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P R W P 9103
e External Wealth of Arab Nations
Structure, Trends, and Policy Implications
Mahmoud Mohieldin
Ahmed Rostom
Chahir Zaki
Oce of the Senior Vice President for e 2030 Development Agenda
United Nations Relations and Partnerships
January 2020
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
Produced by the Research Support Team
Abstract
e Policy Research Working Paper Series disseminates the ndings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the
names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its aliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
P R W P 9103
e paper makes two main contributions. First, it analyzes
net foreign assets and liabilities in selected Arab coun-
tries over the past two decades, emphasizing the relative
signicance of direct versus portfolio investment. It distin-
guishes between foreign direct investment, portfolio equity
investment, ocial reserves, and external debt. Second, the
paper examines the eects of policy variables that aect
the accumulation of net foreign assets and its components,
analyzing how the existence of a sovereign wealth fund,
the country’s exchange rate regime, and the development
of its nancial system aect its net foreign assets. e main
ndings show that the presence of a sovereign wealth fund
is positively and statistically signicantly associated with
foreign direct investment in Arab countries. Financial
development (dened as credit to the private sector as a
percentage of gross domestic product) is also statistically
signicant across various regressions. e more nancially
developed a country is, the more it should invest in riskier
assets, such as portfolio assets. But Arab investors are more
risk averse than investors elsewhere. Oil-exporting countries
tend to invest more in debt assets than in portfolio assets.
For oil-importing countries, nancial development is the
most important determinant of foreign direct investment.
is paper is a product of the Oce of the Senior Vice President for e 2030 Development Agenda, United Nations
Relations and Partnerships. It is part of a larger eort by the World Bank to provide open access to its research and make
a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on
the Web at http://www.worldbank.org/prwp. e authors may be contacted at arostom@worldbank.org.
The External Wealth of Arab Nations:
Structure, Trends, and Policy Implications1
Mahmoud Mohieldin,2 Ahmed Rostom,3 and Chahir Zaki4
Keywords: Net Foreign Assets (NFA), Foreign Direct Investment (FDI), External Debt,
Sovereign Wealth Funds (SWFs), Arab economies.
JEL classification: F41, O11.
1 The findings, interpretations, and conclusions expressed in this paper are those of the authors in their
personal research capacities. They do not represent the views of the World Bank Group, its affiliated
organizations, the Executive Directors of the World Bank, or the governments they represent. The authors
wish to thank Mr. Rabah Arezki and the participants of the Middle East Economic Association (MEEA)
Annual Conference held in Philadelphia; January 2019 for helpful comments and suggestions. They also
wish to thank Ms. Mariam Hoda El Maghrabi and Mr. Ramy Zeid for excellent research support.
2The World Bank Group and Faculty of Economics and Political Science, Cairo University.
3The World Bank Group and George Washington University.
4Faculty of Economics and Political Science, Cairo University and the Economic Research Forum.
2
1. Introduction
Over the past two decades, global economic cycles were coupled with remarkable
dynamics in cross-border holdings of foreign assets These holdings altered the structure and
composition of flows of foreign direct investment (FDI) and portfolio flows to emerging
economies. In addition, the recent downturn in oil prices severely affected the realized surpluses
of resource-rich countries, particularly the Gulf Cooperation Council (GCC) countries, which
suffered significant deterioration in their fiscal balances. Fiscal accounts swung from a surplus
equivalent to 3.8 percent of GDP in 2014 to a deficit estimated at $147 billion (10 percent of GDP)
in 2015 and $162 billion (7 percent of GDP) in 2016 (IIF 2015). In the absence of flexible exchange
rates, oil revenues in local currency terms have fallen sharply. At the same time, political
uncertainty in Arab countries that underwent political and social transformation reduced investors’
interest.
These factors gave rise to large external imbalances in Arab countries. They revived
interest in analyzing the pattern and assessing the adjustment mechanism as well as the dual role
played by exchange rate regimes in influencing both net capital flows and net capital gains in
external holdings in Arab countries.
Net foreign assets (NFA) are the value of overseas assets owned by a country minus the
value of its domestic assets owned by foreigners, adjusted for changes in valuation and exchange
rates. A country’s NFA position can also be defined as the cumulative change in its current account
over time. The NFA position indicates whether a country is a net creditor or debtor to the rest of
the world. A positive NFA balance means that it is a net lender; a negative NFA balance indicates
that it is a net borrower (Bouchet, Fishkin, and Goguel 2018).
The Arab region is of particular interest for four main reasons:
Since the oil boom of the mid-1970s, oil and gas revenues in many Arab countries have
been substantially larger than their import needs. Consequently, their foreign asset
accumulations have been far greater than those of midsize oil-exporting countries, such as
Algeria.
Political and social unrest in many Arab Spring countries resulted in greater fiscal spending
and a decline in private investment, leading to internal and external imbalances in many
countries.
