GCC countries’ aggressive global acquisition and foreign asset creation drive is expected to continue well into 2009, global investment experts said. The phenomenon is dominated by UAE- and Qatar-based buyout and investment companies.
While GCC countries, riding the crest of economic prosperity driven by soaring oil revenues, have exported capital of $542bn (Dh1.9 trillion) over the past five years, mostly into the United States to buy US Government bonds and equity, they are estimated to have ploughed up to $120bn (Dh440bn) into the Middle East and North Africa (Mena) and in East Asia.
“This appetite for US equity represents 29 per cent of the region’s total investment offshore. The trend will continue for the next couple of years as the region, awash with record oil revenues and a consequent cumulative current account surplus of $710bn (Dh2.6bn) over the past five years, will show a growing appetite for foreign investments,” an expert said.
According to financial experts, given the huge inflow of cash due to higher crude prices in the global markets, the cumulative current account surplus of the six Gulf countries will touch the $3 trillion (Dh11trn) mark within a few years. A massive accumulation of current account surpluses is not only helping the GCC build up international assets, but also reduce indebtedness, finance structural change and invest in social and economic projects within and outside the region.
“Having learned from their past mistakes, GCC countries have saved some 80 per cent of the oil windfall, almost triple the amount they saved in past oil booms,” said a Merrill Lynch report. GCC countries grew at a 7.3 per cent real average rate since 2002 and this high growth is becoming less dependent on the oil sector. While the contribution of the non-hydrocarbon sector to GDP growth was 49 per cent back in 2003, it increased to 85 per cent in 2006.
The Washington-based Institute of International Finance (IIF) said in a report that total foreign asset holdings by the GCC now stand at about $1.6trn (Dh5.8trn), 225 per cent of GDP, versus China’s foreign reserves of $1.1trn (Dh4trn), 42 per cent of GDP. “Over the past four years, cash-rich oil exporting Gulf countries are estimated to have invested up to $60 billion (Dh220bn) in East Asia – as much as they have ploughed into the Mena,” said a briefing paper on GCC countries titled “Tracking GCC petrodollars: how and where they are being invested around the world”.
Koch-Weser, a former German deputy finance minister and presently vice-chairman of Deutsche Bank, said over the next five years, Gulf investors will pump close to $250bn (Dh917bn) worth of investments in Asian nations.
East Asia appears to be one of the region’s favourite investment destinations. “We reckon that total GCC flows into Asia are probably in the same order of magnitude as those into Mena, at around $60bn (Dh220bn),” the IIF report says. It adds that the Gulf countries have been heavy buyers of Chinese shares through IPOs and Asian real estate, banking, and telecom ventures.
Such deals include Qatar Telecom’s purchase of a stake in Asia Mobile Holdings of Singapore and Dubai Investment’s acquisition of Bank Islam Malaysia. The report notes that GCC investors are typically in for the long term – with a 5- to15-year time horizon – and have been concentrating on energy infrastructure.
Swiss investment bank UBS says in 2005-06 the GCC announced investment projects in Asian infrastructure worth $155bn (Dh568bn). IIF notes that GCC countries are taking advantage of quickening liberalisation, privatisation, regional integration and an increased pace of project implementation in both Mena and East Asia.
The rise in oil prices has delivered a financial bonanza to the oil-producing nations, and was worth around $1.5trn (Dh5.5trn) from 2002 to 2006. International oil prices rose from $20 a barrel at the end of 2002 to $60 per barrel at the end of last year. The region’s combined external surplus totalled about $200bn (Dh734) in 2006 – one quarter of the US deficit. Along with China, the IIF mentions the GCC as the other cause of global imbalances. Despite growing demand for riskier assets, the IIF says GCC countries have not forsaken US Government debt. Allocations to short-term securities, most notably in US Government bonds, rose from 1.4 per cent in 2001 to 7.9 per cent in 2006. Demand for long-term paper also remains robust, increasing from 14 per cent to 20 per cent over the same period.
The report says GCC has moved away from bank deposits to develop a much stronger appetite for mergers and acquisitions, seeking out investment opportunities in several sectors. The Abu Dhabi Investment Authority, which has accumulated assets of at least $500bn (Dh1.8bn), appears to have 50-60 per cent of its resources in equities, 20-25 per cent in fixed income, 5-8 per cent in both real estate and private equity and 5-10 per cent in alternative investments.
The Kuwait Investment Authority, with some $400bn (Dh1.4bn) in assets, is understood to be allocating a larger share of its portfolio to emerging markets. Although IIF could find little firm data, it says European equity and fixed income markets appear to have benefited from Gulf financial flows, particularly as the desire to diversify currency holdings has gained traction within the GCC.
On the FDI front, IIF says indications are that Europe attracted some 55 per cent of identified GCC capital flows during 2002-06. Dubai International Capital (DIC) has already short-listed more Fortune 500 companies for possible investment and about 15 are on a close watch list. Over the past one year, DIC has made investments in European Aeronautic Defence & Space, the maker of Airbus aircraft, global banking giant HSBC Holdings and ICICI Bank of India.
While Dubai-based Istithmar is also keeping pace with DIC with a string of possible new acquisition targets, Borse Dubai and Dubai Aerospace Enterprise are making significant headway in acquiring overseas assets. Some of the headline grabbing investments include purchase of General Electric’s plastics business by Saudi Basic Industries, and a bid by a consortium led by Kuwait’s Mobile Telecommunications Company for Saudi Arabia’s third mobile licence. High-profile Saudi investor Maan Al Sanea has acquired around $6.81bn (Dh25bn) worth of shares in HSBC Holdings.
Other significant foreign acquisitions by Gulf companies include Saudi Arabia-based National Industrialisation Company’s agreement to buy the titanium dioxide pigment business of Lyondell Chemical Company for $1.2 billion, the $965.3 million purchase of British luxury carmaker Aston Martin by a consortium headed by Kuwait's Investment Dar, Dubai's 1.35 billion euro acquisition of a 2.2 per cent stake in Deutsche Bank through DIFC Investments, an arm of the Dubai International Financial Centre.