Burgeoning Gulf Oil Coffers Pose Challenges
A new report by the Mckinsey Global Institute ighlights the ballooning oil revenues of the six Gulf Cooperation Council (GCC) states – Bahrain, Kuwait, Saudi Arabia, Oman, Qatar and the UAE – and the challenges they face in what to do with it.
If oil maintains an average price of $70 a barrel over the next 14 years, GCC states will see $6.2 trillion in revenue, or triple the revenue of the previous 14 years. At $100 a barrel, that number will rise to $9 trillion, according to the report The Coming Oil Windfall In The Gulf.
In 2006, the GCC states together had net capital outflows of $202 billion, joining China to become the world’s largest sources of surplus capital.
This massive amount of capital will give new weight to the financial decisions made by gulf leaders. “Their foreign-investment choices will affect interest rates, liquidity, and financial markets around the world… This new fortune comes with new risks. A flood of liquidity into global markets could lead to asset price bubbles, fuel profligate lending, and result in poor use of global capital.” That is, worries that gulf state financial elites will repeat past mistakes weigh heavily on western policy makers’ minds.
The report estimates that revenue from the oil windfall already reached $1.9 trillion at the end of 2006. This figure is equal to the GDPs of India and Brazil combined. By 2020, the authors estimate, “new foreign investments from the GCC could amount to more than $3.5 trillion.”
Similarly, by the same year, domestic investment in GCC economies could total $3 trillion. Much of this capital will be aimed at job creation. “More than 40% of the population is under the age of fifteen.”
As the report notes, recent moves by GCC state sovereign wealth funds have prompted widespread interest and even concern among some political elites. “Overall,” MGI believes, “we estimate that about two-thirds of the GCC’s foreign wealth in 2006 was held by various types of government investment funds… a large share” of that money is in traditional sovereign wealth funds.
GCC foreign investment, however, is anything but monolithic. The different types of SWFs and private investment companies vary as much as their investment strategies.
The historical reliance of GCC SWFs on external asset managers and “funds of funds” is expected to decline: GCC companies have grown more comfortable with high-profile, media attention-grabbing deals.
The question today is whether in this new oil boom, history will repeat itself and nature’s bounty will again be frittered away, or whether it will spur a burst of investment and economic activity that transform the Gulf economies for years to come.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.