Low oil prices raise sovereign investors funding concerns

Oil pumpsNorth American sovereign investors are forecasting a decline in funding this year as a result of low oil prices, finds the latest sovereign asset management study from Invesco.

A significant majority (80%) of North American sovereign investors said that they expected new funding to be negatively impacted in the short term, reveals the study. For the rest for the world, 42% of sovereigns with high oil exposure expect a decrease in funding compared to last year.

The recent fall in oil price has impacted on economies, stock markets and current account surpluses across the world, all of which can drive funding for sovereign investors in the short term. The research from Invesco shows that not all sovereign investors feel equally exposed to the effects of the falling oil price, with regional differences existing as a result of the level of oil exposure (defined as oil rents as a percentage of GDP) and governance, risk and liquidity management factors.

Nick Tolchard, chair of Invesco’s Global Sovereign Group & head of Invesco Middle East, says: “The timing of the fall in oil prices has been particularly challenging for state governments in North America and Canada; with reduced revenues from oil producers having driven down state taxation income at the same time as state expenses are rising sharply as a result of the baby boom generation retiring.”

However, in spite of these challenges the survey also finds that some sovereign investors feel they are better placed to manage funding concerns today than they were before 2008.

Governance and legal structures surrounding sovereign investors were shown to be highly important. The majority (80%) of North American sovereigns said they are confident their assets are protected from being drawn on to fund potential government shortfalls. In other parts of the world the mood was less optimistic, with 67% of oil-funded sovereigns expecting withdrawals if the oil price remains below $40 (€36) per barrel for two years.

This has polarised sovereign investors’ objectives and strategy. While those with conservative objectives and portfolios cite no change, others have moved away from more progressive investment strategies, in an attempt to cope with potential liquidity issues. Some respondents expressed concern that this shift could defer the implementation of more progressive long-term allocation trends towards alternatives.

Invesco’s third annual Global Sovereign Asset Management Study, which analyses the investment behaviour of sovereign wealth funds, was conducted amongst more than 50 individual sovereign investors across the globe representing $7.09 trillion in assets.

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