Overseas investment revenues are an important source in financing GCC (Gulf Cooperation Council) countries budgets’ and Gulf economies in general.
These revenues exceeded oil returns in the UAE and Kuwait during the oil price drops of the mid-1980s and late-1990s. However, they fluctuated over the past three decades.
The most severe fluctuations were those that took place during the latest international financial crisis, which led to the decrease in the size of their assets by 50 per cent in some cases.
One of the most important lessons from the crisis is the asset structure of these investments. Before the crisis, most assets in the financial sector, in the form of deposits, stocks and bonds, and hedge funds, which suffered the most during the financial crisis. Moreover, some of these hedge funds were part of the crisis because they adopted speculation in high-risk financial derivatives.
With the start of the current decade, which coincided with overcoming some of the repercussions of the financial crisis in late 2008, GCC countries and their major investment institutes – especially sovereign funds — sought to reconsider their investment map. As a result, structural investment rose in select sectors, to the extent that the real estate asset share in the Abu Dhabi Investment Fund Authority (Adia) rose to 10.5 per cent of the total investment, according to the Authority’s 2010 report.
Qatar’s sovereign wealth fund has turned over the past three years into one of the biggest foreign investors in British real estate, after taking over important assets such as the Harrods store in London.
In infrastructure, Adia bought a stake in London’s Gatwick airport, while Qatar is seeking to take over Sainsbury’s retail stores in London.
Gulf investments prior to the international financial crisis were centred mostly in western countries. Currently they have become more geographically diverse. Hence, Adia, as part of its diversification strategy, will increase its direct investments in Indian real estate. The value of investments in this has now reached $400-500 million.
Kuwait has signed an agreement with China’s Sinopec and France’s Total to set up a $9 billion petrochemical complex in China, in addition to huge Qatari and Saudi investments in that market.
Consequently, Gulf foreign investments in the post international financial crisis era are expected to be more balanced and cautious structurally and geographically.
The Bric countries (Brazil, Russia, India, and China) provide many feasible investment opportunities that are less risky because of their dependence on investments in the real sectors of the economy. These emerging markets have not been hit so badly as the others, with the insanity of speculating in financial derivatives that were a major cause of the recent financial crisis.
All this coincides with expectations that oil prices will remain high, and are likely to rise further; with additional oil production, GCC countries will have huge surpluses that can be directed towards increasing investments abroad. It is expected such moves will take into account experience of the previous crisis by concentrating on real economic sectors and geographic diversity to avoid losses as much as possible.
If all this takes place, revenues from Gulf foreign investments will help backing financial conditions in GCC countries if oil prices fall. These returns will also contribute to diversifying national income sources. Thus, they will serve one of the most important strategic targets sought by GCC countries in their ever preparations for the post-oil era.
Moreover, these revenues will develop the non-oil economic sectors that achieved high growth rates over the past couple of decades.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.
