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Bader Al Sa’ad, the head of the Kuwait Investment Authority, isn’t spending much time these days assessing new investments. Instead he is advising his government as it moves to establish a debt management office.

Circumstances have changed in the Gulf, bringing in their wake a host of ripple effects. A while ago, the biggest headache for the sovereign wealth funds of the Middle East was finding safe but profitable homes for their portion of swelling oil revenues.

Now, many are fortunate if they do not have to liquidate holdings at the request of their cash-strapped governments.

Kuwait is among the best managed of the sovereign wealth funds in the Gulf which means it is under less pressure to sell, rather it is simply putting out less new money.

But should low prices for oil continue, the strain on these hitherto deep-pocketed investment firms will intensify, giving rise to ripple effects across markets, whether public or private. That will mean both downward pressure on the prices of some assets that has little to do with fundamentals, and more attractive valuations for new money coming in.

Moreover, most governments in the region will probably prefer to run down their reserves than to see their currencies lose value, analysts say. That is another reason these giant pools of money will have less to put to work globally going forward.

“Global liquidity will shrink because global liquidity basically means dollar liquidity and all the GCC and Saudi need dollars,” says Mohamad Al Hajj, a macro strategist for EFG Hermes UAE in Dubai.

Of course much depends on the direction of oil prices but it is safe to say that barring a massive disruption of supplies, the days of $100 oil are unlikely to return any time soon.

Already Qatar has been quietly selling commitments to private equity funds and public shares, according to people familiar with the matter. Others say that the reason that the Japanese market dropped early in the year was because of selling from Saudi Arabia. The Saudis are also liquidating their managed accounts with many banks, assuming oil prices don’t go much beyond where they are today.

The reduced presence of the regional sovereign wealth funds will be felt more strongly in asset classes that have an especially long-time horizon, such as private equity and infrastructure.

In addition, after the global financial crisis in 2008, much of the rescue money that helped stabilise shaky financial firms in the US came from funds like the KIA which provided billions of dollars to Citigroup and what is now the Merrill Lynch arm of Bank of America.

The scaling back of the oil fund investment comes as other sovereign wealth funds also see a drop in inflows. Weak exports and slowing domestic economies mean that sovereign funds and other deep pools of money in Asia also have less money to invest globally. That means pension funds in countries from Canada to Korea will have more opportunity. But managers at some of these funds say they are still waiting, convinced that if they are patient, there will be even more bargains in coming months.

It may be that low oil prices will be the catalyst for structural reform in the emirates of the region, making their capital markets much more attractive for foreign investors. Saudi Arabia, for example, opened up its stock market to outsiders just as oil prices started to slide and for the first half of last year foreigners were net sellers. But meaningful reform and privatisation could bring the foreigners back (though some listings have been delayed because the price is seen as too low at the moment, Mr Al Hajj adds).

New taxes, the proceeds of asset sales at home, reduced subsidies and encouraging people to join the private sector rather than seek the security of a government sinecure have become the order of the day. Kuwait is introducing a corporate tax, a change which the UAE may also adopt. Qatar plans to introduce private-public partnerships to ease government finances.

Already straitened circumstances also mean that there is more of a debate about the way the region has invested — generally sending money to managers sitting in London and New York with only a portion of it returning home. Now, that debate has suddenly come to matter more.

henny.sender@ft.com

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