Gcc trade and investment flows the emerging market surge

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Sponsored by Falcon & Associates

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Foreword

Sustained economic growth in the Gulf Cooperation Council (GCC) countries, buoyed by government

spending, has provoked intense interest in the region The traditional trading partners—Western Europe, North America and the wider OECD—maintain strong relationships with the GCC, but the emergence of newly dynamic, high-growth economies in Asia and other parts of the developing world is producing new opportunities It looks likely that emerging-market economies will enjoy an increasing share of the spoils

GCC trade and investment flows: The emerging-market surge is an Economist Intelligence Unit

report that explores the changing and growing economic relationships between the GCC and emerging markets It lays out the key findings of extensive research into trade and investment flows between the GCC and different emerging-market regions: Asia; Africa; the Middle East; Latin America; and Eastern Europe/CIS It also discusses the implications of the burgeoning interest in emerging markets for the region’s traditional economic partners in the OECD

Ayesha Sabavala and Ali al-Saffar were the authors of the report, and Jane Kinninmont was the editor Aviva Freudmann and Stephanie Studer also contributed research and ideas

The research has been sponsored by Falcon and Associates, a Dubai-based company

The findings and views expressed in the report are the responsibility of the Economist Intelligence Unit, which conducted the research independently They do not necessarily reflect the views

of the sponsor

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In December 2010 and January 2011 the Economist Intelligence Unit conducted detailed research

and analysis on the trade and investment flows into, and out of, the GCC The data analysed, sourced from a number of international organisations as well as our own forecasts, were supplemented by 14 in-depth interviews with a selection of senior business executives (with responsibility for trade and investment in the Middle East), academics and investment experts The insights from the interviews appear throughout the report

We would like to thank all the participants in the in-depth interviews for their time and help

About the research

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The story of the rise in prominence of the Gulf Cooperation Council (GCC) is by now well known:

the region sits on some of the world’s largest hydrocarbons reserves and has used its massive influx of revenue to fund large-scale infrastructure development and, more recently, economic diversification strategies

Beyond oil, however, the complex and vitally important trade and investment relationship the GCC has with the world is less well known New markets are being sought around the world for a growing range of non-oil goods and services, while, on the investment side, both the well-capitalised sovereign wealth funds and an increasing range of private investors have built up wide-ranging investment portfolios Emerging markets, especially in Asia, are becoming increasingly important economic partners for the GCC

To put this in perspective, 0 years ago, the OECD, a group of developed countries dominated by Western Europe and North America, accounted for almost 85% of all the GCC’s trade But since the 1990s there has been a perceptible shift in the pattern of trade, with emerging markets becoming increasingly important By 2009 the emerging-market share of GCC trade had reached 45% This share has been rising by an average of 11% per year between 1980 and 2009, compared to only 5% a year for the OECD

The Economist Intelligence Unit has conducted a programme of research, analysis and in-depth interviews on the trends that will shape the GCC’s trade and investment flows in the coming years Some of the findings of the report are as follows

lEmerging markets will drive global growth in the years ahead: We forecast that around two-thirds

of the world’s economic growth will be generated by emerging markets in the next five years This means that by 2015 emerging markets are projected to account for 41% of global GDP, compared to an estimated 1% in 2011

l The increasing economic importance of India and China and the economic emergence of Saharan Africa present massive opportunities for the GCC Multinationals operating in the Middle

sub-East already use the GCC as a base for their regional operations, but the GCC also has opportunities further to develop as a base for their expanding operations in Africa and South Asia However, the

Executive Summary

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GCC will also face competition from rival hubs and will need to keep improving if it is to maintain its competitive edge There is a need further to strengthen the labour market, including the local skills base, and the regulatory environment.

