Region’s oil wealth soars to $30trn

“The region is currently characterised by increasing wealth and liquidity. To show you how big the region’s wealth is, if you pile up this $30 trillion in single $1 notes, the notes would reach the moon,” Dr Nasser Saidi, who is also the executive director of Hawkamah, Institute for Corporate Governance, said.

The accumulation of assets has led to a tripling of international reserves, which grew from $188.7 billion in 2002 to $767bn in 2007, he added. This wealth, he said, has fuelled region-wide growth by an average of 6.2 per cent from 2004 to 2007 – up from 3.7 per cent between 1998 and 2003. Some countries, such as the UAE, have even recorded growth reaching up to 12 per cent.

“The growth in the past six years has been phenomenal. It has been sustained by strong global growth led by emerging markets,” Saidi told the Corporate Governance Congress yesterday.

The continued growth is buoyed by the GCC governments’ relative prudence on spending. The region is now awash with cash, with the GCC having built up a cumulative surplus of about $730bn over the past five years. In addition, private wealth assets in the region have been estimated between $1.2 and $1.5trn, while the GCC’s current account surplus in 2006 alone was a quarter of the deficit in the United States.

Saidi said GCC growth, which used to be driven by a strong oil economy, is now driven by all sort of investments. “In the UAE, 15 years ago, 70 per cent of the GDP came from oil, now oil revenues is less than 30 per cent of the GDP. Thus the UAE is no longer just an oil economy.”

The growth has spilled over into countries neighbouring the GCC through international remittances. “As a result of higher GDP growth, the labour force working in the GCC has been sending high remittances too,” he said. “In Egypt for example, 15 per cent of its GDP is comprised of its international workers’ remittances, while in a country as small as Lebanon, remittances comprise 25 per cent of its GDP.”

Investments, which were largely banked on infrastructure, are also increasing the region’s capacity as well as the productivity of the labour force, he added. Most of the investments moreover have been earmarked by the private sector in contrast to the dominance of the public sector in the past. “For the first time, we have seen multinational corporations coming from the region. We now have the likes of DP World, etisalat and MTC leading international businesses,” he said.

According to Saidi, GCC countries have been growing faster than the regional economy and at the moment they have surpassed other emerging and developed markets.

Supporting Saidi’s point is a recent equity markets report, which found the Middle East and North African (Mena) region had outperformed other emerging and developed markets.

And although equity markets in the region are still vulnerable to the global “margin call” and risk aversion, Mena’s capital markets are expected to maintain their momentum from 2008 up to the mid-term, a report by Merrill Lynch, said. The report said the Gulf is expected to trade at premium to other emerging markets given healthy macroeconomic growth, low-risk premiums and abundant capital and solid current account positions relative to other fast-growing frontier markets.

The region, it noted, has recently recovered from the 2006 crisis where a market capitalisation of $1trn, more than the region’s $700 million GDP, was wiped out.

The recovery, which according to Merrill Lynch was “quicker than most post-bubble experiences”, will be sustainable over the medium term driven by an economic boom of unprecedented scale.

Saidi said GCC markets have increased from less than $200bn in 2002 to $1.039trn by January 2008.

“GCC markets, which used to comprise 65 per cent of GDP, have grown to 149 per cent in 2002 to 2008,” Saidi said, noting the markets’ continuous diversification will overcome the boom and bust cycle.

“To date, $1.6trn worth of projects have been financed through banks. Usually when the price of oil is high, the investment is also high, but once the price goes down investment also goes down. This causes the boom-bust cycle,” he said.

Saidi noted that it would be good if the link between energy revenues and capital spending could be severed and projects were instead financed totally by the financial markets.