It is important to understand how Arab countries allocate their assets (mainly oil-exporting
countries’ assets from oil revenues) and liabilities (mainly oil-importing ones with oil
imports representing the key liability).
This topic is timely for the Arab region, as some countries are creating sovereign wealth
funds (SWFs), which may help them increase their NFA.
Following the methodology of Lane and Ferretti (2001, 2007), this paper analyzes trends
in and the composition of net foreign assets and liabilities in selected Arab countries over the past
two decades, with an emphasis on the relative significance of direct versus portfolio investment.
3
It distinguishes between foreign direct investment (FDI), portfolio equity investment, official
reserves, and external debt. The paper examines the effect of different policy variables that affect
the accumulation of NFA and its components, analyzing how the existence of an SWF, the
country’s exchange rate regime, and the development of its financial system affect its NFA.
The paper is organized as follows. Section 2 reviews the literature on NFA and their policy
determinants. Section 3 provides background information on the countries relevant to this study,
identifying attributes unique to each country, and the composition and trends of the NFA. Section
4 presents the methodology and econometric specification. Section 5 analyzes the results. Section
6 will provide policy recommendations and proposals for future research.
2. Literature Review
Empirical studies have been conducted on the measurement, acquisition, and management
of countries’ NFA. The assessment of such composition is beneficial, as it is indicative to
understanding a country’s external assets and liabilities to ultimately estimate its external position.
Lane and Milesi-Ferretti ((2001) maintain that substantial changes reported in the composition of
capital flows reflect the increasing role of foreign direct investment (FDI) and equity flows. They
show that net flows of portfolio equity and FDI, changes in debt associated with assets and
liabilities, and net foreign account transfers and exports were key factors in the changing
composition of the current account.
Vermeulen and de Haan (2014) examine the relationship between the composition of NFA
and financial development. They assess the validity of the claim suggested by Mendoza and Smith
(2006) that financially developed countries are likely to take more risks than developing countries,
because development allows them to insure against risk. Financially developed countries thus tend
to have positive net equity positions, whereas developing countries tend to have positive net debt
positions. Vermeulen and de Haan show empirically that financial development reduces a
country’s long-run net foreign position and that development leads to higher net equity and lower
net debt positions. It is therefore advantageous for a developing country to focus on deepening its
financial markets in pursuit of higher NFA and consequently development and growth.
Henderson and Rogoff (1982) examine the relationship between a country’s NFA position
and the stability of its exchange rate regime. A negative NFA position has been associated with
unstable regimes, particularly flexible exchange rates. Henderson and Rogoff construct a two-
country portfolio model to investigate the stability problem associated with a negative NFA
position. They conclude that such a position does not on its own indicate instability. However, in
conjunction with static or regressive expectations, instability can arise.
Furthering the investigation of stability, Ghironi and Stebunovs (2007) study the domestic
and international effects of financial deregulation. Using decreases in monopoly power of financial
intermediaries as proxies for deregulation, they reach several conclusions. First, an economy that
deregulates experiences a rise in growth, real exchange rate appreciation, and a deficit in the
4
current account. As a result, higher consumption as well as an increase in the number of domestic
producers will be observed in economies that lags in deregulation. Second, a decrease in monopoly
power leads to less volatile business creation, reduced countercyclicality, and weaker substitutions
in labor supply to alleviate the adverse effects to productivity shocks. Third, financial deregulation
contributes to a moderation of firm-level and aggregate output volatility; financial ties between
two countries therefore reduce volatility in the foreign economy. The study claims that its findings
are consistent with findings drawn from data following the deregulation of banks in the United
States beginning in 1977.
The model of exchange rate determination of Obstfeld and Rogoff (1995) incorporates the
role of current account imbalances. However, despite its initial motivation, the paper became
fundamental to further research on the relation between the exchange rate and net NFA
accumulation, deemphasizing the role of the latter, due to the non-stationarity revealed within the
developed model. In the same line, Cavallo and Ghironi (2002) revisited the former with emphasis
on the original intent; that is, the authors develop a two-country model of exchange rate
determination in which stationarity and foreign asset composition play an explicit role. They
explore whether the exchange rate is determined less by the exogenous money supply and more
by net foreign assets. They find that the flexible-price model delivers exchange rate appreciation
under a relatively favorable productivity shock; the home economy accumulates assets rather than
debt. The sticky-price model generates appreciation, net foreign debt, and stock market expansion
after a permanent favorable shock to relative productivity. The study proposes further research on
the implications of the developed model as well as the consequences of deviations from purchasing
power parity. It also suggests exploration of the performance of policy rules.
Debelle and Galati (2007) examine the consequences of the current account dynamics for
the exchange rate. They show that over the past 30 years, episodes related to current account
adjustments in industrial countries were associated with major slowdowns in economic growth
and large exchange rate deprecations; the effects on capital flows were indeterminate. The study
explains such adjustments as responses to domestic imbalances, particularly within the private
sector.
