GCC countries look towards developing world for growth
It is one of the most exclusive economic clubs in the world, and it's not the G20, the G8 or the IMF board of directors. It's the dwindling list of countries that have retained the gold standard of investment grade status: the AAA rating. From Canada to Sweden, from Switzerland to Germany to Australia, these AAA countries will soon be an even smaller club as France's status totters.
Savvy long-term investors, however, should be mindful of the new and far more consequential "AAA": Asia, Africa and the Americas. These high-growth regions will drive global economic growth over the next two decades, and this new club will have a far bigger effect on our future than the old guard, most of whom will face sluggish growth over the coming decade. Many of these new AAA countries will be gathered in Dubai this week for the Annual Investment Summit, sponsored by the UAE Ministry of Foreign Trade.
Summit attendees will be aware of the latest IMF World Economic Outlook report that lays out a two-track world of growth: recessionary to slow to modest growth in most advanced economies, and solid to robust growth in emerging and developing economies. The IMF forecasts negative growth in the euro zone, modest growth of 2 per cent in the United States and a limping 1.4 per cent growth rate overall in advanced economies for 2012. The picture brightens slightly in 2013 with 2 per cent growth projected for advanced economies.
By contrast, the IMF forecasts a robust 8.2 per cent growth in China for 2012, and solid 5.7 per cent growth in emerging and developing economies in 2012 - more than four times the growth of advanced economies. By 2013, developing Asia will likely be close to 8 per cent growth as a whole, sub-Saharan Africa will be north of 5 per cent, and emerging and advanced economies will hit 6 per cent growth, according to IMF estimates.
With the rise of Latin America and sub-Saharan Africa, global growth drivers are also moving southward. Indeed, in the decade from 2000 to 2010, six of the fastest growing economies were in Africa. Meanwhile, across Latin America, sustained economic growth over the last several years, prudent macro policies, increased political stability and an ability to weather global financial storms has created tremendous opportunities.
It's no longer just a BRICS world, the acronym for the high-growth economies of Brazil, Russia, India, China and, more recently, South Africa. It's an AAA world. But in much the same way that the "C" is the most important part of the BRICS, the "Asia-A" is the most important part of this new AAA world. After all, it contains 60 per cent of the world's population and is home not just to East Asian tiger economies and the China behemoth, but growing mega-economies such as Indonesia. If we added Indonesia and South Korea to the BRICS - the BRIICKS, if you will - these six countries may account for more than half of global growth by 2025.
It is fitting that the BRIICKS includes one African and one Latin American country. But let us not get weighed down by another acronym, lest we miss those countries who did not fit neatly into one. There are tremendous investment opportunities across Africa, Latin America and Asia. From Vietnam to Argentina to Indonesia to Nigeria to Ghana, opportunities abound.
But, what of the Middle East and North Africa region? The North African countries will face some short and medium-term problems owing to a drop in tourism and remittances, a fall in foreign direct investment because of political instability, persistent unemployment and euro-zone troubles. The GCC countries will benefit from higher oil and gas prices, driven largely by growing demand across the "AAA" world (but mostly Asia). However, the GCC states face a collective problem: recent massive fiscal stimulus has driven the break-even price of oil to dangerous new highs. The UAE now has a break-even price of oil that stands at $107, according to Emirates NBD bank, the highest in the GCC.
For the UAE, there is a silver lining, however. Investments in transport and logistics, and Dubai's role as a cross-continental services and trade hub ensures that the UAE will play a large role in this new AAA world. Dubai's ports are among the biggest and busiest and most efficient in the world, and both Etihad and Emirates Airline are benefiting from the increased air cargo opportunities across what is sometimes called the South-South trade corridor.
Of the roughly $15 trillion (Dh55 trillion) in world trade today, nearly a third of that takes place between developing and emerging economies. HSBC calls this the "Southern Silk Road", and Brazil and India already conduct the majority of their trade (58 per cent) along this route. By the year 2050, according to HSBC, Brazil, China and India will conduct more than 75 per cent of their trade along the Southern Silk Road. Hub cities such as Singapore, Hong Kong and Dubai will mediate large portions of this trade.
This new AAA world will have significant ramifications for geopolitics. After all, China became a world power not when it became a member of the nuclear club, but when it became a member of the economic powers club. Watch for the increased geopolitical assertiveness of Indonesia over the next decade. This does not, of course, mean the decline of the West, but it does accelerate, in Fareed Zakaria's term: "The rise of the rest."
Global growth is not a zero-sum game. In fact, the AAA world will grow even faster when Europe and the advanced economies fully recover. But a euro-zone meltdown still threatens the entire globe, not just the advanced economies. The irony of shared global growth is shared global risk.
The world is shifting and new political and economic centres are forming. Understanding this world won't be easy. The new AAA is an important place to start.
Afshin Molavi is a senior adviser at Oxford Analytica, a senior fellow at the New America Foundation and a speaker at the AIM Congress (www.aimcongress.com) that begins today.
On Twitter: @afshinmolavi
Updated: May 1, 2012 04:00 AM