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Secular trends in Gulf geo-economics

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. The next 40 minutes. Setting the stage: Gulf and MENA growth trends

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Secular trends in Gulf geo-economics

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  1. 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

  2. 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

  3. No other high-income region has grown as fast as the GCC (source: IIF)

  4. The rest of MENA has also been growing faster than the rest of the world, but it does not matter much:

  5. 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?

  6. Still, the GCC remains a SMALL players on the global scene in terms of GDP (source: Deutsche Bank)

  7. 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

  8. Source: Gulf Investment House

  9. Why the Gulf and Asia are emerging as tomorrow’s geo-economic axis: factor complementarity

  10. Long-term trends in GCC exports (IMF DOTS)

  11. Long-term trends in GCC imports (IMF DOTS)

  12. 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

  13. 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

  14. 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

  15. Is the GCC’s window of surpluses closing?(Source: Citi)

  16. Gulf governments could run fiscal deficits next year already (Source: Citi)

  17. (Source: Citi)

  18. Relative importance of oil exporter SWFs likely to decline

  19. 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

  20. 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

  21. Gulf service exports: telecoms as new FDI niche

  22. 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

  23. Populist oil states have much smaller resources:

  24. Linkages of economics and politics – are there security dimensions to the Gulf’s 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…

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