l Asia will be the most important emerging-market region for the GCC This is partly a story about rising demand for oil: we forecast that oil consumption in Asia will grow by 4.4% per year on average

over the next five years, while the OECD’s demand is expected to plateau But it is not just an energy story Growth in China and India is now moving into a new phase, from being focused on exports to

a greater focus on domestic demand Rising consumption in Asia, fuelled partly by an expanding middle class, will produce a host of new opportunities for trade Tourism, one of the GCC’s competitive strengths, is already benefiting from the growing Chinese middle class

lMost of our interviewees expressed certainty that China would be the GCC’s most important economic partner by 2020, although India’s historical and cultural links with the region will also

stand it in good stead Nonetheless, South Korea, Singapore, Malaysia and India will remain important

as providers of technology and know-how for the GCC states The GCC states already have an abundance

of capital; in general, their main reason to attract foreign direct investment (FDI) is for the associated transfers of technology

lAgriculture is a promising sector in Africa: As most GCC countries import the bulk of their food

requirements, Africa’s abundance of arable land presents an opportunity for the GCC to implement food security strategies through the acquisition of land for export-oriented farming However, GCC investors need to be aware of legal and political risk in this area

l In Asia and some parts of the Middle East, GCC investment will be channelled into infrastructure development: Large populations and a shortage of capital in Asia provide an ideal opportunity for the

GCC to fill the gap Tourism and telecommunications, in particular, will be attractive industries for GCC investment In the Middle East, growth in Iraq has put a strain on the poor infrastructure and there are significant opportunities to invest in the region, particularly in the housing sector

lOverall, the GCC’s investments in emerging markets are likely to focus on tried and tested areas of competitive strength, chiefly energy and services industries and sectors, such as port

operations, tourism, retail, financial services (especially sharia-compliant finance) and telecoms Financial investments will also go into agriculture, minerals and real estate in a broad range of emerging markets

In short, the opportunities are significant, but the rise of new economic powers also means new competition OECD companies and markets will remain important economic partners for the GCC, especially in knowledge-intensive sectors, but will need to work harder to maintain an edge

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Since the onset of the global financial crisis, it has become clear that emerging markets will drive

global growth in the years ahead In 1987 these countries made up just 16% of global GDP, but today they account for 1% By 2015 the Economist Intelligence Unit forecasts that 41% of the world’s GDP will come from countries that are currently defined as emerging markets In 2011-15, emerging-markets are expected to generate just under two-thirds of global economic growth

This is partly because growth in many OECD countries is forecast to be fairly modest, owing to ageing populations, fiscal constraints and market maturity It also reflects favourable demographics, growing levels of investment, and the rapid adoption of technology in many poorer countries To some extent, emerging-market growth may also be a self-fulfilling prophesy, as confidence in emerging-market opportunities prompts greater investment, boosting growth

This dramatic shift of economic power will also be accompanied by social, political and cultural shifts In one symbolic illustration, in 1989 the ten tallest buildings in the world were all in North America; in 2011, seven of the ten are to be found in Asia

Emerging markets are by no means a homogeneous bloc Some will grow faster than others In addition, an official designation as a “developed country” does not necessarily mean a reduction

in poverty and inequality; indeed, these indicators often worsen in periods of rapid growth The substantial rewards on offer to investors in high-growth emerging markets will also be accompanied

1 The rise and rise of emerging markets

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by high risks; state institutions may not be well-developed and rapid population growth will present political and social challenges, as well as opportunities

What does this shift mean for the GCC?

The growing importance of emerging markets presents massive opportunities for the six states

of the Gulf Cooperation Council (GCC): Bahrain;

Kuwait; Oman; Saudi Arabia; Qatar; and UAE

The GCC is geographically well positioned to act

as a trading hub between the east and the west, expanding on a role that it played for centuries before the discovery of oil Both trade and tourism can leverage on this strategic location, a point highlighted by John Grant, senior vice-president of

a US-based route-development company, Airport Strategy and Marketing, who told us “The Middle East is almost an acronym for the middle of the world’’ The GCC governments are also proactively pursuing economic, financial and diplomatic links, particularly with Asia, and are developing shipping and aviation links with a widening range of emerging markets

Our interviews with GCC businesspeople and investors indicate that there is a strong belief in the Gulf countries that emerging markets will be increasingly important economic partners Asia—

especially China and India—dominates the picture

Meanwhile, opportunities in other areas, such as Latin America and Eastern Europe, may be relatively overlooked

