Rapid Growth of GCC Investment Income in the Coming Years Nader Habibi

Published July 29th, 2007 - 12:56 GMT

Careful investment of surplus oil wealth can help generate a major source of income for Gulf Cooperation Council countries in the long run and reduce their vulnerability to future fluctuations in oil revenues.  The record high oil revenues of last four years have enabled GCC countries to generate large current account surplus in recent years. In 2006 the aggregate current account surplus of GCC states stood at $203 billion compared to $89 billion in 2004.  Indeed when we add up the GCC surpluses for 2002-2006 it amounts to $537 billion. This implies that GCC countries added half a trillion dollars to their already large portfolio of foreign assets during this five year interval. It is then no wonder that the governments and private investors of GCC countries have been on a shopping spree in global real estate and financial markets.
The total size of GCC countries foreign assets are not exactly known but due to the international communities’ strong interest in this matter several attempts have been made to estimate them. A recent study by the International Institute of Finance estimated GCC’s assets $1550 billion in 2006. This figure demonstrates the immense financial power of GCC countries in the Global Financial markets. Inside GCC, the United Arab Emirates holds the largest portfolio of foreign assets ($600 billion), followed by Saudi Arabia ($450 billion) and Kuwait ($400 billion).
These large assets will generate substantial investment income for GCC countries. With the recent rise in global interest rates and the continuing strength of the global economy, it will be reasonable to assume that the GCC assets earn at least a 7% rate of return in 2007 and will generate similar or higher returns in the next five years. (This is a very conservative estimate. Most well diversified international investment funds have generated larger long-term returns in recent decades.) This conservative rate translates into approximately $110 billion worth of investment income on GCC’s $1550 billion global portfolio in 2007.
Furthermore the size of GCC foreign assets is certain to grow even larger in the next few years. The strong global demand for oil and natural gas products is expected to continue and support the price of oil in the $50-$70 per barrel range for several years. Based on this projection GCC countries can look forward to substantial oil revenues in the near term. Although the strong economic growth of recent years will increase the volume of imports, the import bill will still remain below export revenues and result in current account surpluses in the next five years. Even with very conservative projections for oil production levels the GCC states external surplus (excluding investment income) is likely to exceed $100 billion per year through 2012. (Even with highly conservative revenue estimates the 2007 and 2008 are expected top be at least $160 billion and $120 billion, respectively.) These surpluses will add an additional $680 billion to GCC foreign assets during 2007-2012.

GCC foreign assets at start of the year $billion Rate of return on total asset portfolio Investment Income $billion Additional investment from CA surplus $Billion
2007 1550.0 7% 108.5 160
2008 1764.3 8% 141.1 120
2009 1954.8 7% 136.8 100
2010 2123.2 7% 138.0 100
2011 2292.2 7% 160.5 100
2012 2472.5 7% 173.1 100
Note: The asset value at beginning of 2007 was reported by IIF. The rest are Author’s calculations. Asset estimates are based on the assumption that 50% of the investment income will be reinvested each year.

 


The GCC countries which are currently flushed with liquidity are also likely to reinvest a large portion of the investment income that their foreign assets will generate each year. Under the highly conservative assumption that only 50% of investment income will be reinvested, these countries will reinvest an additional $54 billion in 2007 and this amount will grow to $86 billion in 2012. Consequently, the GCC countries are expected to reinvest a total of $430 billion in their foreign assets during 2007-2012.
Adding up the total amount of additional investment during next five years, the total foreign assets of GCC countries are expected to approach $2500 billion by 2012 and generate approximately $173 billion in investment income. This will be a significant source of income for GCC countries and will complement their ongoing energy export revenues. The merchandise export earnings of GCC countries amounted to $477 billion in 2006 and are expected to reach $625 billion by 2012. Based on the projections in this article the GCC investment income will then stand at 28% of merchandise export revenues. A significant amount by all accounts.

*Nader Habibi is the Henry J. Leir Chair in Economics of the Middle East in the Crown Center for Middle East Studies (Brandeis University).

 


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