The financial sectors in the GCC states are growing fast and could overtake well-established ones such as Australia and Japan in the International Financial Centre (IFC) rankings over the next decade, says a report.
The study examined the prospects of the Gulf states' economies and the potential development of the region as a global financial centre over the next decade.
The Chatham House report – The Gulf as a Global Financial Centre: Growing Opportunities and International Influence – says the region's global economic status is impressive, underpinning significant growth in the financial sector and potentially the rise of the GCC as a top rank global financial centre.
In principle, the GCC could overtake both Australia and a weakened Japan in the IFC rankings over the next decade, says the report.
Although the IFC rankings started from a very small base and are, therefore, not yet punching with the full weight of the economy behind them, it is clear the Gulf states have seen a radical and positive transformation in their economic fortunes over the past few years. The City of London Corporation carries out a continuous market survey of international financial centres, the findings of which are published biannually. This illustrates perceptions and the current standing of the GCC centres compared to others.
The first Global Financial Centres Index (GFCI1) was published in March 2007, the second edition in September 2007 and the third in March 2008. The index positions financial centres according to a range of criteria – human capital, business environment, market access, infrastructure and general competitiveness. London has come top in all three surveys, while New York has been number two each time. London and New York scored 795 and 786 points out of 1,000 respectively in March 2008, while the number three ranked centre, Hong Kong, scored nearly 100 points less – 695.
This large gap reflects the fact that London and New York have a long history of operating in financial services and over time have amassed a perhaps unsurpassable set of skills and comparative advantages.
Turning to the Gulf countries' individual rankings, Dubai was in 25th position in March 2007. Six months later Qatar and Bahrain entered at the bottom of the top 50, at 47th and 44th respectively. In the March 2008 survey Dubai ranks 24th, Bahrain 39th and Qatar 47th.
Among the Gulf states, Dubai has been comfortably ahead in the rankings, largely largely due to its higher investment levels in the Dubai International Financial Centre. In fact Dubai is cited as being the number one among financial centres that "might become significantly more important over the next two to three years", as well as ranking number one as a destination where businesses are thinking of opening in the next few years – an indication of how much momentum it has built up.
Bahrain and Qatar may be starting from a lower base but they are moving rapidly upwards, having climbed 59 and 51 points respectively in the six months from September 2007 to March 2008. They are among the most significant upward movers in the latest report.
Saudi Arabia, Kuwait and Oman are not on the chart yet. Saudi Arabia has begun constructing a major financial centre, to be named the King Abdullah Financial Centre, but it remains to be seen how quickly this will develop. Oman is unlikely to enter the financial centre race, concentrating instead on sectors such as tourism.
The GCC economies have approximately tripled in size in just five years and their combined gross domestic product will be well above $1 trillion (Dh3.67trn) in 2008, while their external financial wealth in the form of sovereign wealth funds and foreign exchange reserves alone is more than double this figure. These trends are not, of course, unconnected.
Nevertheless, it is easy to see the region's comparative advantage from the swing in oil prices, whereas the scope for developing a significant advantage in global finance remains tentative. To develop and mature the global financial centre concept will require considerable effort and nurturing, chiefly by GCC governments, banks and fund managers but also through co-operative ventures with leading GFCs and financial services companies.
Economic growth and wealth creation will continue to provide the big punch behind the GCC "brand" – regional GDP will comfortably exceed the $1trn-mark in 2008, moving the GCC further up the top 10 in terms global GDP rankings.
However, appropriate recognition of this status is needed to support the GCC's aspirations in global finance. Remarkably for economies of such high standing, they are typically still treated as developing countries in spite of GDP/capita being well above emerging market levels, even excluding the energy sector. None of these countries has joined the OECD and there is notably no representation at the world's top table, the G8 summits.
However, the continued development of the region's economic and financial power suggests an urgent need for the GCC's position to be reviewed by all parties and new channels of communications, discussion and influence to be opened up. This review should also acknowledge the importance of Gulf finance and the aspirations for development of the region's financial sectors.