Multinational companies operating in the Middle East already use the GCC as a base for regional operations In the coming years, more will also use the area as a base for their growing activities in Africa and South Asia, especially when doing business in countries with weaker infrastructure and higher political risk For instance, a spokesman for Unilever,

a consumer goods multinational, notes that, for his firm, “The GCC is an attractive market in its own right

on account of a young, growing and increasingly affluent population, but it also provides a base for operations into Africa.” Markus Wildi, president for the Middle East at the Dow Chemical Company, told

us, “Our company believes the GCC is on track to becoming the world’s petrochemical hub”, because

of its energy resources and its current industrial development Hadi Damirji, deputy chairman at the London-based Trinity Group, notes that “the GCC has developed a brand name as a hub for the Asian economy,” although he adds that doing business between the GCC countries is not always easy The rise of new emerging markets certainly presents opportunities for the GCC, but will also bring with it new competition from emerging-market multinationals and from rival trade and financial hubs Maintaining competitiveness as a hub will depend on maintaining and building on the quality

of infrastructure (especially international transport links), regulations and ability to attract talent

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In 1980 the OECD, dominated by countries in Western Europe and North America, accounted for

almost 85% of all the GCC’s trade The dominance of these blocs reflects geopolitical, as well as economic, relationships that stretch back centuries before the discovery of oil in the Gulf Since the development of the GCC’s oil and gas resources, trade with the OECD has largely involved the GCC exporting energy, while the OECD countries have provided a broader range of goods, from agricultural commodities to industrial materials and consumer goods For much of the past 20 years, the trade balance has been in the GCC’s favour This has left the GCC with a substantial capital surplus, most of which has been re-invested in OECD markets

Since the 1990s there has been a perceptible shift in the pattern of trade, which accelerated in the early years of the last decade: growth in Asia, on the back of the rise of China and India, have made these markets far more prominent partners to the GCC By 2009 the emerging-market share of GCC trade had reached 45% This share has been rising by an average of 11% per year between 1980 and

2 The story so far: The shape of trade and investment flows to and from the GCC

Growth in oil demand

(%)

-6 -4 -2 0 2 4 6 8

Non-OECD OECD

15 14

13 12

11 10

2009

Source: Economist Intelligence Unit.

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2009, compared to only 5% a year for the OECD

In the coming years, oil demand will be an important factor in the shift in trade to emerging markets Our forecasts suggest that, whereas demand for oil will grow by only 0.1% over the next five years in the OECD, demand growth in Asia will reach 4.4% In emerging markets as a whole, demand for oil will rise by an average of .9% per year, according to our projections

The increasing importance of non-OECD countries does not necessarily signal the absolute decline

of the OECD, which is likely to remain an important trading partner and investment destination But the OECD countries—and businesses based there—will need to work harder to compete for market share and can no longer rely on being the first port of call for Gulf businesspeople or investors

OECD GDP growth vs emerging markets GDP growth forecast

(%)

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Emerging markets OECD

Forecast 2010-12 Avg 1995-2009

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Asia

The current picture

Asia is clearly the most important emerging-market region for the GCC In 1980 just 10% of the GCC’s total trade was with Asia By 2009 this share had risen to 6% Growth in trade has risen by 12% per year since 1980, double the rate of growth in trade with the OECD If this level of trade growth continues, Asia will be the GCC’s biggest trading partner by 2017, accounting for a greater volume

of trade than the OECD India, China and Indonesia account for more than half of the GCC’s trade with Asia

The Economist Intelligence Unit forecasts that oil consumption in Asia will grow by 4.4% per year

on average over the next five years, while the OECD’s demand is expected to plateau According to Raja Almarzoqi Albqami, director of the Saudi-based Institute of Diplomatic Studies, “58% of China’s oil imports currently come from the Middle East region, and by 2015 this share will increase to 70%.”

3 The outlook by region

Regional oil consumption growth, 2011-15

(% change)

(a) Asia includes India and China.

Source: IMF, Direction of Trade Statistics.