At the Middle East and North Africa region level, Lane and Milesi-Ferretti (2001) reach
three main findings. First, this region is extremely heterogeneous: Gulf countries hold mainly
external assets, and other countries have large external liabilities. Second, in contrast to developing
countries, the role of stocks of equity is increasing in Middle Eastern countries as opposed to
developing ones. Third, NFA are significant, because they indicate changes in real exchange rates
in the long run, as suggested by the degree of depreciation of exchange rates in debtor countries
relative to creditor countries as evidence of their theory. As per cross-border investment and
foreign assets in the Arab region, Elbadawi and others (2018) study the allocation decisions of
SWFs in terms of both the probability of investing abroad (the extensive margin) and the level of
investment (the intensive margin). They find that foreign investors have a positive bias for Arab
destination countries at the extensive margin level but a negative bias against them at the intensive
margin.
5
3. Data and Stylized Facts
This paper uses data from the International Monetary Fund–International Financial
Statistics (IMF-IFS) database. Lack of data forced the exclusion of Algeria, the Comoros,
Lebanon, Libya, Oman, Qatar, Somalia, and the United Arab Emirates. Many data points were
also missing for other countries, including Djibouti, Morocco, Saudi Arabia, the Syrian Arab
Republic, and Tunisia.
The countries’ foreign assets and liabilities grew rapidly over the past four decades,
increasing from about 20 percent of GDP in 1970 to 205 percent in 2016, as is shown in figure 1.
NFA rose from about 20 percent of GDP in 1970 to about 90 percent in 1994 before falling to 40
percent in 2015 (figure 2).
Figure 1 Global ratio of total assets and
liabilities to GDP, 1970–2015
Figure 2 Global ratio of net foreign assets to
GDP, 1970–2015
Source: International Monetary Fund–
International Financial Statistics (IMF-IFS) database.
Source: International Monetary Fund–
International Financial Statistics (IMF-IFS) database.
Net foreign assets and/or liabilities are seen as the reflection of a country’s external position
and trade and investment with the rest of the world. Central banks traditionally define NFA as the
change in net foreign assets as the current account balance. This definition is a bit narrow and more
of a short-term nature. A country’s external sector also involves portfolio investments, direct
investments as well as debt instruments. This broader context is more reliable. It is captured in the
definition proposed by Lane and Ferretti (2001), which relies on two identities. The first identity
is
NFA = FDIA + EQA + DEBTA + FX – FDIL – EQL – DEBTL (1)
where FX = foreign exchange reserves, FDI = the stock of direct investment, EQ = portfolio equity
investment, DEBT = debt, A = assets, and L = liabilities.
0.0
0.5
1.0
1.5
2.0
2.5
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Percent of GDP
Total assets/GDP Total liabilities/GDP
‐100
‐80
‐60
‐40
‐20
0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Net foreign assets as
percent of GDP
6
The second identity is
CA = (∆FDIA – ∆FDIL) + (∆EQA – ∆EQL) + (∆DEBTA – ∆DEBTL) + ∆FX – ∆KA – EO (2)
where CA = the current account, ∆ = flows, ∆KA =capital account transfers, and EO = errors and
omissions (assuming this reflects changes in debt assets held by residents abroad).
Lane and Ferretti build on the capital flight literature. Disregarding asset valuation changes,
they approximate the change in NFA with the current account balance, net of capital account
transfers:
∆NFA ≅ CA + ∆KA. (3)
According to Lane and Ferretti (2001), given an initial stock of net external assets, the
current stock of net external assets can be estimated by cumulating the current account balance,
net of capital transfers. The composition of NFA can be obtained by cumulating the relevant flows
on the right-hand side of equation 2. Lane and Ferretti claim that their measure represents an
improvement over the crude NFA measure along several dimensions. First, they use direct stock
measures, rather than cumulative flows, for foreign exchange reserves and gross external debt
(with respect to developing countries) and adjust the NFA measure correspondingly, allowing
them to take into account the impact of debt forgiveness and reduction agreements, cross-currency
fluctuations, misreporting of capital flows, and capital gains and losses on foreign reserves on
NFA. Second, they allow, albeit imperfectly, for the impact of changes in relative prices across
countries on the value of FDI assets and liabilities, as well as for the impact of variations in stock
market prices on portfolio equity stocks. The impact of these adjustments is substantial: For some
industrial countries, the correlation between changes in NFA and the current account is zero or
negative.
As Lane and Ferretti (2007, updated in 2015) note, large discrepancies in the measurement
of a country’s foreign asset and liability position are observed. Hence, to account for such a
heterogeneity, multiple indicators of the degree of financial globalization are needed to assess the
composition of NFA.
Lane and Ferretti focus on the global level. This paper focuses on the subset of Arab
countries (see figures 3–10). The countries selected reveal wide disparities, as they include both
oil exporters and oil importers as well as countries that experienced significant political, economic,
and social instability and countries that did not. Adopting a comprehensive data set is critical to
understanding the NFA dynamics of these countries and providing accurate comparative analysis
that yields relevant policy recommendations.
