UAE, Kuwait can absorb shocks of geopolitical tension due to huge SWFs

UAE, Kuwait can absorb shocks of geopolitical tension due to huge SWFs
UAE, Kuwait can absorb shocks of geopolitical tension due to huge SWFs

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Aden - Yasmine El Tohamy - The UAE and other Gulf countries holding strong sovereign wealth funds are better positioned to absorb the shocks of geopolitical tension following the assassination of Iranian general by the US on Friday morning.

Alexander Perjessy, vice president and senior analyst at Moody's Investors Service, said sovereigns in the regions have different capacities as some have extremely limited ability to absorb the shock while others have more capacity.

"The sovereigns potentially affected have very different capacity to absorb shocks, from extremely limited for governments in Iraq and Lebanon, to more significant for sovereigns in the Gulf including Kuwait (Aa2 stable), Qatar (Aa3 stable) and the UAE," Perjessy said in a note.

However, in case of a prolonged and broad conflict, these regional governments' capacity to support their related issuers could become impaired, Moody's said.

Total assets held by the UAE sovereign wealth funds amount to $1.16 trillion. Abu Dhabi Investment Authority (Adia), third largest fund in the world, controls $696 billion in assets, followed by $239.4 billion by Investment Corporation of (ICD), $228.9 billion by Mubadala and $793 million by Sharjah Asset Management, data by the SWF Institute showed. While the total assets held by GCC sovereign wealth funds are estimated at close to $3 trillion.

On Friday morning, the US said it killed Iranian Major-General Qassim Suleimani and Iraqi Popular Mobilization Forces Deputy Head Abu Mahdi al-Muhandis in a drone strike. This results in serious tension in the region and worldwide.

"However, the risks have markedly increased in the past few days. The credit implications of a military conflict would depend on its duration, scope and the severity of damage to critical infrastructure - factors that would remain highly uncertain for some time should an outright military conflict start. In particular, depending on its scope, the sovereigns and other issuers affected could include Iraq, issuers in the GCC and potentially even the broader region including Lebanon," it said.

Moody's Investors Service assumes that the US and Iran will avoid an outright military conflict.

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