-1 0 1 2 3 4 5 6 7 8

-1 0 1 2 3 4 5 6 7 8 OECD Asia (a)

China

15 14

13 12

2011

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Drivers of growth

Economic growth in Asia averaged 5% per year between 2005 and 2009, and reached over 8% in

2010 However, these figures belie much more significant growth in some of Asia’s largest and most important economies, with growth in India and China nearing 10% a year

Stretching back decades, Asian growth has traditionally been predicated on a strong manufacturing base This has worked well, with export-driven growth propelling the continent into the global economy

Over the next decade, Asian growth will enter a new phase, with domestic demand, particularly the local consumer market, which has substantial savings to draw on, becoming increasingly important This translates into new opportunities to export goods and services to Asia The increasing importance of the middle-class Chinese consumer is already evident to retailers in Dubai, ranging from the top end of the luxury market to airport duty free, where Chinese beverage brands are now evident alongside the traditional European and American products The growth outlook for the GCC’s primary trade partners in Asia looks particularly strong; ties with China and India are expected to strengthen markedly over the next ten years, as these economies continue their meteoric rise For GCC investors, expected returns on investment in Asia compare very well with those in the OECD

But there are risks to this positive picture; Asia’s export-oriented economies are inextricably linked to the performance of international markets for their goods The global economic downturn in 2008-09 hit export-oriented economies in Hong Kong, Singapore, Malaysia and Taiwan particularly hard, and a double-dip recession would have similar repercussions there The risks are lesser in the GCC’s main trading partners, India, China and Indonesia, where domestic demand is more significant There are also concerns about loose monetary policy, which could lead to asset-price bubbles This would be doubly dangerous in the event that commodity and oil prices stay high

India, China and Asean 6 trade as a proportion of total trade with the GCC

(%)

0 2 4 6 8 10 12 14 16

Asean 6 India

China

09 08

07 06

05 04

03 02

01 2000

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Opportunities:

Energy trade: Oil and gas dominate GCC exports to Asia, and are likely to continue to do so as

industrialisation and rising consumer incomes contribute to an increasing demand for hydrocarbons The story of the growth in China’s demand for oil is well known and during the US recession the country briefly overtook the US as the biggest buyer of Saudi crude China is likely to regain this position within the next five years The GCC will be crucial to the future of the global oil market, although China will source some of its oil from newer producers, like Sudan and Angola, where it has more of a chance of being the dominant partner in the political relationship Indian oil demand is also something to watch Rachel Ziemba, a senior research analyst at New York-based consultancy, Roubini Global Economics, and a specialist in sovereign wealth funds, notes that as India’s population makes “the car transition”, there will be significant opportunity for increased oil trade

Energy investment: Kuwaiti and Saudi national oil companies are already investing in refineries in

China, while China’s Sinopec is involved in gas exploration in Saudi Arabia

Consumer goods will remain one of the GCC’s major imports from Asia At present, this sector is

strongly dominated by China However, Shin-Ichiro Fukushima, the executive director of the Japan External Trade Organisation, told us “There is a movement of manufacturing locations from China to Thailand and Indonesia, because costs are increasing in China.” He adds that “Transportation costs between the GCC and South East Asia will be lower, facilitating trade.”

Industrial materials—notably chemicals, steel and aluminium—will be increasingly important GCC

exports to Asia, allowing the GCC to diversify its export base into more value-added sectors than hydrocarbons

Growth in Asia compared with the OECD

(%)

0 1 2 3 4 5 6 7 8 9 10 11 12

OECD Asean 6

India China

20 19

18 17

16 15

14 13

12 11

2010

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Services will also be a crucial component of GCC-Asia economic relations Most Asian countries have

vast infrastructure development needs This, coupled with a shortage of capital, provides ideal opportunities for the GCC to step in Notable investments by GCC companies in Asia are evident in the

telecommunications industry, where giants such as Etisalat and Saudi Telecom have obtained licences

to operate in India, Indonesia, Malaysia and several smaller Asian countries The expansion of Asia’s middle classes will boost tourism, which will be supported by the expansion of routes to Asia by the

big three airlines in the Gulf: Emirates; Etihad; and Qatar Airways The UAE’s inclusion on China’s list

of “approved destinations” since 2007 has resulted in significant Chinese tourism to the country, and other GCC states are likely to seek similar status, particularly Qatar, in time for the 2022 football World Cup We estimate that around 50m tourists from China travelled abroad in 2009 This figure is expected

to more than double in the next five years Mr Grant of Airport Strategy and Marketing notes that smaller airlines in the GCC, including the budget airlines, will need to develop new niche markets in an increasingly competitive international landscape This is likely to lead to new routes into second-tier Asian cities