The Arab oil-exporting countries of Saudi Arabia, Kuwait, Bahrain, and Algeria
maintained positive net total assets positions over the past two decades (figure 3). Iraq achieved a
7
positive total asset position only after recovering from the Gulf War. The total foreign assets of
these countries rose sharply during the late 1990s; that growth slowed, particularly in the past five
years, in what seems to be a response to the volatility of and decline in oil prices and the uncertainty
caused by the Arab Spring.
Non-oil-producing countries (the Arab Republic of Egypt, Jordan, Morocco, and Tunisia)
maintained positive net total liabilities positions over the past two decades. Total liabilities in these
countries rose sharply over this period, with total assets falling, widening the gap between total
liabilities and total assets to 3: 1 over the past 10 years.
Figure 3 Net foreign assets as percent of GDP, by country, 2007 and 2015
Source: Authors, based on data from Lane and Feretti 2015.
Figure 4 Current account as percent of GDP, by
country, 2007 and 2015
Figure 5 Capital account as percent of GDP, by
country, 2007 and 2015
Source: Authors, based on data from Lane and Feretti 2015. Source: Authors, based on data from Lane and Feretti 2015.
In order to understand the dynamics of the foreign sector in the oil versus the non-oil sector,
we also look at changes in NFA and its key components over the period 2007–15. With the
exception of Libya, which has been in severe conflict, oil-exporting countries increased the share
of NFA in GDP. The surplus in the current account as a percent of GDP plummeted, except in
Iraq. Only Bahrain and Qatar achieved growth in the capital account balance as a percent of GDP;
all other oil-exporting countries suffered declines.
This simple elevator analysis confirms that the NFA positions of oil-exporting countries
are under extraordinary pressure. The change in NFA to GDP was negative in most non-oil-
exporting countries, with the exception of Jordan and the Comoros, where it soared, driven mainly
-2 0 2 4 6
ARE
BH
R
CO
M
D
JI
DZA
EG
Y
IR
Q
JO
R
KW
T
LB
N
LB
Y
M
AR
M
R
T
O
M
N
Q
A
T
SAU
S
D
N
SYR
TUN
W
BG
Y
EM
by country
2007 2015
-.05 0.05 .1 .15
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
MRT
OMN
QAT
SAU
SDN
SYR
TUN
WBG
YEM
by country
2007 2015
-.5 0.5
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
MRT
OMN
QAT
SAU
SDN
SYR
TUN
WBG
YEM
by country
2007 2015
8
by surges in the current account. Egypt, Lebanon, and Djibouti recorded positive changes in their
capital accounts as percentage of GDP, but the increases were not sufficient to yield a positive
change in the NFA position as a percent of GDP (table 1).
Table 1 Change in net foreign assets, current account, and capital account as percent of GDP
between 2007 and 2015, by country
Country Net foreign assets Capital
account
Capital account transfers
Non-oil-exporting countries
Djibouti - - +
Mauritania - - -
Lebanon - - +
Algeria - - Na
Jordan + + -
Tunisia - - +
Sudan + - -
Yemen, Rep. - + -
Egyp
t
, Arab Rep. - - +
Morocco - + -
Comoros Islands + + -
- - Na
Oil-exporting countries
Libya - - Na
Oman + - -
Saudi Arabia + - -
Iraq + + -
Bahrain + - +
Kuwait + - -
Qatar + - +
Source: Authors, based on Lane and Feretti 2015.
Note: ‘Na’ refers to data that not available.
9
Another key component of the external sector position is the FDI position. In all countries
studied except Kuwait and Bahrain, FDI assets exceeded liabilities during the past two decades (in
Kuwait liabilities exceeded assets; Bahrain maintained a balanced position) (figure 6). Saudi
Arabia maintained a large gap between direct investment liabilities and assets. The growth in total
direct liabilities slowed in Egypt, Jordan, and Morocco during the early 2000s, which were coupled
with the early wave of the global financial crises at the time.
Figure 6 Net foreign direct investment as percent of GDP, by country, 2007 and 2015
Source: Authors, based on Lane and Feretti 2015.
The net portfolio debt positions indicate that oil exporters are net portfolio investors abroad
and net debt asset holders (figure 7). Non-oil-exporting countries, especially Egypt, witnessed
volatile net portfolio liabilities positions. Morocco was able to maintain a stable portfolio liabilities
position over the past eight years, indicating investor trust in the economy.
Figure 7 Portfolio equity and foreign direct investment holdings
as percent of GDP, by country, 2007 and 2015
Source: Authors, based on Lane and Feretti 2015.
