The COP26 climate talks in November 2021 will confirm global commitments to tackle climate change and its risks.

At the heart of the response are energy transition strategies away from fossil fuels, the main source of wealth for GCC countries. It can be an existential threat.

GCC countries have experienced exceptional growth over the past five decades, but how governments respond to the energy transition, manage their wealth, and their public sectors, both active and passive, will determine their future. Effective public budgetary and financial management is necessary to ensure sustainability and preserve intergenerational equity. In particular, governments can use sovereign asset-liability management (SALM) as a macroeconomic and financial tool that helps them manage public sector balance sheet risks and decide on various political compromises.

Despite major initiatives in recent decades to diversify their economies through economic zones, investments in infrastructure, state-owned enterprises (SOE) and government-related entities (GRE), and reform the finances away from hydrocarbons through subsidies, pricing of public services, expenditure reform and VAT. , GCC governments still suffer from large non-oil budget deficits. For example, the non-oil primary balance as a percentage of non-oil GDP remains negative for all GCC countries, in some cases reaching close to minus 100 percent.

In this process of economic growth and development, GCC governments have accumulated significant international reserves and financial investments, made up of real assets and businesses. There is also the other side: debt, contingent liabilities, as well as generous entitlement programs that generate future liabilities that must be funded. In addition, the size and important role of SOEs and GREs in the economies of GCC countries, which are estimated to carry liabilities of 30% or more of GDP for some GCC sovereigns, and their impact on the economy. Overall health and the soundness of the balance of public sector records, reinforces the importance of a holistic approach to risk management and policy development.

In addition, the energy transition from fossil fuels implies a fall in real oil prices. This increases the risk of an earlier than expected depletion of the net financial wealth of GCC countries and the endowment of fossil fuels and associated industries becoming stranded assets. GCC sovereign funds have historically stabilized public accounts during times of volatile oil revenues, but asset accumulation stabilized following the decline in oil prices in late 2014, leading to reduced reserves.

Despite the recent partial recovery in oil prices, even countries with large stocks of liquid assets will need to manage their debt within the broader context of liquidity management and macro-fiscal stability. Indeed, the International Monetary Fund (IMF), in its report “TThe Future of Oil and Fiscal Sustainability in the GCC Region», Warned that in the absence of tax reforms, the net financial wealth of oil producers in the region is likely to turn negative from 2034, making the region a net borrower.

What GCC governments should now do is adopt SALM, which integrates multiple government assets, future income and cash reserves, as well as government debt and contingent liabilities into a sovereign balance sheet. This enables governments to manage liquidity, risks, savings and liabilities, in order to ensure macro-fiscal stability and sustainable public finances in the long term.

For a successful MAGAS, governments need an effective governance framework. They should institute clear mandates for different public sector entities so that their data is transparent and should encourage cooperation, centralized risk management and market-oriented asset and liability valuations.

A few countries have implemented the SALM framework comprehensively. Countries, including Denmark and New Zealand, have significantly improved their risk, fiscal and debt management, as well as intergenerational equity, resilience to shocks, efficiency in the use of public assets, quality of public service delivery and asset management.

The SALM journey begins with identifying public sector assets and liabilities, starting with a public asset register, followed by data collection and balance sheet construction. Then, dynamic tools would be developed and linked together so that policy decisions can be evidence-based, impactful, fair and risk-minimized.

This will translate into an effective decision engine for policy development and leadership. Essentially, the public sector would emulate the good financial management tools used by modern private companies to manage their balance sheets and risks. The GCC countries have set great examples in many areas. They can be at the forefront of nations in the management of public finances, effective management of their assets and liabilities, transparency, good governance and intergenerational equity to meet the looming challenges of climate change.

Nasser Saidi is an economist, corporate governance expert, former minister and vice-governor of the Central Bank of Lebanon, and Talal F. Salman is director of government and public sector practice at Strategy & and public policy expert.