Many things have changed since the turn of the century, and the most important of them is probably the dispersion of wealth and power. When we look back at history, it is quite evident that the shifting of power and wealth is a continuous process as it moves around the world from region to region, and mostly everyone gets a chance to make use of it.
Though many of the countries that comprise emerging markets started from a low base, they have grown rapidly and now their size has become significant. Currently these emerging markets account for about 50 percent of the global GDP (see Fig. 1). An interesting statistic to note is that there are about 8,000 large companies worldwide with revenues of more than $1bn, and three out of four of these are based in the developed world.
It is estimated that by 2025, the number will become 15,000 – 70 percent of which will belong to the emerging markets. While there is an undeniable shift in wealth and resources towards Asian economies, the case is more favourable for the GCC region, comprising of Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Oman and Bahrain.
Continuously pushing ground
The region is an exception to several of the commonly faced problems in the Asian economies, and is also often misread along with the other countries of the Middle East. The continuous political imbroglio at its periphery has always been a distraction, which is why foreign participation was limited in the region. A great deal of literature has already been written on the progress made in the economy and improvement in the socio economic status of the union, which has contributed to its success.
As an investor, and having seen the growth in the region, I believe the improvements witnessed in the economy and equity markets in the recent past is sustainable, and the years ahead will be far more exciting (see Fig. 2). The graph clearly indicates the higher rate of growth experienced in the GCC. This has been affected partly due to high oil prices, and to the gradual social transformation that has created underlying buoyancy in the economy. There has been a phenomenal increase in the employment rate, new industries have propped up and FDI levels have increased.
The paradigm shift to the region ensued with the remarkable emergence of Dubai and the media sensation it created over the last decade. The flutter has forced open the eyes of several foreign investors, and huge investment has gradually flowed in. The minimal time for setting up a business, hassle free operations, low cost of infrastructure, tax-free haven and stable currency have been some of the main attractions.
The influx of capital has also led to wide spread improvements in the regulatory and policy framework of the region as a whole to match and accommodate the objectives of the local and international investors. As a result of the increasing attention, the GCC union – on a combined basis – has entered the trillion-dollar economy club and growing at a much faster pace than its peers. This kind of size and rate of growth is difficult to ignore.
GCC economies that were once fully dependent on revenues from oil and gas have taken great strides in diversifying into various service- and production-related industries. The non-oil revenue for the GCC region combined has grown over seven fold in the last decade. The average contribution of the non-oil sector to the nominal GDP of the GCC is close to 50 percent now. Sectors such as tourism, healthcare and education have received major boosts in the government budgets.
Employment opportunities have increased along with the local pool of skilled labour. Most of the sectors that are at the end of their product life cycle in other places are still in their nascent stage here, and hence there is ample scope for growth. Retail and healthcare are two sectors that have maintained double-digit bottom line growth for more than five years and still going strong.
Young, rich and driven
Developed nations are facing heat over an ageing population. GCC countries have the youngest demographic status, with a majority of the population under the working age – and younger. This will have a far-reaching long-term positive impact on the region, and growth would be a must to provide for this generation. Also, unlike other developing countries, the GCC nations are wealthy and can afford to provide the appropriate training and education for citizens to make them employable.
The equity markets in the GCC have gone through tremendous changes over the last decade. Corporates that were initially shy of entering the public space have realised the various advantages of sourcing capital through the stock markets and deploying them effectively in their business. This trend has primarily been a forced progression and as a result of the rapid growth and capital requirements it entailed.
The evolution of various business opportunities brought with it a host of professional managers both from within the region and abroad. They have imbibed the best practices from across the globe and transferred the same in the GCC. Currently we have an increasing base of local and foreign participants in the equity and bond markets. There are over 100 asset management companies managing 400 funds with a total corpus of near to $50bn in the region.
Further there is a private equity segment that separately manages over $20bn. The fund management industry has not only grown in size but also in terms of sophistication and risk controls. The aggregate market cap of the listed GCC companies in the GCC has almost doubled from 2006. Aiding to the growth of the industries, companies have also evolved to become investor friendly, adhering to disclosure norms and publishing data on a voluntary basis. The improvement in transparency has been acknowledged by several international agencies such as MSCI that recently upgraded Qatar and the UAE to an emerging market status after thorough consideration and in-depth research of the entire process flow in the capital market.
Global trade has focused itself around the Middle East region for some time now. Capitalising on the geographical advantage that the region already possesses, it has built an integrated system of road, air and sea ports. Currently it boasts the biggest air and sea ports in the world. The most ambitious GCC rail that will connect all the six countries in the union is already in the final stages of planning, and work is expected to commence next year.
Superior infrastructure and efficient management of resources has attracted several large global companies to move their base or office in the region for the future. The significance of this sharing of security network and infrastructure will bolster the GCC’s strength. As the region gets global attention the local population also stands to benefit imbibing the best practices from international players. The GCC currency is pegged to the dollar and offers a great amount of stability and comfort to the investors. Any improvement in the advanced economies will have a direct multi-fold positive impact on the region.
Going forward, it is expected that crude prices will continue to remain in the $80-90/bbl range, aiding sufficiently for large-scale projects in the pipeline. It is envisaged that over the next decade, projects worth over $1.1tn will be completed and several more in the design stages. IMF has forecasted the regional GDP growth rate at 4.5 percent that is in the higher range compared to the global average of 3.3 percent. Out of this the non-oil GDP is expected to grow at six percent while oil GDP at 0.5 percent.
The GCC current account surplus is among the highest in the world, and stands at $238bn. The World Expo 2020 in Dubai and the football World Cup 2022 in Doha both have a total project outlay of $220bn. These events confirm the fact that GCC has arrived on the global stage and is capable of managing such comprehensive large-scale deals.