-1.5 -1 -.5 0.5
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
MRT
OMN
QAT
SAU
SDN
SYR
TUN
WBG
YEM
by country
2007 2015
-2 -1 0 1 2 3
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
MRT
OMN
QAT
SAU
SDN
SYR
TUN
WBG
YEM
by country
yg
2007 2015
10
With regard to the debt position, debt liabilities rose steeply in Egypt and Morocco in the
past two decades. This uptrend, coupled with a downtrend in the portfolio liabilities position,
represents a shift in foreign investors’ preference for holding sovereign debt rather than equities
in both countries. Hence, investors are becoming more risk averse evidently during late 2000s.
Net debt as a share of GDP is consistent with the earlier results on non-oil-exporting
countries’ maintenance of their net borrower position between 2007 and 2015. Egypt, Tunisia,
Jordan, Lebanon, Morocco, and Mauritania ended up with larger net debt positions in 2015 than
in 2007, indicating a higher propensity to borrow foreign currency. Saudi Arabia, Bahrain, and
Oman extended more debt financing to international borrowers in 2015 than in 2007. Libya and
Algeria closed 2015 as net lenders. Their lower net position than in 2007 reflects growing domestic
financing needs. Almost all oil-exporting countries closed 2015 with a higher ratio of reserves to
GDP than in 2007; exceptions were Algeria, Bahrain, and Iraq, which suffered slight declines
(figure 8). Non-oil-exporting countries ended up with higher ratios of reserves to GDP than several
oil-exporting countries (exceptions are Libya and Saudi Arabia). This pile-up of reserves in non-
oil-exporting countries coupled with higher levels of total liabilities, including foreign borrowing,
FDI liabilities, and excessive leveraging (figure 9). Reserve cumulation in non-oil-exporting
countries is costly, given the sources financing it. As a consequence, the scale of financial
integration in oil-exporting countries was greater in 2015 than in 2007 and significantly greater
than in non-oil-exporting countries.
Figure 8 Net debt as percent of GDP, by country, 2007 and 2015
Source: Authors, based on Lane and Feretti 2015.
-4 -3 -2 -1 0 1
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
MRT
OMN
QAT
SAU
SDN
SYR
TUN
WBG
YEM
by country
2007 2015
11
Figure 9 Reserves as percent of GDP, by country, 2007 and 2015
Source: Authors, based on Lane and Feretti 2015.
After presenting the structure and trends of NFA in Arab countries, it is important to see
how such variables are correlated with macroeconomic determinants. Table 2 shows the interaction
between NFA and a series of policy variables, including whether a country has a more developed
financial system, an SWF, or an intermediate exchange rate regime (a regime between a fixed and
floating one). Countries that are more financially developed and countries with SWFs are more
likely to have a better allocation of their assets. Yet, countries with an intermediate exchange rate
regime have more uncertainty in their exchange rate policy than countries with fixed peg or flexible
regimes, which can adversely affect their external positions. Table 2 highlights these findings. For
most of the variables (for both assets or liabilities), countries with an SWF, with a more developed
financial system, and without an intermediate exchange rate regime are financially more integrated
with the rest of the world. This finding was the key motivation behind including these policy
variables in our empirical estimation.
0.5 11.5 2
ARE
BHR
COM
DJI
DZA
EGY
IRQ
JOR
KWT
LBN
LBY
MAR
M
RT
OMN
QA
T
SAU
SDN
SYR
TUN
WBG
YEM
Constructed by the authors using Lane and Feretti (2007)
by country
Reserves to GDP
2007 2015
12
Table 2 Financial integration and its policy determinants
(millions of US dollars, except where otherwise indicated)
I
ntermediate exchan
g
e rate
F
inancial developmen
t
Soverei
g
n wealth
f
und
I
tem No Yes Ratio No Yes Ratio No Yes Ratio
Assets
FDI 4,727.6 504.0 0.11 782.1 4868.0 6.22 422.2 1,1402.8 27.01
Portfolio 30,001.2 4,041.4 0.13 15,605.4 26539.1 1.70 2,470.6 4,4687.5 18.09
Debt 54,809.7 9,340.8 0.17 14,747.5 45724.2 3.10 8,592.9 10,8749.5 12.66
Total 107,720.7 18,590.7 0.17 32,432.6 93895.6 2.90 17,062.7 22,2520.4 13.04
Liabilities
FDI 12,368.5 5,684.1 0.46 4,422.0 13510.6 3.06 5,799.2 20,892.7 3.60
Portfolio 11,56.6 211.9 0.18 63.6 1234.5 19.40 318.0 1,919.1 6.03
Debt 23,361.2 13,721.3 0.59 11,213.4 25098.9 2.24 14,103.1 33,645.8 2.39
Total 36,886.3 19,600.9 0.53 15,710.2 40161.4 2.56 2,0326.0 56,457.6 2.78
Aggregates
Capital account 173.2 94.4 0.55 212.1 87.8 0.41 163.9 91.2 0.56
NFA 7,0834.5 –1,010.2 –0.01 16,722.4 53734.3 3.21 –3,263.2 166,062.8 –50.89
Reserves 18,887.9 8,268.0 0.44 10,500.4 18516.4 1.76 6,660.5 41,055.4 6.16
Source: Authors, based on Lane and Feretti 2015.
