GCC foreign wealth rises to $2 trillion

Middle East, The, April, 2008 by Pamela Ann Smith

THE NET FOREIGN assets of Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Bahrain and Oman are expected to rise by $200bn this year to $2 trillion, according to a new report by the Washington-based Institute for International Finance (IIF). By 2012, their total assets held abroad could reach almost $7 trillion, another new study by global management consultants, McKinsey, estimates.

Significantly, while a large portion of these massive funds will be poured into the international financial system and direct investments in the US, Europe and Asia, the Arab region is expected to take proportionally more than ever before. Egypt, Jordan, Syria, Lebanon, Morocco and Tunisia are expected to be the main beneficiaries, along with sectors such as banking, telecoms, real estate, tourism, construction and infrastructure.

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Based on an average price of oil at $50 a barrel, McKinsey calculates that the six states of the Gulf Cooperation Council (GCC) could be investing some $1.5 trillion abroad over the four-year period to 2012, or about $1bn a day. By 2020, McKinsey said in The Coming Oil Windfall in the Gulf, published by its Global Institute, this could soar to $3.5 trillion, taking the region's total overseas wealth to $8.3 trillion.

If oil were to average $70 a barrel, the outflows would rise to an average of about $628bn a year, "implying new petro-dollar investments of nearly $2bn a day", the study predicts. Even if oil prices declined to $30 a barrel, the GCC's foreign assets would reach some $4.8 trillion by 2012. In a worst case scenario, the consultants add, even if the GCC states never invested another dollar abroad, the returns on their existing foreign assets would produce $1.6 trillion by 2022, making the GCC, along with China, one of the world's largest sources of surplus capital.

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"This is only the second page of the first chapter of the coming of the petro-giants," McKinsey's managing director for the Middle East, Kito de Boer, said in late January. "If oil prices remain at a level over $50 a barrel, then this will become a structural shift of global capital flows on a material scale."

"High oil prices are enabling the GCC governments to place a growing volume of resources into reserve and wealth management funds, which will play increased roles in international financial markets," commented Charles Dallara, managing director of the IIF, the highly respected organisation of the world's leading banks. While some observers were concerned that the recent slowdown in the US and Europe caused by the sub-prime mortgage crisis could lead to a dip in the GCC's oil revenues, George Abed, IIF's director for Africa and the Middle East, felt that, "while the oil sector will remain the principal driver of the economies of the region, there are also important drivers toward diversification, especially in the larger, more populated countries. In addition," he told a meeting of IIF members in Dubai in late February, "countries in the region are generating financial surpluses that are being invested for the benefit of future generations when the oil economies no longer play much of a crucial role and [their oil reserves] begin to be depleted."

"The GCC is in the midst of a boom, underpinned by sustained high oil prices, with the economic drivers going beyond oil as private confidence and investment are now at an all-time high," Josef Ackermann, chairman of the IIF, told the meeting. "As such, even if the US were to slip into recession, and oil prices were to dip, we believe the impact would be greatly mitigated by the significant number of major infrastructure projects that are already underway or are being pursued throughout the GCC," he added. "These will provide momentum for robust development in a number of sectors, including energy and petrochemicals, real estate, trade and finance and tourism, for several years to come."

"Roughly $1 trillion in infrastructure investments are now in the pipeline" in the GCC, observes de Boer. By the end of the decade, "they could total $3 trillion." The massive rise in foreign direct investment in the region, he wrote earlier this year in The McKinsey Quarterly, which had seen it rise tenfold to $20bn between 2001 and 2005, would "help integrate the GCC's insular economies into the global economy and provide an additional impetus for reform".

As a result, the IIF report maintains, the GCC's combined current account surplus should exceed $250bn this year, 16% more than in 2007. Oil export revenues, it notes, rose 8% last year to $381bn, while receipts from natural gas exports climbed by 18% to $26bn, mainly because of the huge increase in exports from Qatar. In 2009, nominal economic growth should continue at a rate of 8-10% a year, the study adds, a figure which de Boer suggests might be closer to 20% if the performance of GCC economies since 2003 is taken into account. Altogether, the IIF estimated, the GCC's nominal GDP was expected to reach $900bn this year, more than double the figure recorded in 2003, just five years ago.