Reverse capital flows: A key trend that we will see emerging in the next decade is the growth of

capital flows from Asia into the GCC China will become an increasingly important capital exporter

to the rest of the world And while average incomes in countries like India and Malaysia will be well below GCC norms, emerging Asian corporations, financial institutions and wealthy individuals will be important investors One indication of this trend came in reports that around one-third of demand for Dubai’s September 2009 sovereign bond came from Asia In Oman, a number of Indian companies have invested in manufacturing for export back to the Indian subcontinent, taking advantage of the low-tax environment and well-developed port infrastructure

Islamic finance synergies

Islamic finance has grown rapidly in the past five years in both the GCC and Asia Total assets of the

500 largest Islamic banks grew year on year by almost 29% in 2009, to an estimated US$822bn, according to Standard & Poor’s Rating Services

Sukuk (Islamic bond) issues totalled US$2.bn

in 2009, with cumulative issuance exceeding the US$100bn mark The majority of the global issuance took place in Asia, primarily Malaysia, which is home

to the largest sukuk market in the world According

to the Economist Intelligence Unit, around US$41bn

in sukuks have been issued globally since 1996, 75%

of which have been arranged or issued by Malaysia

Other markets, such as Indonesia, are also emerging

as Islamic finance hubs in the region There is

some rivalry between the GCC and Asia over where the natural hub of Islamic finance should be, but more recently there has also been a trend towards co-operation between the different jurisdictions as the industry seeks to establish itself as a credible alternative around the world Sharia standards still vary, but according to the Bank Negara Malaysia (BNM, the Malaysian central bank) a programme of dialogue including Gulf and Asian Islamic scholars has led to a consensus being reached on around 80% of sharia finance issues Asian and Arab states have also come together to support a new liquidity-management body for the industry, based in Malaysia In spite of this, Eckart Woertz, a research associate at the Princeton Environmental Institute, believes that the ‘’GCC appetite for Malaysia sukuks will be limited, because most Malaysian bonds are issued in the local currency, the ringgit”

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Prioritising markets

China versus India?

Asia’s importance to the GCC as a trade and investment partner is certain, but will it be a battle of wills between the two Asian powers, India and China?

China’s growth has been faster in recent years, and its economy and population are both far larger than India’s, but in the next decade, we see India’s growth rates overtaking China’s The two economies have very different structures In China, manufacturing constitutes just over one-third of GDP, more than double the contribution of manufacturing to GDP in India On the other hand, services make up more than one-half of the Indian economy, compared with 40%

He believes that the shift to emerging markets is predicated on manufacturing and since “India is less

of a manufacturing powerhouse than China”, China will retain its role as the leading trading partner to the GCC

However, other interviewees emphasised the importance of historical and cultural ties in determining economic links Professor Niblock of Exeter told us, “I believe India is not given enough prominence in the general discourse It assumes a different role in the Gulf to China, whose relationship really started developing in 199 when its demand for oil surpassed its domestic supply and picked

up significantly after 2000.” He goes on to expand

on the distinction and says, “ India’s relationship, however, is much more historical, there is a cultural affinity shared by the two regions, and there are 6m Indians in the Gulf.” While most are recent migrants, there is also a long-established Indian merchant community in port cities like Dubai, Manama and Muscat, whose presence in the Gulf predates the British imperial presence in the region Imed Ben Abdallah of Etihad also points to the GCC’s Indian community, saying “India stands to gain from the strong cultural relationship with the UAE China is increasingly becoming significant as the political and economical relationship with the UAE strengthens.”

India vs China growth rates

(%)

3 4 5 6 7 8 9 10 11

3 4 5 6 7 8 9 10 11 China India

30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 2010

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Although India’s cultural ties are stronger with the GCC, India’s economic growth faces some key risks, which, unless addressed, will hinder growth in trade and investment with the GCC Chief among these are infrastructure bottlenecks and a less friendly business environment Mr Grant of Airport Strategy and Marketing sees the existence of “bureaucratic customs and logistics processes” as the main risk, while “The GCC is making it as easy as possible to

do business in the region.” The World Bank’s Doing Business 2011 report ranks India at 14 out of 18

countries in ease of doing business, while China is ranked 78 Overall, however, India has strong growth fundamentals, based on high saving and investment rates, a large, mobile labour force and the rapid expansion of the middle class