Note: Countries whose credit to the private sector is above (below) the median are assumed to have a higher (lower) level of
financial development.
4. Econometric Specification
To examine the determinants of the accumulation of NFA and its components, we
introduce several policy variables. First, we include a variable measuring the existence of an SWF.
For long-term investors, SWFs can play a stabilizing role in financial markets by supplying
liquidity and reducing market volatility. Second, we include Ln(Credit), a variable measuring
financial development (the share of credit to the private sector), as countries with a higher level of
financial development are more likely to attract both FDI and portfolio investment. Third, we
control for the exchange rate regime (Interm) as well as whether the country is a net oil exporter
(Oil). The econometric specification is as follows:
Yit = α0 + α1 SWFit + α2Intermit + α3 Ln(Credit)it + α4Oilit + εit
Where Y = the share of FDI to GDP (assets and liabilities), debt to GDP (assets and liabilities),
portfolio investment to GDP (assets and liabilities), total assets and liabilities, reserves to GDP,
and the capital account, and εit is the discrepancy term.
Two remarks are worth mentioning. First, we run all regressions using a random effects
estimator, as the Hausman test showed that it is more efficient. Second, in some regressions, we
distinguish between oil exporters and oil importers, as in general oil exporters have more assets
and oil importers more liabilities.
13
The data come from several sources. For financial variables, we use Lane and Ferretti (2007,
updated in 2015). For the share of credit to the private sector, we use data from the World
Development Indicators. For the exchange rate regime (Eichengreen et al., 2013), we use data from
the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange
Restrictions (AREAER), which reports countries’ self-reported exchange rate regimes. The
existence of an SWF was constructed using different websites of SWF (see Appendix A).
5. Empirical Findings
We used the Lane and Ferretti (2007) data set, which was updated to include data covering
the period 1970–2015. We ran a compendium of regressions, including various components of the
NFA—including the capital account, FDI, portfolio assets and liabilities, external debt,
international reserves, and total foreign assets—as dependent variables.
We first present the results on assets (with a focus on oil-exporting countries). We then
report the results on liabilities (with a focus on oil-importing countries). We then report aggregates
of the balance of payments, especially the capital account and reserves, for both oil-exporting and
oil-importing countries.
Table 3 shows the basic specification for assets. The SWF variable is statistically
significant and positively associated with FDI (Reddy, 2019); it does not seem to matter for other
assets (portfolio and debt). This finding shows the extent to which an SWF can help improve the
allocation of investment assets toward FDI rather than portfolio investments. Financial
development (defined as credit to the private sector as a percent of GDP) is also statistically
significant for all asset components, with the highest elasticity for portfolio investments. This
result is highlighted by Vermeulen and de Haan (2014), who show that financially developed
countries are likely to take more risks than developing countries, because development allows
them to insure against risk. For this reason, financially developed countries tend to invest more in
portfolio investments than in FDI or debt.
14
Table 3 Determinants of assets – all countries
F
D
I
Port
f
olio Deb
t
Total
Sovereign wealth fund 1.105***
(0.395)
-0.129
(0.440)
0.0435
(0.132)
–0.149
(0.120)
Ln(Credit) 0.705*** 1.424*** 0.109*** 0.108***
(0.124) (0.140) (0.0411) (0.0374)
Intermediate exchange rate –0.156
(0.225)
–1.794***
(0.259)
–0.0166
(0.0737)
–0.143**
(0.0669)
Oil 1.029 4.343*** 2.296*** 2.376***
(0.903) (0.560) (0.843) (0.661)
Constant –2.716*** –4.962*** 3.373*** 3.952***
(0.883) (0.813) (0.640) (0.509)
Year dummies Yes Yes Yes Yes
Observations 626 634 626 626
N
umber of countries 21 21 21 21
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
An intermediate exchange rate does not have a significant association with FDI or debt; it
has a detrimental effect on total assets and portfolio investment, because it increases uncertainty.
This is interpreted by the fact that oil-exporting countries are transparently adopting fixed
exchange rate regimes supported by the comfortable current account surpluses.
The oil dummy is positive and significant for portfolio and debt assets; it is not statistically
significant for FDI. Thus, oil exporters in the region tend to invest more in debt assets and less in
FDI (Elbadawi, Soto, and Zaki 2018).
Table 4 shows the results on the determinants of assets for oil-exporting countries. Three
findings are worth noting. First, the coefficient for having an SWF is largest for FDI, followed by
the coefficient for debt. This finding suggests that GCC countries are more risk averse and tend to
invest in less risky assets, namely debt. Second, financial development matters most for FDI,
followed by portfolio and debt assets. This result confirms the finding of Vermeulen and de Haan
(2014) that the more financially developed a country is, the more likely it will be to invest in risky
portfolio assets rather than debt.
