IMF said. The IMF, which in February projected growth in the Gulf region of 3.5 percent this year, also warned of risks from a prolonged global recession and further deterioration of bank balance sheets due to exposure to weak real estate markets. Gulf economies - which also include the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain - grew at 6.4 percent last year. Saudi Arabia's economy would contract 0.9 percent, the UAE's would shrink 0.6 percent and Kuwait's would contract 1.1 percent, the IMF said in a regional economic outlook. Over all, economies in the Middle East and Central Asia are likely to grow 2.5 percent compared with 6 percent last year, it said. Gulf states were previously seen as less vulnerable to financial turmoil as they were cushioned by accumulated windfall revenues from oil.