The Chinese economy, which the Economist Intelligence Unit estimates to have grown by 10.2%

in 2010, also faces risks Growth, which has been export-driven and boosted by a massive stimulus package, could suffer from a sharp correction in the next five years The withdrawal of the stimulus package, tightening monetary policy, weaker exports

as a proportion of GDP and overinvestment in the economy all pose a threat to economic growth

Whatever the outcome, there is no doubt that both India and China will be increasingly important trade

partners for the Gulf countries

Beyond China and India

The six major economies of the Association of South East Asian Nations (Asean)—Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam—contributed over 1% of the GCC’s total trade in

2008 Although the bloc continues to be extremely important to the GCC, its share of the trade has been eroded by the growth of China and India, whose trade with the GCC has grown at an annual average rate

of 18.5% since 1980 This has meant a major shift

in the pattern of trade with Asia In 1981 China and India accounted for just 10% of Asia’s trade with the GCC, while the Asean-6 made up almost 77% Today, China and India’s share has risen to almost 58% of all Asian trade with the GCC, while the Asean-6 account for 5%

Beyond trade, the Asean-6, particularly Indonesia and Malaysia with their large Muslim populations, have important financial links with the GCC, especially in the growing area of Islamic finance Even South Korea, which has only a tiny Muslim population, has taken steps to develop this sector, which is a clear testament to its confidence in the economic importance of key Muslim countries such as the GCC states

South Korea, Singapore, Malaysia and India will

India, China and Asean 6 trade as a proportion of total trade with the GCC

(%)

0 10 20 30 40 50 60 70 80

Asean 6 China

India

08 06 04 02 2000 98 96 94 92 1980 88 86 84 82 1990

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Risks

N Janardhan, a UAE-based political analyst on Gulf-Asia affairs, notes that ties will Asia are moving beyond a pure buyer-seller relationship Rapidly growing GCC-Asia ties in the economic sphere are already having a notable effect on political relations and will continue to do so In the long term, these strengthened political ties also have the potential to influence the Gulf region’s security arrangements However, he says, “For these long-term considerations and possibilities to translate into realities, both sides will need to run a strategic marathon from economic engagement to political engagement, to perhaps a security engagement in the longer term.”1

1 Mr Janardhan’s view is

supported by Professor Tim

Niblock of Exeter University

Professor Niblock estimates

that “By 2030, there will

be more Indian naval

ships in the Indian Ocean

than [those of] any

other country.” However,

Professor Niblock highlights

China’s cautious approach

and notes that “The Chinese

are perfectly aware of the

fact that oil supplies from

the Gulf are dependent

on the US navy, both in

the Persian Gulf and the

Straits of Malaka, and are

keen to integrate into the

global leadership role, not

challenge it.” Nevertheless,

Mr Janardhan suggests,

there are “opportunities

for the GCC to call on others

for things that have been

traditionally done by the

US”, highlighting the role

China and South Korea

already play in tackling

the piracy issue in the

Gulf of Aden.

remain important as providers of technology and know-how for the GCC states The GCC states already have an abundance of capital, and ultimately do not require foreign domestic investment (FDI) simply for financing Rather, they seek FDI that brings technology transfer, as the GCC region’s own research and development (R&D) has historically been very

limited Chinese investments may prove useful in energy and infrastructure, but the more knowledge-based economies will be more important across many other sectors Of course, there will also be competition between Asian countries and the GCC,

as all try to develop the much desired “knowledge economy”

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The current picture

Africa is becoming increasingly important to the GCC as a trade partner, a trend that we expect to continue over the next decade Trade links are limited at present: trade with Africa accounted for only

