The Gulf looks to Asia to grow trade

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. East Asia, excluding Japan, 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. It 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, which is 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 7%.

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

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 became 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. The UAE and Oman have also gained substantial amounts of revenue from oil exports to China, while Qatar is by far the largest liquefied natural gas (LNG) exporter to China. The state shipped 6.73m tonnes in 2014, as well as supplying a 90,000-tonne LNG cargo in August 2014 to the China National Offshore Oil Corporation. Even so, this is not the only market for GCC hydrocarbons exporters, with South Korea and Japan also absorbing significant Gulf crude and gas supply. The two countries are Qatar’s largest LNG markets. The state supplies crude oil as well as 18% and 30% of all Japanese and Korean LNG imports, respectively.

Looking Beyond Energy

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 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 or retained Asian money that would have been remitted. “The GCC views Asia as more than an oil importer now,” said Janardhan.

Inbound Investment

Indeed, Asian firms are driving many signature projects in the GCC. There are currently 44 Japanese and 20 South Korean firms operating in the Gulf. In Qatar the majority of the first entrants helped to develop oil and gas assets, but now can be found in a variety of industries, including ICT, health care and manufacturing, among others. These companies are most notably involved in construction, with iconic projects like the new airport, Doha Metro, Msheireb Downtown, and roads and expressways.

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, in addition to 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 RAK-based Union National Air Land & Shipping Company, told OBG.

Asia

GCC investment in Asia is 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 in 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 Kuwait Finance House and Saudi Arabia’s Al Rajhi Bank, 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. Medical tourism is also leading to more opportunities. The emirate’s leading private hospital, RAK Hospital, is targeting new foreign patients from Asia in line with the UAE’s medical tourism strategy, and in January 2015 RAK Hospital partnered with India’s Shalby Hospital to offer a new knee replacement surgery.

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 across 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 and expanded over the coming years.