Secular trends in Gulf geoeconomics

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Secular trends in Gulf geo-economics

• Steffen Hertog
• Kuwait Professor, Sciences Po
• Second Franco-Singaporean conference on the
  impact of the Middle East on Southeast Asia and
  Europe

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The next 40 minutes

• Setting the stage Gulf and MENA growth trends
• MENAs role in the global distribution of
  resources
• ? Trends in trade
• ? Trends in FDI
• Intra-regional power shifts in MENA
• Comparing MENA oil state foreign policies
• Where are Sovereign Wealth Funds headed?
• Gulf public enterprises as international
  strategic actors

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No other high-income region has grown as fast as
the GCC (source IIF)
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The rest of MENA has also been growing faster
than the rest of the world, but it does not
matter much
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Intra-regional power shifts

• Intra-regional trade stagnates at around 10 of
  the total, but intra-regional investment has been
  booming
• An estimated 60 billion of Gulf money was
  allocated in the wider MENA region 2002-2006
• Increasing role of FDI, including in new sectors
  like
• Finance
• Manufacturing
• Telecoms and ICT
• Increasingly proactive policy to solicit Gulf
  capital
• Gulf capital as political capital in a region in
  which military assets have lost much of their
  value?

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Still, the GCC remains a SMALL players on the
global scene in terms of GDP (source Deutsche
Bank)
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The Gulf matters for a different reason

• Feedstock
• Oil, but also
• Gas
• Petrochemicals
• Other basic inputs for heavy industry
• Capital surpluses
• SWFs, but also private overseas capital

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Source Gulf Investment House
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Why the Gulf and Asia are emerging as tomorrows
geo-economic axis factor complementarity
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Long-term trends in GCC exports (IMF DOTS)
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Long-term trends in GCC imports (IMF DOTS)
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Trade follows factors, but does investment?

• Despite much talk, only to some extent
• Source IIF
• Western markets remain deeper and more liquid
• Asia has its own capital resources

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Will a large-scale shift of Gulf capital towards
Asia happen?

• Not in the wake of the current credit crisis
• In the long run? Depends on
• a) whether there are actually surpluses to
  allocate, which is determined by
• Scale of losses in the current crisis
• Domestic spending policies in the Gulf
• Long-term oil prices
• b) Gulf investors appetite for risk
• c) Asian opportunities, specifically Chinas
  willingness to engage in quid-pro-quos of FDI vs.
  feedstock

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The geo-economics of Gulf oveseas capital basic
figures

• Gross official reserves of MENA have increased at
  a 5-year CAGR of 43.3 from 180 billion in 2003
  to 1.087 trillion in 2008.
• Aggregate current account surpluses of the MENA
  economies
• estimated to reach 495 billion by end of 2008
• estimated to decline to 406 billion in 2009.
• 2009 might look at lot worse
• Sources IIF, Deutsche

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Is the GCCs window of surpluses
closing?(Source Citi)
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Gulf governments could run fiscal deficits next
year already (Source Citi)
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(Source Citi)
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Relative importance of oil exporter SWFs likely
to decline
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Recent overseas capital trends

• Further shift away from US assets after 2006
  (50 of gt900 billion allocated 2003 to 2008
  went into non-US markets)
• But flight to quality with the credit crisis
• US-denominated assets have made a comeback, for
  the time being
• SWFs have burned their fingers with more
  speculative assets losses of about 15
• ? Low appetite for risk
• ? Together with lower surpluses, large-scale
  inflows into Asia unlikely

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The new Gulf SOEs

• A new generation of large, multinational
  enterprises has emerged in the Gulf, most of
  which are state-owned
• Much more than SWFs, they have been aiming
  specifically at Asian markets
• Tourism and real estate
• Logistics
• Heavy industry
• Telecoms
• Large enough to make a substantial impact, small
  enough to thrive in niches
• Apart from trade, the burgeoning Gulf SOEs could
  emerge as the main economic link between the two
  regions

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Gulf service exports telecoms as new FDI niche
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What about other oil states in the region?

• Iran, Libya, Algeria (post-)populist,
  republican regimes are likely to suffer more
  from the crisis than the Gulf states
• Smaller surpluses
• Worse fiscal management
• higher breakeven oil prices
• higher inflation
• Less successful diversification policies (no
  successful SOEs e.g.)
• Worse public sector legacies
• Gulf crisis resilience is higher

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Populist oil states have much smaller resources
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Linkages of economics and politics are there
security dimensions to the Gulfs geo-economic
repositioning?

• Not many! Gulf states want
• A calm environment and to depoliticize their
  economic relations as far as possible
• The calmer the Middle East is, the more powerful
  they are relative to other MENA states
• Different from China (but similar to Singapore),
  their economic rise is not tied to any
  geo-political ambitions
• They want multiple partners to increase
  interdependence
• But they have no alternative to the US security
  umbrella
• Will China develop geo-strategic ambitions in the
  Gulf?
• Not any time soon