Secular trends in Gulf geoeconomics
Steffen Hertog
Kuwait Professor, Sciences Po
Second Franco-Singaporean conference on
the impact of the Middle East on Southeast
Asia and Europe
The next 40 minutes
• Setting the stage: Gulf and MENA growth trends
• MENA’s 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
No other high-income region has grown
as fast as the GCC (source: IIF)
The rest of MENA has also been growing
faster than the rest of the world, but it
does not matter much:
Nominal GDP 2005-2006 ($ billion)
Saudi Arabia
UAE
Egypt
Kuwait
Morocco
Qatar
Oman
Iraq
Syria
Lebanon
Bahrain
Jordan
0
50
100
150
200
2005
2006 Growth
250
300
350
400
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?
Still, the GCC remains a SMALL players
on the global scene in terms of GDP
(source: Deutsche Bank)
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
Source: Gulf
Investment House
Why the Gulf and Asia are emerging as
tomorrow’s geo-economic axis:
factor complementarity
Labour
Capital
Feedstock
Gulf/MENA
Emerging Asia
Scarce
Abundant
Abundant
Abundant
Depends
Scarce
Industrialized
countries
Scarce
Abundant
Scarce
Long-term trends in GCC exports
(IMF DOTS)
40.00%
35.00%
Asian DCs
30.00%
European Union
25.00%
France
20.00%
Japan
15.00%
Singapore
10.00%
United States
5.00%
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0.00%
Long-term trends in GCC imports
(IMF DOTS)
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0.00%
Asian DCs
European Union
France
Japan
Singapore
United States
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
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 China’s willingness
to engage in quid-pro-quos of FDI vs. feedstock
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 $406
billion in 2009.
• 2009 might look at lot worse
Sources: IIF, Deutsche
Is the GCC’s window of
surpluses closing?
(Source: Citi)
Gulf governments could run fiscal
deficits next year already
(Source: Citi)
(Source: Citi)
Relative importance of oil exporter
SWFs likely to decline
Recent overseas capital trends:
• Further shift away from US$ assets after 2006
(50% of >900 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
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
Gulf service exports: telecoms as new FDI niche
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
Populist oil states have much
smaller resources:
Linkages of economics and politics – are
there security dimensions to the Gulf’s geoeconomic 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…