x Abu Dhabi, UAEFriday 28 July 2017

GCC needs united profile with investors

Arab nations should stress their common features that make them an appealing destination for inflows of foreign capital and a rival for the likes of BRIC.

GCC citizens are accorded the same treatment in all member states, including economic activities and movement of labour.
GCC citizens are accorded the same treatment in all member states, including economic activities and movement of labour.

The size and strong economic growth of Brazil, Russia, India and China has earned them a prestigious acronym as coined by Goldman Sachs in 2001: BRIC. These emerging economies are fuelled by transformational regulatory and political reforms, ample natural resources, a broad consumer base or a combination of these factors. While the acronym is certainly not a primary driver of economic growth, it does serve as a powerful marketing tool, setting BRIC nations apart in the minds of institutional investors from other large emerging markets with lucrative investment opportunities such as Indonesia, South Korea and Turkey. GCC countries should seek to achieve such prominence, which would enhance their profile with global investors. Gaining the attention of global institutional investors results in more private equity capital being raised for any given country and inevitably in more private equity capital being deployed in that country. More so than other forms of foreign direct investment such as public markets funds, private equity brings tangible benefits to a country's economy other than capital. Private-equity investors who rely on earnings growth, as opposed to excessive leverage, to achieve their return targets typically instil in their companies better governance, facilitate access to new markets and aid in achieving an initial public offering. They do this without exposing the company's stakeholders to the risks associated with high debt levels. Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain should aspire for the inclusion of the Arabian Gulf in a new acronym: ABRIC. There are compelling reasons why these countries can be viewed as one economic bloc from a global investor's perspective, and why this bloc is very significant and will become even more so over time. Many common features bind the GCC economies to each other. Most in the Gulf share the Arabic language, an Arab ethnicity and the Muslim religion. These traits account for strong cultural similarities within the region and allow professionals to operate seamlessly across the Gulf. The countries are also contiguous or connected by bridges, enjoy political stability and have a council to promote regional co-operation and economic integration. While some GCC economic goals such as a single currency are yet to be achieved, the glass is more than half full. GCC citizens are accorded, in any member state, the same treatment accorded to its own citizens in all economic activities including movement of labour and treatment of share ownership. Trade and investment flows among the six countries can be felt in every facet of business life. Furthermore, the currencies of each of the countries are pegged to the dollar (except in the case of the Kuwaiti dinar, which is pegged to a basket of currencies). The GCC is also a formidable economic bloc. With a GDP last year of US$1.1 trillion (Dh4.04tn), the Gulf economy is roughly equivalent to India's. The Economist Intelligence Unit has determined that the GCC's annual GDP growth has been 5.2 per cent in the past decade and expects it to be 4.5 per cent in the next decade, compared to an aggregate global rate of 3.3 per cent. The economic bloc accounts for 40 per cent of the world's proven oil reserves and 23 per cent of proved natural gas reserves. As living standards improve and industrial production grows in China and India, demand for the Gulf's natural resources will conti nue to rise. However, while Gulf-based hydrocarbons are relatively cheap to extract, the GCC's share of global oil production is only 22 per cent and its share of global gas production is 8 per cent, implying that the Gulf's potential for acquiring market share through greater production is tremendous. GCC countries are now also capturing more of the downstream profit margins that are forfeited by selling crude oil and gas, through the use of these resources in domestic petrochemical facilities as well as export-orientated industries further downstream. This margin-capture trend will accelerate. Additionally, using data from Transparency International, the GDP-weighted Corruption Perceptions Index for GCC countries ranks the economic bloc 59 out of 180 economies, hardly ideal but well ahead of the BRIC's GDP-weighted ranking of 89. Although at 39 million, the GCC's population is small relative to that of BRIC's, 35 per cent of that figure is comprised of expatriates who enjoy easy entry into the local workforce and many of whom bring their families to live with them. Thus, regional demographic trends are fuelled by immigration as well as indigenous growth. While the move from BRIC to ABRIC in the minds of investors should happen today, there are some initiatives that Gulf countries need to undertake to cement this transition by growing the size and diversity of available investment -opportunities. Governments in the Gulf should privatise more of their assets and further liberalise their foreign ownership rules. Many of the major companies in the Gulf continue to be government-owned, despite a few successful privatisation initiatives. Governments would do well to open more of their prized assets to private capital in order to benefit from enhanced accountability and efficiency that comes with private sector involvement. Furthermore, some countries continue to restrict foreign ownership in public companies, while others have foreign ownership limits on public and private companies. By allowing greater ownership of assets by foreigners, these countries can immediately increase the size of their investment universe for global investors. With regards to the diversity of the economic base, oil and gas exports account for roughly 50 per cent of the GCC's GDP, but major diversification efforts are underway. For example, the Dubai International Financial Centre has become the regional financial services hub. In Abu Dhabi, a Guggenheim Museum and Louvre Museum will help drive greater tourist traffic flows to the UAE. In Qatar, an Education City is attracting first-tier universities to establish bases and students from the greater region to gain an education. In Saudi Arabia, the King Abdullah Economic City, a $27 billion greenfield city designed for 2 million people, is creating new opportunities in almost every sector. So while the GCC has a long way to go in diversifying its economy, there are major initiatives pulling it in the right direction. Despite competition within the GCC in various arenas, member countries realise that they have much to gain by standing together, and it is for this reason that the council was established. Global institutional investors should now realise that this trillion-dollar economy is globally important and afford it ABRIC status. Fawzi Jumean is the executive vice president heading the lower Gulf region at Amwal AlKhaleej, a Middle East and North Africa private-equity firm