15
Table 4 Determinants of assets of oil-exporting countries
F
D
I
Port
f
olio Deb
t
Total
Sovereign wealth fund 1.487***
(0.432)
0.198
(0.532)
1.227***
(0.195)
1.081***
(0.201)
Ln(Credit) 1.872*** 0.677*** 0.610*** 0.582***
(0.191) (0.236) (0.0862) (0.0891)
Intermediate exchange rate 0.752*
(0.421)
–5.742***
(0.518)
–1.080***
(0.190)
–0.918***
(0.196)
Constant –5.013*** 2.092 4.617*** 5.208***
(1.694) (2.087) (0.763) (0.789)
Year dummies Yes Yes Yes Yes
Observations 334 334 334 334
Number of countries 11 11 11 11
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
As per liabilities, the existence of an SWF is associated with less debt and more portfolio
liabilities (table 5). Financial development is also associated with greater portfolio liabilities and
less debt. The elasticity of SWF with respect to debt liabilities is higher than the elasticity of
portfolio liabilities, suggesting that it can lead to a larger decrease in debt, thanks to a better
allocation of resources. As oil-exporting countries are mainly creditors not debtors, the oil dummy
is insignificant. Exchange rate policy also turns to be insignificant.
Table 5 Determinants of liabilities – all countries
F
D
I
Port
f
olio Deb
t
Total
Sovereign wealth fund –0.0443
(0.0351)
0.0622***
(0.0109)
–0.933***
(0.158)
–0.911***
(0.165)
Ln(Credit) 0.00554 0.0103*** –0.0824* –0.0754
(0.0110) (0.00348) (0.0491) (0.0515)
Intermediate exchange rate 0.00322
(0.0200)
–0.00355
(0.00635)
–0.00984
(0.0879)
–0.00775
(0.0922)
Oil –0.0577 –0.0296* 0.866 0.778
(0.0759) (0.0171) (1.158) (1.233)
Constant 0.194** –0.0308 0.527 0.708
(0.0763) (0.0212) (0.869) (0.924)
Year dummies Yes Yes Yes Yes
Observations 626 626 626 626
Number of countries 21 21 21 21
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
In oil-importing countries, the SWF dummy drops out from the liabilities’ regression, as only
exporting countries have SWFs (table 6). For FDI-receiving countries, financial development
matters more for FDI attraction than portfolio or debt liabilities.
16
Table 6 Determinants of liabilities of oil-importing countries
F
D
I
Port
f
olio Deb
t
Total
Ln(Credi
t
) 0.189*** 0.0279*** 0.108*** 0.325***
(0.0157) (0.00504) (0.0401) (0.0467)
Intermediate exchange rate
0.114***
(0.0233)
–0.00821
(0.00750)
–0.0200
(0.0596)
0.0855
(0.0694)
Constan
t
–0.346*** –0.0777*** –0.0930 –0.517*
(0.0931) (0.0300) (0.238) (0.277)
Year dummies Yes Yes Yes Yes
Observations 292 292 292 292
N
umber of countries 10 10 10 10
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
Regarding the balance of payments components, the existence of an SWF positively affects
the accumulation of foreign reserves. From a policy perspective, this result is crucial to oil-
importing countries that are currently accumulating reserves but will have to create SWFs in order
to better allocate their assets. As expected, financial development and the oil exporter dummy have
a positive and negative effect on reserves respectively. As in the case of assets, an intermediate
exchange rate reduces assets and hence reserves, because it is less transparent than a fixed or
flexible exchange rate regime (table 7). The results for the capital account are also in line with
theory: The higher the level of financial development, the more the country invests abroad and
hence the larger the deficit in its capital account. The same result applies for the oil dummy.
Table 7 Determinants of reserves and the capital account – All countries
Reserves Capital accoun
t
Soverei
g
n wealth fun
d
0.373** 0.000185
(0.189) (0.000172)
Ln(Credi
t
) 0.160*** –0.000164**
(0.0567) (6.84e–05)
Intermediate exchan
g
e rate –0.260** –5.75e–05
(0.104) (0.000124)
Oil 1.203*** –0.000310**
(0.419) (0.000145)
Constan
t
2.748*** 0.000408
(0.400) (0.00118)
Year dummies Yes Yes
Observations 638 498
N
umber of countries 21 20
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
When we distinguish between oil exporters and oil importers, table 8 shows that financial
development matters more for both reserves and the capital account of non-oil-exporting countries,
17
which rely more on FDI than do oil-exporters (table 8) since FDI is sensitive to the level of
financial development in receiving countries.
