Saoudi Arabia - Gulf states 'should look East for investment’

JEDDAH: About 75 percent of GCC's (Gulf Cooperation Council’s) savings are invested in Western G3 economies, which are saddled with structural deficits and low growth rates. Comparatively, Asia's share of world's GDP (gross domestic product) is expected to increase from the current 25 percent to 35 percent by 2020, while G3's share will fall from 48 percent to 38 percent.

Yet, only 11 percent of the Gulf's outward investment was directed to Asia. Allocating an additional 10 percent of the future oil proceeds to Asia (excluding Japan) would imply $600 billion of new investments in the Asian region in the next decade, according to a report prepared by the Research Department of the Kuwait China Investment Company (KCIC).

GDP

Compared to the rest of the world, the GCC countries -  Saudi Arabia, Kuwait, UAE, Oman, Qatar and Bahrain - are set for a smooth 2012. While in the EU, Japan and the United States (known as the G3) a double-dip recession is becoming a real threat, analysts expect GCC's GDP to grow close to 5 percent next year. The factors underpinning these expectations are: a) exports are the main driver of growth in the region; b) oil accounts for most of those exports; and c) oil price is likely to remain high over the next months. But, in a world where the three main economies are slowing down, how could oil prices remain high? The answer is Asia. Since 2000, the weight of Asia (excluding Japan) in GCC's exports rose from 24 percent to 39 percent, whereas G3's share decreased from 41 percent to 31 percent. The highly commodity-intensive Asian growth has come mostly from India and China, whose rapid expansion was initially led by exports to G3 but has been gradually switching to domestic demand and trade with the rest of the Asian region.

Indicator

The first implication is that Asia has been gaining relevance as a trading partner for the GCC, while the most developed economies have been losing out over the last 10 years. In absolute terms, since 2000 the G3 has multiplied its oil and natural gas imports from GCC by 2.8, while Asia - excluding Japan - has multiplied them by 6.1, with China and India increasing their imports twenty-fold. The second implication comes from the fact that oil demand can be considered a leading indicator of growth. By definition, commodities are "fungible" across consumers. Supply tends to be relatively rigid in the short term and prices usually are very sensitive to supply and demand conditions. The rise of energy-starving China and India has been the most important single factor pushing the price of commodities up in the world in the last years, and keeping the Gulf's oil exports revenues growing consistently. Robust energy demand in Asia is strongly linked to its high GDP growth forecast of 7.5 percent for 2012, the report said.

Implications

All world economies - and markets - are interconnected. The year 2011 has been a good example of how global macroeconomic conditions and jittery financial markets have moved together, producing negative returns in both developed and Asian economies. But the economic fundamentals are profoundly different between developed and emerging economies. The G3 faces the problem of an ageing population, while most of Asia, with already 60 percent of the world population, enjoys a healthy demographic structure and growing urbanization rates. G3 consumption rates are limited by high levels of private debt, whereas Asia's consumption rates keep growing and will continue to do so as Asian countries put in place social security systems that will diminish defensive accumulation. As a result, Asia's share of world's GDP is expected to increase from the current 25 percent to 35 percent by 2020, while G3's share will fall from 48 percent to 38 percent. Enormous opportunities will arise for local and foreign companies catering to these new Asian consumers in need of infrastructure, healthcare, education, consumer goods, financial services and leisure activities. These opportunities will materialize as the global macroeconomic uncertainty is left behind and fundamentals start playing again, and GCC investors can be a part of it via portfolio rebalancing.

Indeed, according to latest available data a high 75 percent of GCC's savings are invested in developed economies like the US and the UK, that are saddled with structural deficits and low growth rates - which in the long run will affect the returns of those investments. Does it make sense to put your savings where growth is not happening any longer? Yet, only 11 percent of the Gulf's outward investment was directed to Asia. Allocating an additional 10 percent of the future oil proceeds to Asia ex Japan would imply $600 billion of new investments in the Asian region in the next decade. Gulf portfolios in this century should have more of an Asian flavor, the KCIC report said.

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