By Khaled Al Muhairy
The GCC has wisely used its energy windfall to pay down debt, bringing their debts down to just 15% of its Gross Domestic Product.
There's no doubt that the wealth of GCC nations is growing significantly - oil at US$70 per barrel translates into US$6.2 trillion of export revenues over the next 14 years; at US$100 a barrel, this is equivalent to US$9 trillion. GCC countries stand to collectively earn more than US$6 trillion by 2022, more than triple the amount they earned from 1993 to 2006, according to a new report from McKinsey & Company.
Factor in asset appreciation and this will raise their total foreign wealth to US$8.3 trillion. Even if they never invest another dollar, the returns on their existing foreign assets would add more than US$1.6 trillion over the next 14 years. The Gulf States vie with China as one of the world's largest sources of surplus capital - in 2006, the GCC had net outflows of US$202bn and definitely some of the current windfall will find its way back into investments overseas.
A new ‘silk road’ has opened and investors from the Gulf are now actively identifying opportunities in the East.
This amount will be a function of oil prices and domestic investment levels - according to the McKinsey report, around US$3.5 trillion of new funds is likely to be invested in global capital markets between now and 2020. Taking into account asset appreciation, this will raise total overseas wealth of GCC nations to US$8.3 trillion - this kind of liquidity is bound to have long-term global repercussions.
Providing liquidity to global markets and providing permanent equity capital for private equity companies and hedge funds does not necessarily lead to inflation in asset prices and financial speculation. Going by past examples, the GCC has wisely used its energy windfall to pay down debt, bringing their debts down to just 15% of GDP, investing in non-oil growth initiatives.
In fact, GCC nations have announced aggressive plans to invest in infrastructure, industrial, healthcare and education sectors of the economy. Investments will also be made into local financial markets, giving a fillip to the regional bourses, and to newer financial products coming onto the scene.
This will add depth to regional markets and offer attractive valuations and options for overseas investors. Foreign direct investment into the GCC, for example, rose from just under US$2bn in 2001 to more than US$20bn in 2005 - with newer products and attractive valuations, this figure will increase exponentially.
I agree with the theory that investors are on the lookout for investments that lead to technology or skills transfer, and improve domestic economies. There is also an ever-increasing focus on other emerging markets.
In the past, investment portfolios were predominantly passive and concentrated in North America and Europe. I believe a new ‘silk road' has opened and investors from the Gulf are now actively identifying opportunities in Asia and the East. It has been said that outlays to Asia can double from the 10% today to 20% by 2020.
During the oil boom of the mid-1970's and early 1980's, GCC states were not equipped to absorb a six-fold increase in revenue - this is not the case today. Disciplined fiscal regimes and debt reduction policies are in place, equity markets are well-developed - as a percentage of GDP; GCC market capitalisation is much higher than even the hottest emerging markets, and more in line with levels in mature developed markets.
Thus, there is no need for any irrational exuberance or for global policy makers to be weary of the Gulf's current oil windfall. Experimental evidence suggests that ‘bubbles' arise from a confluence of factors; no single factor appears to be sufficient to generate a bubble in a given market - and it is always better to find a cure for bubbles rather than simply treat the symptoms.
Khaled Al Muhairy is CEO of leading alternative investment company Evolvence Capital.