The GCC is well positioned to act as a key hub in global financial markets, serving the wider Asia-Mena region. To enable the GCC to leverage its position an important development would be the creation of a larger, deeper debt market, whether based on Western-style bonds or the Shariah model, building on the region's strength in Islamic finance.
This implies a radical departure for the GCC in terms of the role played by government debt and project finance, its potential in promulgating local market activity and broadening the base of the financial sector. If successful, this move could open up a much larger role for the GCC in global debt markets, especially across the Middle East and Asia. This would provide a massive hinterland within which the GCC's financial sector could expand and fulfil the target of becoming a GFC.
With regard to the long-term plan, the Gulf is clearly not aiming simply at a niche or local role – the level of commitment already made in terms of construction, operations and international partnerships represents a very visible statement of intent. The GCC centres are pitching at a higher goal, at least to be a part of the global financial system and an important centre for a significantly large region.
This also shows in the GCC's strategy for tax regimes where rates are being set to be competitive but not aggressively so – Qatar, for instance, has chosen to implement a low-tax (10 per cent) rather than no-tax regime for firms within the QFC.
This clarifies the development objectives of the GCC financial markets and centres – they are thinking and acting international in the short and medium term, with the very long-term aim of becoming an important hub for global finance. Singapore and Hong Kong have shown that this is possible.
Re-doing the rankings
The collective GCC financial centre may be able to pitch itself into the top 10 IFCs by identifying and focusing on its ranking as a region, thereby achieving a similar ranking to that enjoyed by the regional economy.
There is potential for the GCC's IFC to move up into the top five or six in the IFC rankings in the long run based on strengths, not just in GDP but also in world trade and wealth. In these rankings the GCC is comparable to the likes of Hong Kong and Singapore, which have successfully used their hub status, among other advantages, to help leverage their financial power base and move themselves up the IFC rankings.
The City of London survey's findings can be adjusted to illustrate some important points about the GCC's position, which may not be obvious from the current format for presenting results. The large number of multi-markets, the multiplicity of European markets and numerous niche centres in the rankings tend to obscure the international picture. It is useful to look separately at rankings on the basis of regions and also rankings of centres, excluding the leading areas of the US and EU.
Individually the GCC countries currently rank within the top 50 financial centres, with Dubai at 24 and Bahrain and Qatar nearer the bottom end. However, if the numerous multi-markets are stripped out, Dubai moves up to around 14th place. Indeed if these rankings are reconfigured more radically according to region served rather than individual country, the GCC can be seen to fare even better, scraping into the top 10 based on the current GFCI score for Dubai alone. Alternatively, if all the financial centres of America and Europe are stripped out, then Dubai is actually placed fifth in the rest of the world rankings, while Bahrain and Qatar are also in the top 15.
Co-operation vs competition
The GCC financial centres are in a special situation considering both the intense competition and opportunities created by three financial centres (four, counting Saudi Arabia) all trying to get off the ground in the same place at the same time. They must decide where co-operation is mutually beneficial and where competition serves their interests best.
Inevitably the question arises as to whether all these centres can survive or if consolidation will reduce the number over time. Looking at the City of London table, the top 20 financial centres in the rankings actually include five centres from the US and eight in the European Union – these can be termed multi-markets in a country or region.
This illustrates that models for coexistence with close rivals/neighbours already exist and the challenge of a multi-market system is, therefore, not unique to the Gulf and need not be unsustainable.
Looking at how these neighbours and potential rivals interact should yield lessons for the GCC centres and their potential for co-operation as well as constructive competition. For example, the US model suggests that specialisation is one option for maintaining multiple centres. The existence of small, important players in Europe indicates that even when pressured by large, dominant players, centres can survive and grow. However, all these examples benefit from using co-ordinated systems, methodologies and regulations.
The GCC needs to adopt early harmonisation to reap similar benefits and to eliminate the external image of a fragmented set of small markets with variable rules and systems.