Table 8 Determinants of reserves and the capital account
in oil-exporting and non-exporting countries
Oil-exportin
g
countries Non-oil-exportin
g
countries
Reserves Capital accoun
t
Reserves Capital accoun
t
Soverei
g
n wealth fun
d
1.299*** 6.35e–05
(0.229) (0.000123)
Ln(Credi
t
) 0.252** 0.000129** 0.704*** –0.000465***
(0.102) (5.82e–05) (0.141) (0.000134)
Intermediate exchan
g
e rate 0.0754 0.000169 0.658*** –0.000207
(0.224) (0.000120) (0.216) (0.000217)
Constan
t
3.707*** –0.000287 2.210*** 0.00132
(0.795) (0.000716) (0.808) (0.00156)
Year dummies Yes Yes Yes Yes
Observations 338 258 300 240
N
umber of countries 11 10 10 10
Note: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
6. Concluding Remarks
This paper makes two main contributions. First, using the methodology of Lane and Ferretti
(2004, 2007), it analyzes trends in and the composition of NFA in selected Arab countries over the
past two decades, with an emphasis on the relative significance of direct versus portfolio
investment. It also distinguishes between FDI, portfolio equity investment, official reserves, and
external debt. Second, the paper examines the effect of various policy variables that affect the
accumulation of NFA and its components. It examines the effects of the presence of an SWF, the
country’s exchange rate regime, and the level of development of the country’s financial system.
Analysis of the stylized facts revealed by the data confirms that non-oil-exporting countries
maintained a net borrower position between 2007 and 2015. Egypt, Tunisia, Jordan, Lebanon,
Morocco, and Mauritania had higher net debt positions in 2015 than in 2007. These countries had
a higher propensity to borrow foreign currency than GCC countries. Saudi Arabia, Bahrain, and
Oman extended more debt financing to international borrowers in 2015 than they did in 2007.
Libya and Algeria closed 2015 as net lenders, albeit with lower net positions than in 2007, a
reflection of growing domestic financing needs. Almost all oil-exporting countries closed 2015
with higher ratios of reserves to GDP than in 2007; exceptions were Algeria, Bahrain, and Iraq,
which experienced slight declines. Non-oil-exporting countries ended up cumulating higher ratios
of reserves to GDP than all oil-exporting countries except Libya and Saudi Arabia. This pile-up of
reserves in non-oil-exporting countries was coupled with higher levels of total liabilities, including
foreign borrowing, FDI liabilities, and excessive leveraging. It is costly, given the sources
financing it.
18
The presence of an SWF is statistically significant and positively associated with FDI in
Arab countries. Financial development—defined as credit to the private sector as a percent of
GDP—is also statistically significant across different regressions. In theory, the more financially
developed a country is, the more it should invest in risky assets, such as portfolio ones. Arab
investors are more risk averse than other investors, however, and hence invest mainly in debt.
These results are particularly evident in oil-exporting countries, which tend to invest more in debt
assets than portfolio assets. For oil-importing countries, financial development is the most
important determinant of incoming FDI.
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20
Appendix A: Largest Direct Sovereign Wealth Fund Transactions in 2015
Table A1 Largest direct sovereign wealth fund transactions, 2015 (millions of US dollars)
Source: Sovereign Wealth Fund Institute website. [https://www.swfinstitute.org/]
Ran
k
Date Tar
g
et name Tar
g
et secto
r
Soverei
g
n wealth
f
und Countr
y
A
mount
1 2009-11-23 Qatar Railways Development Company Infrastructure Qatar Investment Authority (QIA) Qatar 13,260.00
2 2011-07-01 Allied Irish Banks Financial National Pensions Reserve Fund
(NPRF)
Ireland 12,748.50
3 2009-09-02 Porsche Automobil Holding SE Industrial QIA Qatar 9,983.40
4 2008-03-05 UBS AG Financial Government of Singapore Investment
Corporation (GIC)
Singapore 9,760.00
5 2009-07-06 France Telecom SA Telecommunications Fonds Strategique d'Investissement
(FSI)
France 8,099.08
6 2007-02-28 Telstra Corp Ltd. Telecommunications Future Fund Australia 7,576.77
7 2007-11-26 Citigroup Inc Financial Abu Dhabi Investment Authority
(ADIA)
United Arab Emirates 7,500.00
8 2009-05-12 China Construction Bank Corporation Financial Temasek Singapore 7,314.55
9 2010-09-24 Petrobras Energy Fundo Soberano do Brasil (FSB) Brazil 7,076.64
10 2008-01-28 Citigroup Inc Financial GIC Singapore 6,880.00
11 2008/-10-16 Credit Suisse Group AG Financial QIA Qatar 6,000.00
11 2010-07-16 Agricultural Bank of China Financial QIA Qatar 6,000.00
12 2014-03-21 A.S. Watson and Co Discretionary Temasek Singapore 5,700.00
13 2007-12-28 Morgan Stanley Financial China Investment Corporation (CIC) China 5,579.14
14 2014-8-24 VTB Bank OAO Financial Russian National Wealth Fund
(NWF)
Russian Federation 5,422.70
15 2011-02-16 Cia. Espanola de Petroleos SA Energy International Petroleum Investment
Compan
y
(IPIC)
United Arab Emirates 5,370.00
