GCC trade with Asia growing and diversifying

Following a difficult period for the international shipping market, in 2012 the container route from Shanghai to the Gulf through Dubai saw the second-highest rate of freight growth in the entire Asian region. This was part of an emerging trend of the maturation of GCC-Asia trade. 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 key 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 Patterns

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 emerging Asian economies absorb increasing volumes of goods and services. India jumped from the GCC’s 10th-largest trading partner in 2000 to second in 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.

This eastward shift is not too surprising given the continuing travails of many developed Western economies. With the sluggish recovery from the financial crisis in the EU and the US, Gulf economies have had to look elsewhere. For example, the UK, a traditional trading partner, has experienced faltering growth in the last five years, while the US has fared little better, with annual growth rates below 3%. Conversely, in the same period, China recorded average straight-line annual growth of 8.9% and India achieved a rate of 7%.

While much attention has been focused on this as a result of the global financial crisis, the trend is much older. Indeed, three decades ago the OECD countries 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. “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.

Energy

The GCC-Asia trade relationship was initially founded on the energy requirements of established and emerging Asian economies, and the pivot to emerging markets is partly a product of GCC hydrocarbons producers satisfying the energy needs of those fast-growing economies. In 2013, for example, China accounted for almost a 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. GCC producers 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 30% of the country’s total oil imports.

Abu Dhabi and Oman have also gained substantial amounts of revenue from oil exports to China, while Qatar’s gas exports to the country reached an annual value of $1bn in 2009. Even so, this is not the only market for GCC hydrocarbons exporters, with South Korea and Japan absorbing significant Gulf crude and gas supply too. In 2012, the latest year for which statistics are available, Asia (excluding majority Muslim and Arab countries) accounted for 58% of Saudi Arabia’s crude oil export earnings, illustrating the importance of the region for hydrocarbons-related export earnings.

Looking Beyond Oil

However, the relationship between the two regions can no longer be defined simply 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 points to the improvement in the GCC regulatory infrastructure, including free zone industrial areas, freehold property and maturing stock markets, as measures that have captured Asian investment or retained Asian money that would otherwise have been remitted. “The GCC views Asia as more than an oil importer now,” Janardhan told OBG.

Inbound Investment

Indeed, Asian companies are driving many signature projects in the GCC. In 2009 the UAE awarded a $20bn contract to a South Korean consortium led by Korea Electric Power Company for the development of four nuclear reactors, the first in its nascent civilian nuclear power programme. Moreover, the primary contractor for the world’s tallest man-made structure, Burj Khalifa in Dubai, was South Korea’s Samsung. Across a number of sectors, Asian capital and expertise are exerting greater influence in the Gulf.

Moreover, it is not just public sector spending and the offer of large-scale contracts that have drawn attention from Asian firms. The region’s modern infrastructure and efficient processes, as well as its location, are alerting firms 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 major growth towards Africa, so you are seeing imports from the East that are bound for re-export to Africa,” Nadia Abdul Aziz, the managing director of Union National Air Land & Shipping Company, based in the emirate, told OBG.

Asia

GCC investment in Asia is also on the rise. The UAE was the third-largest investor in Pakistan in the five years to 2012, with $1.4bn, or 9% of Pakistan’s total foreign direct investment (FDI). The UAE was also among India’s largest sources of inward FDI, ranking 10th between 2000 and 2013, and contributing $2.6bn, or 1% of inflows. 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 important strengths for GCC economies, namely the services sector and construction. For example, GCC sharia-compliant banks, such as Saudi Arabia’s Al Rajhi Bank and 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. In other segments, UAE heavyweights such as real estate developer Emaar and port operator DP World have significant interests in Asia.

With many Asian economies shifting their focus from exports and trade to domestic demand, there are opportunities for Gulf companies to tap into the emerging middle class in developing Asian economies and broaden the scope of GCC involvement in Asia. The entry of Asian firms into Gulf markets is unlikely to slow any time soon, while historic links between the regions also look likely to be reinforced over the coming years.