By: Eduardo Gonzalez
The GCC equity market experienced what many are calling a rollercoaster ride caused by recent market corrections in oil prices at the end of 2014. The recent developments, however, also resulted in more attractive valuations of well managed oil companies that have helped retain market confidence and reports indicate the 2015 market looks promising for investors. While oil will continue to account for a large portion of GCC revenues, the volatility in emerging-market currencies will create a shift in the market psychology of the region, and consequently the region will be poised to open its borders to economic competition in other non-oil sectors.
Domestic Sovereign Wealth Investment in Other Sectors: Long-term instability in the oil market will likely cause problems for the GCC’s economic outlook, but the region’s sovereign wealth funds indicate it is well prepared to compensate for the decline in oil revenues. Collectively, the region accounts for 37 percent of the world’s sovereign wealth funds, creating an opportunity for GCC investors to generate growth in sectors the GCC has not traditionally targeted. Many argue that sovereign funds will be the drivers of economic development in the region—in particular, the region’s focus on education and real estate indicates a push to leverage human capacity. Sovereign funds will play an increasingly important role in determining the regions economic trajectory, and taking into the account the surrounding area’s financial trends will ensure investors make the best possible decisions.
Increasing Foreign Investment: Continued free trade agreement (FTA) negotiations with the Association of Southeast Asian Nations (ASEAN), China, Australia, and Europe will allow the region to benefit from more open trade borders and establish strategic partnerships with regions that excel in areas the GCC is targeting. An FTA with Singapore, for example, went into effect at the start of this year that illustrates a commitment to enhancing bilateral trade between the two regions. Ongoing talks with nearby economies will streamline the trade of goods and services, and expand the GCC’s capacity for growth. In effect, the declining profitability of oil may actually accelerate economic reform that could remove restrictions on foreign investment and generate opportunities for the GCC to address its regional challenges.
Domestic Development via Bolstering Human Capital: The GCC will experience two catalysts in 2015 that will increase growth in non-oil sectors: the first is the UAE’s and Qatar’s upgrade to emerging market status in 2014. These states will receive a great deal of attention from foreign investors—that view ‘emerging market status’ as the “Wild Wild West of investing”—and may become critical elements to the GCC’s success across different sectors in the coming years. As the region’s markets become more flexible there will be increasing opportunities for the GCC to guide investments into areas it has traditionally left out. In fact, many argue that the booming markets will be most profitable through diversified approaches. This reality highlights the second factor to watch this year: the region’s focus on increasing human capital. Dubai, for example, struggles to attract expatriates because of rising living costs, and the residential markets in both Dubai and Abu Dhabi have experienced a growing ‘supply and demand’ imbalance. This indicates a low rate of middle class nationals seeking to establish professional networks in a region experiencing infrastructure growth in all sectors. Dubai responded to this mismatch by focusing on improving the quality of education and working with foreign investors to provide first-class education systems that compete with nearby regions. Similar approaches will help the GCC retain skilled nationals and attract highly capable professional that will improve demographic imbalances across the MENA region.
The GCC is prepared to see a great deal of success in 2015, but the region will need to maneuver its efforts to work against a reliance on oil and towards development in other sectors. The GCC expects increased investment across all economic sectors as it relinquishes restrictions on foreign trade; and the region has the opportunity to strategically plan infrastructure developments to retain regional talent. The GCC has the means and resources to maintain its position as one of the most attractive regions for the tech-boom and it will do so by becoming a leader in modern standards.
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