Remarks on GCC Economic Issues by Dr. Odeh Aburdene

The National Council on U.S.-Arab Relations recently organized and administered a seminar, moderated by Council President and CEO Dr. John Duke Anthony, on various aspects of the Gulf Cooperation Council and its members: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. In addition to Dr. Anthony, the speakers were international investment advisor Dr. Odeh Aburdene, independent consultant Ms. Randa Fahmy Hudome, scholar Ms. Molly Williamson, the U.S. Department of State’s Mr. Joshua Yaphe and Mr. Andrew Rabens, and National Defense University Near East South Asia Center for Strategic Studies representative Mr. Robert Sharp. The occasion for the seminar was in commemoration of the GCC’s 31st anniversary since its founding in May 1981.

The National Council on U.S.-Arab Relations’ Capital Seminar on

“The Gulf Cooperation Council at Thirty Plus One:
Implications for GCC and U.S. Interests and Policies”

Transcribed, Edited, and Revised Remarks on GCC Economic Issues

by Dr. Odeh Aburdene

The Ronald Reagan Building and International Trade Center

Washington, D.C.

May 24, 2012

I agree with you Dr. Anthony that there are many people in Washington with opinions about the GCC but very little knowledge it and that one can apply the same to the whole region. What I’m going to do is focus on economic and financial aspects of the GCC as they relate to the global economy and to the U.S. economy in particular.

GCC Economic Resources 

Dr. Odeh Aburdene

Dr. Odeh Aburdene

First, when we look at the GCC, it possesses 40 percent of the world’s oil proven reserves and 25 percent of the global gas reserves. At the moment, the GCC is producing nearly 16.5 million barrels. This accounts for 20 percent of the total worldwide production of oil. In 2011, GCC exports reached $538 billion. In 2012, they could range from $530 billion to as high as $570 billion. In 2011, these countries accumulated over $350 billion in surpluses. By the end of 2011, their foreign exchange holdings reached $2.3 trillion.

We hear a great deal about China. Everybody is talking about the Chinese foreign exchange reserves that amount to $2.3‐2.5 trillion, as compared with the $2.3 trillion of gross reserves for the GCC. Why did these reserves increase? The key reason is the price of oil. In 2003, the average price per barrel was $30. In 2011, the average price was almost $92 a barrel.

GCC Investment Policies 

Secondly, the investment policy of these countries were overly conservative and we have seen the results of that conservatism in what happened in 2007‐2008 when we had a financial crisis that hit the U.S. and Europe and that continues today because of, among other reasons, Greece, Portugal and Spain. Now, if we look at Saudi Arabia, it had the most conservative policy of any among the six GCC countries. The kingdom invested the bulk of its assets in US Treasury notes and various bonds. When the markets tumbled in 2008 and 2009 the value of Saudi Arabia’s bond portfolio jumped substantially. Secondly, Riyadh did not engage in speculation nor investing in sub‐prime assets like many of the U.S. institutions and European banks. The UAE, Kuwait, Qatar, and Bahrain have all followed a similar policy.

In 1973 I recall, John, that when the price of oil jumped, everybody was saying how the Arabs are going to take over the world with their newly found financial clout. We were told they would take over CBS, IBM, Exxon, and other American corporate giants. However, despite the hysteria, the GCC countries did not do that. Instead, they have invested in U.S. equities such as Microsoft, Time Warner, and Chevron. They have done the same in Europe and Asia. For nations that hardly had a banking system prior to 1970, you had very few big banks in the region. For example, the Abu Dhabi Investment Authority came into being in the mid-70’s. The Saudi Arabian Monetary Authority had a very small staff. Since then, Qatar has established the Qatar Investment Authority and other professional financial investment institutions.

GCC Banking Dynamics 

If we look now at the banking sector over the past five years, that sector’s overall prudence has largely spared it from the significant negative results that others have had as a result of the ongoing international financial crisis. Most of the GCC region’s banks are liquid and have good balance sheets. However, some banks in Kuwait and the UAE have exposure to the real estate market in these countries.

Looking forward, were the price of oil to drop, the income of these countries would decline. If real estate prices were also to fall further than they already have, the results would likely affect negatively the earnings of some of these banks. But as we have seen in Dubai, when its economy had difficulties, the UAE’s public sector quickly realized there was a problem that had to be addressed quickly and not fixed piecemeal. Hence, Abu Dhabi, stepped in, made an advance to Dubai, helped it restructure its debt, and the result is that Dubai recovered and its banks are nowadays financially sound.

GCC Investments and Trade Dynamics Historically, the GCC’s investments have been mainly in the United States and, to a lesser extent, in Europe and in Japan. They also have invested elsewhere in the Arab region. The reason that the United States has been the largest recipient is that it has the largest and most liquid market. In addition, GCC and other foreign investments have found the policy of investing in U.S. bonds, mainly U.S. government bonds, and in bank deposits as well as real estate has provide beneficial.

If we look at the financial transactions between the GCC and the U.S., they involve the following. First, U.S. exports to the GCC countries have been increasing. Last year, for example, the UAE was the largest export market for the United States, with exports over $15 billion. Saudi Arabia was next, followed by Kuwait, Qatar, Oman and Bahrain.

But aside from trade exports, there is the service sector which benefits the U.S. balance of payments, and creates jobs. The service sector includes follow-on training and maintenance contracts related to arms sales and upgrades that benefit America’s aerospace and defense manufacturing companies. The sector also includes tourism, consultancy services, and increasing number of branches of American universities in the region that obtain lucrative fees for their educational services.

Additional revenue to Americans arises from the tens of thousands of students from the GCC countries who obtain their higher education in the United States. Overall, the impact of the American services sector in the GCC region has been a major contributor to the American economy, generating perhaps as much as $30‐40 billion a year.

In sum, from an economic perspective, the GCC’s member-states have been and are likely to remain a major market for the United States, earning billions of dollars annually for American institutions and individuals. What’s more is that a minimum of 50,000 Americans are working and living in the GCC.

The GCC’s Future Economic Prospects 

Looking still further ahead, the bulk of the GCC countries’ income will continue to be derived from the production and export of crude oil as well as the provision of refined energy products and their derivatives in petrochemicals. Their substantial present and foreseeable assets associated with their prodigious holdings of natural resources that fuel the engines of the world’s economies notwithstanding, the GCC countries have little choice but to place increasing emphasis on their development of their human capital.

If one looks at the success of the Western industrialized and service sector economies, there is no escaping the conclusion that human capital and education have been important keys to the Western countries’ productivity, innovation, and creativity, all of which have compares the GCC region’s education systems of fifty years ago with the situation today, the contrasts could hardly be more dramatic. A featured facet of the increasing number of American institutions of higher education in the GCC countries is their emphasis on science and technology.

A missing piece in these endeavors, however is the need for the region to create a venture capital culture where people with money would bet on people with talent, ideas, and excellence. This is not to overlook the extraordinary degree of commercial acumen that has long been demonstrated by the GCC merchant community in terms of trading. But looking ahead 50 years from now, what will be essential to greater and sustained GCC business and investment prowess will be tethered to what these countries can do to excel in the fields of science and technology.

I always tell my friends in the region that, at some point down the road, we need to have an Arab Bill Gates, we need to have an Arab Google, we need to have an Arab MIT. What’s needed over and beyond the needed to continue developing the region’s resources and people is to introduce and nurture an environment and a culture of efficiency, to a greater extent than has been achieved thus far, that will attract talent from the region and from outside the region.

DR. ODEH ABURDENE has had 35 years of experience as an investment advisor and received his doctorate from the Fletcher School of Law and Diplomacy. 

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