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ANALYSIS

GCC vulnerable to emerging markets' slowdown

Dubai, March 31, 2014

The growing trade openness of GCC countries, particularly its rising trade links with emerging Asian markets, is increasing the region's economic dependence on global growth and its exposure to foreign shocks, said a report.

Between 1999 and 2012, trade openness in the region--measured as exports and imports as a percentage of GDP--increased from 68 per cent to 100 per cent, according to a report by Standard&Poors ratings service.

Meanwhile, trade relations between the GCC and Asia (excluding Japan) have grown substantially at the expense of Europe, the US, and Japan, particularly since 2005, it stated.

Although Japan remains the most important export destination for GCC states, its share of exports is declining, the report added.

According to S&P, India is the GCC's second-largest export destination in 2012, followed by Korea, China, and the US. The Asian continent accounted for 57 per cent of the GCC's total foreign trade in 2012.

Investment flows between the GCC and developing Asia are also gaining momentum as infrastructure investments grow in both regions. Developed economies nevertheless remain the main holders of foreign direct investment stocks to the Gulf states.

The GCC's trade and investment links with the emerging Asian markets are strengthening, owing to rising energy demands in the east and growing infrastructure investment in both regions, the report said.

However, ties with developed markets such as the EU and US, are loosening, as unconventional energy production and energy efficiency increases in these regions.

The emerging markets' sell-off since the start of Fed tapering has not greatly affected GCC countries because fiscal and trade surpluses make them largely immune to foreign capital outflows. However, the Gulf would be vulnerable to a slowdown in emerging markets and a resulting fall in oil prices, stated the S&P in its report.

The ratings expert pointed out that two major global developments will continue to shape the GCC's trade ties: the growing demand for commodities in Asian countries and the rising energy supply in developed markets, especially in the US.

Asia's total petroleum consumption doubled between 1990 and 2012 to reach one-third of the global total. China alone already consumes 12 per cent of global petroleum products, at 10 million barrels per day.

According to the International Energy Agency (IEA), China will overtake the US as the largest oil-consuming country by 2030. Oil consumption in the Middle East will overtake that of the EU by about the same time.

In September 2013, China surpassed the US as the world's largest net importer of petroleum and other liquids.

The IEA said it expects China to become the largest oil-importing country by 2020. The region's construction, infrastructure, and manufacturing-based economic model, together with rising incomes and consumer demand are driving this growing energy demand, it added.

Meanwhile, improvements in energy efficiency in developed markets and the rise in unconventional oil production, particularly in the US, are curbing demand for hydrocarbons, the GCC's main export product.

According to S&P, technological advances, such as horizontal drilling and hydraulic fracturing in shale, have substantially increased proved reserves in oil and gas in the US since 2009.

Crude oil proved reserves surged from 19 billion barrels in 2009 to 26.5 in 2012, according to the US Energy Information Administration (EIA). Reflecting the growing role for domestically produced hydrocarbons, production of petroleum and other liquids rose by 22 per cent to 11.1 million barrels a day between 2009 and 2012, while petroleum imports declined by 23 per cent to 7.4 million barrels a day.

As the US prohibits crude oil exports, American refiners are importing less, although still large, amounts of crude oil, while exports of oil products such as gasoline, diesel, and other fuels are increasing.

The US was a net exporter of oil products in 2011 for the first time since 1949. The IEA projects it will meet all its energy needs from domestic resources by 2035.

GCC-Asia trade ties
 
The shift in GCC countries' trade toward emerging markets has accelerated since 2005, and the signs are that this pattern will continue. GCC exports of goods to the EU, the US, and Japan fell to less than 30 per cent in 2012 from 51 per cent in 1995.
Meanwhile, its exports to China rose to nine per cent in 2012 from one per cent in 1995. GCC exports to India rose to 11 per cent from 5 per cent over the same period. Asia is now the GCC's largest export destination, accounting for 57 per cent of total foreign sales.

Oil and gas dominate GCC exports to developing Asian economies, accounting for nearly 80 per cent of the total. Meanwhile,
60 per cent of GCC oil exports are channeled to the Asian continent (excluding Japan), with India and China alone taking
about 20 per cent of its total hydrocarbon exports.

Similarly, the Gulf states' pattern of imports has also reversed. In 1995, the GCC imported 63 per cent of goods from
advanced economies, while importing only about 37 per cent from emerging countries.

By 2012, however, advanced economies accounted for just 42 per cent of the region's imports, while emerging countries accounted for 58 per cent. Approximately 38 per cent of imports of goods to the GCC now come from Asia (excluding Japan), compared with 11 per cent in 1995.

About 70 per cent of these imports are manufactured goods and articles, machinery, and transport equipment.

"This shift is not temporary, and that the share of GCC exports to Asian countries will continue to rise as Asia's developing infrastructure and rising private consumption increases its demand for energy," the S&P report added.

Alongside strengthening trade links, investment flows between the GCC and developing Asia are also gaining momentum. As the GCC has accumulated current account surpluses, capital is also ample. Hence, it is attracting foreign direct investment (FDI) associated with transfers of technology and as part of a diversification strategy.

In 2012, Saudi Arabia and the UAE received 83 per cent of all FDI inflows to the GCC, while Qatar alone received 63 per cent of total portfolio flows.

According to S&P, the total capital inflow to the Gulf states was $43 billion in 2012, below the $68 billion peak reached in 2008 but above the $26 billion low point in 2011 that resulted from the social and political instability associated with the Arab Spring uprising.

Compared with other Arab oil-importing countries, capital inflows to GCC states have stayed constant since 2011 compared with pre-2008 levels, bolstered by infrastructure investments, low interest rates, lax fiscal policy, and relative political stability.
Latest complete and available data from the IMF suggest that China became the sixth-largest investor in Saudi Arabia in 2010, with $9 billion invested. However, advanced economies, including the US, France, and Japan, still invest more, said the report.

Infrastructure flows between the GCC and Asia have been gaining momentum, it added.

The ratings expert pointed out that most GCC countries were looking for investors to pump in money into transport, utilities, and petrochemicals infrastructure to keep pace with their rapidly growing economies and populations.

Examples include the gas exploration activities in Saudi Arabia, nuclear power plant project in the UAE, and communication networks being built by a Chinese telecommunications network supplier, it stated.

Meanwhile, GCC companies are also investing in Asia, said the S&P in its report. This includes investments in Malaysia's financial services industry, Singapore's semiconductor industry, Indonesia's telecoms sector, agricultural projects in Thailand and Cambodia, and refinery projects in China and India, it added.-TradeArabia News Service




Tags: GCC | emerging markets | slowdown |

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