As recession in the US becomes ever more likely, and as the business world in North America, Europe and Asia is gripped by a credit squeeze, the economic success story of the oil-rich Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) continues unabated, the latest report of Barclays Wealth Insights, in cooperation with the Economist Intelligence Unit, said. The report focused on “Evolving Furtunes,” said UAE's GDP will grow 8.3 percent in 2008 as forecast by the Economist Intelligence Unit, and it is expected to reach 11.7 percent in Qatar. The latter country also has one of world's highest levels of per-capita GDP, at around $64,000. Much of this rapid increase in liquidity can, of course, be attributed to demand for commodities, which is currently being driven in large part by resource-hungry Asian countries. According to the IMF, annual oil exports from the GCC countries have reached $400 billion, and are forecast to rise to $450 billion next year. Other factors, however, have also played a part in the huge increase in wealth in the region. Low interest rates, the repatriation of finance in the wake of the Sept. 11, 2001 attacks, and the policy decision of many GCC governments to diversify their economies beyond hydrocarbons have all played a role. Liquidity generated from fossil fuels has been invested in huge, multibillion-dollar infrastructure projects, including upstream oil and gas facilities, and in civil projects, such as roads, ports, airports and new business districts. This large-scale investment creates huge opportunities in property, construction, engineering and other related industries and, by extension, substantial new wealth. As a result of these trends, privately held wealth in the region has increased significantly. According to the Qatar Financial Center Authority, onshore liquid assets held in the GCC countries totaled $78 billion in 2004, equivalent to 16 percent of regional GDP. The data also states that, whereas the largest source of wealth in North America and Europe tends to be business ownership and corporate income, in the GCC it is most likely to be family inheritance. Large family businesses tend to be the dominant economic force within the region, and to date there has been not been the kind of thriving entrepreneurial SME sector that exists in Europe or North America. “The businesses that have made most money in the region have tended to be those that have been established for some years, in industries such as construction, property or hotel management,” said Stuart Pearce, chief executive of the Qatar Financial Center Authority. “The families that control these businesses have been able to generate wealth as a result of the investments made by the government in their economies.” The UN Conference on Trade and Development (UNCTAD) puts FDI inflows into the UAE at $12 billion in 2005 - some 60 percent of total inflows into the Gulf Cooperation Council (GCC) that year. In view of the ongoing real estate boom in the country, which is drawing investors to Dubai and to Abu Dhabi, the Economist Intelligence Unit estimates that FDI inflows rose to $16 billion in 2006. "Based on these figures and trends, we estimate that the stock of FDI stood at $44 billion or 27 percent of GDP in 2006. With international oil prices forecast to remain above their long-term average over the next five years, and concomitant liquidity in the region therefore expected to remain high, we expect the stock of FDI to exceed $100 billion by 2011 (around 33 percent of GDP)." The UAE Ministry of Finance and Industry in its Investment Environment Report 2006, stated that in 2006 the EU accounted for 35 percent of FDI, followed by other GCC countries with 26 percent, Asia-Pacific (led by Japan) with 19 percent and the Americas with 2 percent. “In many GCC countries there is a strong cultural bias towards investing in physical assets or direct business transactions,” the Barclays report said. “Real estate remains by far the preferred asset class for investors in the GCC,” said Osmah Ibrahim Al-Saleh, executive vice-president of the Investment Dar, an Islamic finance and investment institution based in Kuwait. “Investors are familiar with this asset class - there is a ‘bricks-and-mortar' mentality.” This preference for the tangible has been reinforced recently by two separate events: first, the bruising stock market correction of early 2006, which left many retail investors in the region nursing significant losses; and second, the real estate boom in the UAE and elsewhere, where property prices have been increasing rapidly for a number of years. Some analysts warn, however, of a bubble forming, with concerns being raised about a glut of new-build property about to enter the market that could cause an excess of supply. Despite a deepening of the investor culture in recent years, the process that investors adopt for asset allocation is not always carefully considered, the report further noted. Al-Saleh pointed out that, traditionally, many investors have merely chased the most attractive returns. He believes, however, that this situation is starting to change. “Over the past two years, there has started to be a much greater focus on discipline in asset allocation in the GCC,” he said. “Investors are moving away from the mentality of just chasing the highest returns and putting all your money in one basket. There is much greater emphasis now on portfolio diversification and allocation in terms of asset classes, geography and regions, and so on.” The growth in private wealth has attracted a large number of private banks and wealth-management firms to the region. “You certainly see a trend for private banks putting assets on the ground, and you're also seeing a lot of interest from fund managers who want to be closer to their clients,” Pearce said. “They can do that because in Bahrain, Dubai and Qatar there are legal and regulatory constructs that allow them to operate in an environment that they understand,” he added. __
