Today investors from the Gulf region find themselves at an important juncture. Buoyed by sizeable oil proceeds, outward investments from Gulf Cooperation Council (GCC) member states have historically been directed towards North America and Europe. However, growing economic activity in other parts of the world is shifting the tectonic plates of global finance. Investors in the GCC are not immune to this phenomenon. The rise of many rapidly developing economies is presenting new and more attractive investment opportunities to an increasingly sophisticated Arab investment palate.
A quick snapshot of recent Arab sovereign wealth fund trends begins in 2006 with rising oil prices. During this period the EU benefitted from large amounts of bilateral investments originating from governments in the GCC that were experiencing huge surpluses in their fiscal reserves. With the onset of the global financial crisis in 2007 and the subsequent European debt crisis in 2010, investments from the Gulf played an important role in providing much needed liquidity to European markets.
In 2015, four out of the top ten sovereign wealth funds in the world are situated in the GCC , managing a total of around €2 trillion in assets[i]. While exact figures are not publically disclosed, the value of GCC assets managed in the European Union (EU) reached around €69 billion in 2012 up from about €8.8 billion in 2004[ii]. Extrapolating historical data provided by the European Commission’s General Directorate for Statistics this figure can be estimated to be at around €73 billion at the end of 2014. With the surge in oil prices, Europe was clearly a favorable destination for these investments. Why?
History, for one thing, plays a favorable role. Local financial markets in the Gulf region were created in the 1950s during an era marked by exceptional relations with the United Kingdom. Institutional funds were established in parallel with oil companies and surplus oil revenues were often invested in Europe and the United States. Today culture still plays its role. A large number of senior investment professionals and fund managers in the Gulf are either European or educated in Europe, which further strengthens this organic commercial relationship.
From a financial perspective, Europe is also a natural destination for many Gulf sovereign and institutional investors that are in search of stable returns. Most GCC outward investments in the world maintain traditional and risk-averse financial and fixed-asset accounts concentrating mainly on long term equity holdings, sovereign bonds and prime real-estate. European financial markets have done a relatively good job in providing all three. The EU also guarantees more flexible terms for foreign investors than other competing financial markets such as those in the United States. Financial markets in the EU remain relatively more open to foreign investments from the Arab world especially those made by individual investors. This has helped solidify Europe’s position as a safe haven for Arab investments.
To some extent, common geopolitical interests and strategic political priorities in the greater Arab world are also shared between GCC member countries and their European counterparts. Although not formally pronounced in terms of bilateral agreements this strategic cooperation both complements and encourages a favorable bilateral investment relationship.
However, despite these realities, a number of recent trends may begin to challenge conventional Arab investment attitudes towards Europe.
First, the sharp decline in oil prices to pre-financial crisis levels has adversely affected the domestic fiscal capabilities of Gulf countries. Oil proceeds also constitute the lion’s share of outward FDI. If oil prices remain at this level, both sovereign and institutional investors in the Gulf are likely to cut down on any new outward investment plans and may redirect some of their investments towards domestic markets under certain conditions.
Second, the recent announcement of mega-development projects such as EXPO Dubai and Qatar 2022 has shifted the attention of governments in the GCC to local investment priorities including large infrastructure projects and urban expansion plans. Since the Arab Spring the GCC has also witnessed a major shift towards increased social spending and a stronger focus on local development priorities. Coupled with the huge investment needs in other Arab countries exiting the Arab Spring, Gulf investment activities in low-yield countries outside the Middle East, such as those in the EU, are likely to decline.
Third, the explosion of trade levels with Asia may lead to larger bilateral investments in the long run at the expense of the GCC’s traditional financial partners. In the past ten years emerging and developing markets in Asia[iii] have become the Gulf’s largest trading partner receiving more than 50% of their exports in 2013 compared to only 14% of exports to Europe[iv]. Yet GCC investments in Asia are still a fraction of those in Europe. To put things in perspective, in 2012 FDI flows from the Gulf to China were a little above €150 million, less than that of Spain alone at €182 million[v]. However, shifts in the GCC’s global trade pattern may very well create new strategic opportunities for a similar shift in investment relations. Recent years have witnessed a steady increase in bilateral investment relations with East Asia.
Fourth, increasing fears of Islamic fundamentalism in Europe may deter further investments in fixed-assets and infrastructure. An obvious example is the 2006 bid of Dubai Ports World to acquire shares in six major US seaports, which was opposed by some members of Congress arguing for a potential national security threat. Although both public sentiment and political leadership in Europe is much more attuned to the difference between fringe fundamentalist groups and sovereign states, the fear of irrational reprisal fueled by Islamophobic behavior may very well jeopardize the future of Arab investments in Europe.
In summary, although Europe remains a primary destination for Arab investors today, a number of recent phenomena suggest that this relationship may begin unwinding. With new and profitable opportunities presenting themselves in emerging and developing markets around the world, Arab investors may very well find themselves making much larger investments outside the old continent in the decades to come.
[i] Sovereign Wealth Fund Institute
[iii] Emerging and Developing Asia includes: China, India and the ASEAN-5 (Indonesia, Thailand, Malaysia, Philippines and Vietnam).
[iv] International Monetary Fund: Direction of Trade Statistics.
[v] China Statistical Yearbook 2013