The QR5bn ($1.4bn) deal, while significant on its own, represents a new trend for Qatar and many other GCC countries, since it will reshape how and where Qatari petrodollars are invested. The move will significantly reshape the economic landscape well into the future as Qatar looks to counter its exposure to the dollar by expanding its investment reach in Asia. Furthermore, it will lead closer to the establishment of a regional headquarters in Malaysia for further growth in the greater Asia Pacific region.
Thanks to high oil prices, the continued growth of the hydrocarbon sector, and controlled growth and expansion, the Qatari state coffers are continuing to increase. This represents a microcosm of the greater GCC area where, for the period 2002-2006, the six GCC member states (Qatar, Oman, UAE, Bahrain, Kuwait and Saudi Arabia) earned $1.5trn dollars from oil exports, which was more than double the amount earned in the five preceding years. While close to $1trn of that was spent on imports, the remaining current account surplus of $542bn dollars went abroad. The question of late has been where the GCC puts all of that money.
Such questions remain quite an important and difficult topic to decipher, since most of the statistics are not published by the GCC countries and, therefore, must be pieced together by foreign sources. It is important for hedge fund managers to track petrodollar investments, as they are largely believed to be more volatile than other sources of global liquidity, such as Asian reserves. These petrodollars can also come with high amounts of leverage through investments in private equity firms and hedge funds.
Published statistics released by the American Treasury’s International Capital System (which provides information on foreign holdings of American securities); the Bank for International Settlements (which tallies figures on foreign-owned bank deposits); and Bloomberg’s database on global mergers and acquisitions show some $260bn of capital flows from Gulf states over the past five years, or about 48% of the GCC’s cumulative surplus. Statistics from the Institute of International Finance (IIF), a global bankers’ group, show that around $60bn may have gone to Asia, where Qatar and other Arab oil exporters are pouring money into infrastructure projects as well as buying property and firms.
While this increase in exposure to Asia is significant and relatively recent, the expansion is not at the expense of exposure to European and American markets, but more of a counter-balance to a continuously weak dollar that comes along after an announcement made by Sheik Abdullah bin Saoud bin Abdulaziz Al Thani, governor of the Qatar central bank, at a meeting of Arab central bankers in Damascus, that Qatar will not abandon its currency peg to the US dollar. In May, Kuwait changed its currency peg from the dollar and began allowing the dinar to appreciate. Many have speculated that other countries in the region would follow suit, so the announcement came as somewhat of a relief.
Qatar has increasingly been looking into several opportunities across Asia for the diversification of its economy in the long-term. South Korea and Japan already account for 58.4% of Qatar’s exports with Japan leading the way. Although Korea’s trade volume of $5.6bn is considered a good one, a prominent Qatar Chamber of Commerce and Industry (QCCI) member said, “We are still looking for more cooperation due to the potential our two countries have.” Ali bin Abdul Latif Al Mohannadi was addressing a joint meeting of Korean and Qatari businessmen at a meeting at the QCCI.
Another major trading partner for future Qatari development will be China. The Gulf region supplies 60% of the Asian industrial powerhouse’s growing oil needs. This number is expected to pursue an exponential rise in the near and long terms. There is already $45bn in bilateral trade between China and the Gulf and the number is set to rise substantially as relationships are cemented between the two regions.
At the China-Middle East Investment Summit in Dubai, it was noted that the Gulf could invest as much as $250bn in Asia – mainly in China – over the next five years. While many bankers doubt that such a large amount of the GCC’s expected capital outflows will flow to Asia, the summit brings to light the increasing ties between the two regions. Besides, with Qatar being the largest supplier of LNG gas and considering continuing growth in its general output, a very bright future of growth is set.
While Qatar is seeking to expand across several countries in Asia, there is clear evidence that it will not come at the expense of the country’s exposure to the North American and European markets. This has been evidenced by the Riyal peg to the US Dollar and by Qatar’s impressive move at purchasing a nearly 30% stake in the London Stock Exchange (LSE), which is currently held by Nasdaq. This will not only keep the balance in Qatar’s portfolio of investments and its overall exposure, but will also catapult the country into achieving its goal of becoming a regional financial hub, further diversifying the Qatari economy. This is the type of long-term balance that Qatari leaders are seeking to ensure continued economic growth.
