Following a collapse of the international shipping market, in 2012 the container route from Shanghai to the Gulf through Dubai experienced the second-highest freight rate growth in the entire intra-Asian region. This is part of an emerging trend, with GCC-Asia trade maturing. A relationship that was once just based on energy demand is diversifying and the GCC is seen as a viable market for Asian goods and investment, a crucial transit point – given its developed infrastructure – for the fast-growing markets of Africa, and a high-quality producer of goods and services in its own right.
SHIFTING PARTNERSHIPS: The change in emphasis of GCC trade patterns is clear. The focus of Gulf business is moving eastwards. Non-Japan Asia is now the recipient of more than 40% of all GCC exports, according to Deutsche Bank research. While Japan remains the region’s largest export market, its share has fallen from 23% at the turn of the century to 15% in 2012 as the emerging economies of Asia absorb increasing volumes of goods and services.
India jumped from the GCC’s 10th-largest trading partner in 2000 to second on the list in 2012. The South Asian giant now accounts for 10% of Gulf exports. Similarly, China has emerged as a vital market for the economies of the Arabian Peninsula, itself accounting for almost 10% of GCC exports, up from 4% a little over a decade ago.
To some extent, this shift eastward is hardly surprising given the travails of developed Western economies. With the sluggish recovery from the financial crisis in both the EU and the US, Gulf economies have had to look elsewhere to make up for the fall in demand. For example, the UK, a traditional trading partner, has experienced average annual growth of 1.7% over the period from 2010 through to 2014, while the US has fared little better, with annual growth rates below 3%. Conversely, in the same period, China recorded average annual growth of 8.6% and India achieved a rate of nearly 7.3%.
However, while much attention has been focused on this as a result of the global financial crisis, the trend is much older. China has been growing at around 10% per year for the last 30 years and GCC economies have been re-orienting trade eastwards and southwards for some time. Three decades ago the OECD countries, largely the developed nations of the West, made up nearly 85% of GCC trade. However, growing by an annual average of 11% between 1980 and 2009, emerging market trade accounted for 45% of total Gulf imports and exports by the latter year, according to the Economist Intelligence Unit. It is clear that the magnetic pull of the West is weakening. “The old adage that modernisation equals Westernisation doesn’t hold anymore,” Narayanappa Janardhan, a political analyst based in the UAE and the author of “Boom Amid Gloom: The Spirit of Possibility in the 21st Century Gulf”, told OBG.
EXPANDING RELATIONSHIPS: The GCC-Asia trade relationship was initially founded on the energy requirements of established and emerging Asian economies, and to some extent the pivot to emerging markets is simply a product of GCC hydrocarbons producers satisfying the energy hunger of fast-growing economies. In 2013, for example, China accounted for almost one-third of global oil demand growth and consumed 10.7m barrels of oil per day, and the country is expected to become the largest net importer of oil globally in 2014.
The producers of the GCC have made a substantial contribution to China’s energy needs. As of 2009, Saudi Arabia was China’s largest supplier of oil, providing 500,000 barrels per day, or some 30% of the country’s total oil imports. Abu Dhabi and Oman also gain substantial revenue from oil exports to China, while Qatar’s gas exports to the country reached an annual value of $1bn in 2009. However, this is not the only market for GCC hydrocarbons exporters, with South Korea and Japan absorbing significant Gulf crude and natural gas supply as well. In 2012 Asia (excluding majority Muslim and Arab countries) accounted for nearly 60% of Saudi Arabia’s export earnings from crude oil, illustrating the growing importance of markets in the East.
However, the relationship between the two regions is no longer simply defined by the GCC’s hydrocarbons reserves. “It has been driven by energy on one level, but you also see growth in trade as well. It has worked both ways,” said Janardhan. ” The GCC countries realise they have to look beyond oil and beyond expatriates. You see them trying to tap into the money that was being remitted.” He also pointed to the improvement in the GCC’s regulatory infrastructure, including free zone industrial areas, freehold property and maturing stock markets, as measures that have captured Asian investment.
NEW DIRECTION: A cursory glance at the region today would support this view. Asian companies are driving many of the signature projects in the GCC. In 2009, for example, the UAE awarded a $20bn contract to a South Korean consortium led by Korea Electric Power Company for the development of the country’s first four nuclear reactors as part of its nascent civilian nuclear power programme. In the same country, the primary contractor for the world’s tallest man-made structure, Burj Khalifa, was South Korea’s Samsung. Across a number of sectors, from construction to tourism, Asian capital and expertise are exerting greater influence.
It is not just the public sector-driven spending and the large contracts on offer that are drawing the attention of Asian firms. The region’s impressive infrastructure and efficient processes, as well as its location, are alerting companies to its potential as a logistics base. Just as Singapore has become a major trading hub for its Asian hinterland, Dubai has positioned itself as a logistics centre for a catchment area with a population of billions. “There is big growth towards Africa, and so you are seeing imports from the East – and particularly China – that are bound for re-export to Africa,” Nadia Abdul Aziz, the managing director of Union National Air Land & Shipping Company, which is based in the emirate, told OBG.
The UAE is now the world’s 23rd-easiest country to do business in and the fourth-easiest for trading across borders, according to the World Bank. Moreover, the country’s flagship port, Jebel Ali, has emerged as the largest container port between Rotterdam and Singapore, and will be capable of handling 19m twenty-foot equivalent units by 2015. Several other countries in the region are looking to position themselves as important logistics centres and vying for a share of Asian trade. Saudi Arabia, Bahrain, Oman and Qatar all feature in the top 50 of the World Bank’s “Doing Business” rankings for 2014, and have ambitions to emerge as major trading hubs.
IT TAKES TWO: However, traffic into the region is not one-way. GCC investment in Asia is also on the rise. The UAE was the third-largest investor in Pakistan in the five years to 2012, investing $1.4bn, or 9% of Pakistan’s total foreign direct investment (FDI). Saudi Arabia is another significant investor into the region. In 2011 the country ranked fifth in terms of FDI inflows into Malaysia, for example. Much of this interest is focused on areas that remain key strengths for GCC economies, namely the services sector and construction. For example, GCC sharia-compliant banks, such as Kuwait Finance House, have begun operations in Malaysia and, like many of their regional counterparts, are looking to capture an increasing share of the Islamic fixed-income market.
With many Asian economies shifting their focus away from exports and trade to domestic demand, there should still be plenty of opportunities for Gulf companies to tap into the emerging middle class in fast-developing Asian economies and broaden the scope of GCC involvement in the region. At the same time, the entry of Asian businesses into Gulf markets is unlikely to slow any time soon, and the historic links between the two regions are only likely to be reinforced by new, blossoming partnerships.