.6% of the GCC’s total trade in 2009 (the latest data available) However, trade has increased at an average of 11% per year since 1980 That is more than double the rate of growth in trade between the GCC and the OECD, suggesting that Africa’s share of total GCC exports and imports is likely to keep rising strongly A good indicator of the rising importance of the continent is the variation in how multinationals are classifying the region Traditionally, Europe, the Middle East and Africa have been referred to as the EMEA region, but increasingly, we see multinationals forming new classifications, such as MEA (the Middle East and Africa) and META (the Middle East, Turkey and Africa) Ashish Panjabi, the chief operating officer of Jacky’s Group of Companies, an electronics and IT company based in Dubai, says some multinationals run their Africa businesses from Dubai because of port and air connections, noting it can be easier to fly to African cities from Dubai than from other parts of Africa (where air routes are relatively underdeveloped) Jacky’s Group is now focusing on Africa and has invested heavily in retail, distribution and after-sales service in Kenya, Tanzania and Uganda Africa is a particularly fragmented and diverse region; there are major disparities between countries within Africa, both in terms of their trade patterns and growth rates Egypt and South Africa, the second- and fifth-most populated economies in the region, respectively, accounted for over half of all Africa’s trade with the GCC in 2009, but both have grown at below-average rates for the region since 1995 The GCC states are expected gradually to move into newer, faster-growing African markets

Ms Ziemba of Roubini notes that, while the GCC has had particularly strong links with North Africa for cultural reasons, she now sees “a steady increase, albeit from a very low base, in [GCC investment

Africa growth trajectory vs world average and emerging markets average - 1995 - 2009

(%)

0 1 2 3 4 5 6 7 8

0 1 2 3 4 5 6 7 8 Emerging markets Africa avg

09 08 07 06 05 04 03 02 01 2000 99 98 97 96 1995

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in] East Africa, Nigeria and South Africa”

Drivers of growth

Africa’s economy has grown by 5% per year over the past 15 years, driven by rising exports (especially commodities), increased investment and economic policy liberalisation The fundamentals of growth

in Africa, as listed below, are strong

lDemographics The continent will have the youngest, fastest-growing and fastest-urbanising

population in the world Its population has increased from around 110m in the mid-19th century

to an estimated 1bn people today This is set to double before 2050 Global executives cite Africa’s demographics as one of the continent’s biggest competitive advantages, although it is also a source

of political risk in countries where the job market, infrastructure and public services cannot keep

up with rapid population growth Overall, the region has also gradually become more peaceful and democratic in the past 15 years—recent events in Egypt, Tunisia, Libya and Côte d’Ivoire serve as a reminder of continued political risk

lPolicy improvements The apparent willingness of countries in Africa to implement economic

reform has improved the attractiveness of the region to foreign investors and businesses, who will increasingly be keen to tap into the continent’s high-growth markets at a time of sclerotic growth in the developed world

lChina’s investments China’s high-profile investments in Africa have also helped to put the

continent on the global investment map China’s meteoric rise over the last two decades and the expectation that it will grow faster than most other major economies well into the future, means the Chinese authorities are on a quest to secure access to raw materials China is finding many of the minerals and oil it needs in Africa, and is building much-needed infrastructure in return However, China’s interest in Africa goes beyond sourcing raw materials Mr Panjabi of Jacky’s Group of

Africa GDP growth vs world GDP growth, 1995 - 2012

(%)

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 World Africa

12 11 10 09 08 07 06 05 04 03 02 01 2000 99 98 97 96 1995

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Companies believes that China is “also looking to cultivate markets they can sell to Africa is a virgin market From a long-term manufacturing point of view, costs have increased in China and they will start to invest in manufacturing in Africa” India and Brazil are also increasingly important players

in the new “scramble for Africa” China’s investments in Africa are not expected to be a threat to those of the GCC in Africa, as the two blocs differ in their strategic interests According to Mr Woertz

at Princeton, “The GCC would not really go after minerals in Africa for reasons of industrial policy like China does, as the GCC does not have the processing capabilities They only have some interests in alumina and iron ore production on the continent.”

Opportunities for links with the GCC

lAgriculture: The GCC is attracted to Africa’s abundance of arable land, particularly as the Gulf

states move towards implementing food security strategies in the wake of the 2008 global food

Africa: key resources

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So om

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Camer on oo o

Ga Gab bon

Equatorial Guinea São Tom TT é & Príncipe

CAR

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Ug g gaanda a

Kenya

Tanzania TT

R

Rw w wanda anda an Burundi

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zambi ozam oz

oz a o que iiimbabwe

Angola

N Naamibia a Botswana

South Africa

Lesotho Swaziland alaw wi w wi

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oorrrro occo o

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W ssttte ttt rrn e rr Sa Sah ahara ha rr

ea Guinee Sierra Leon one n ne Libe berrria ia

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