| 01 Jun 2008 |
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Investing the Gulf's oil profits windfall
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Despite many uncertainties, the GCCGCC
states will probably be able to finance their own investment needs and those of the world economy to boot. Surging oil prices have turned member states of the Gulf Cooperation Council (GCC)Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)--into financial powerhouses, and they're just getting started. Their companies, sovereign wealth funds, and wealthy individuals could invest trillions of dollars beyond their borders by the end of the next decade, according to new research from the McKinsey Global Institute (this article is excerpted from a longer report, The Coming Oil Windfall in the Gulf, available online.)
The GCCGCC states already hold roughly $2 trillion in foreign assets, maintain large stakes in companies from Sony to Nasdaq, and have purchased, outright, companies like GE Plastics and Barneys New York. MGI research estimates that exports of crude oil will earn these states $5 trillion to $9 trillion from 2007 to 2020 and that they will invest 30 to 60 percent of their oil windfall abroad. The price of oil and the apparently increasing amounts that the GCCGCC states invest domestically will determine how much of this money flows overseas.
MGI's conclusions rest on a combination of interviews (shedding light on the GCCGCC's shifting economic goals and asset allocation strategies) and economic modeling (which employed a national-accounting approach to model capital outflows). Using economic forecasts from institutions such as the International Monetary Fund (IMF) and the experience of McKinsey's industry experts, we calculated the GCCGCC economies' total expected revenues from oil and nonoil sources alike. We then developed a range of plausible domestic-investment levels and derived capital outflows as the difference between total revenues and domestic investment. This approach allowed us to forecast how oil prices, domestic investment, and capital flows will interact.
states will have available to invest. Even at $50 a barrel, they would earn a cumulative $4.7 trillion by 2020--2.5 times their earnings over the past 14 years. At current prices, floating around $100 a barrel, they would earn $8.8 trillion by 2020.How much of this capital will be deployed domestically? Since 1993, GCCGCC
investment rates have averaged 20 percent of GDP, on par with European and US levels but almost one-quarter lower than the 24 percent average investment rate of Brazil, China, India, and Russia combined. If the GCCGCC states continue to increase their domestic investments by the rate prevailing since 1993--6.1 percent annually--by 2020, cumulative domestic investment will reach $3.2 trillion, or $230 billion a year.Current trends suggest that a growing share of petrodollar wealth will be invested in local financial markets, to spur regional development, rather than abroad. Already the GCCGCC states' wealthy private investors hold an estimated 25 percent of their portfolios in local financial products, up from 15 percent in 2002. What's more, a new generation of GCCGCC leaders has announced plans to boost domestic investment in hopes of diversifying the region's economies beyond oil, generating jobs to employ their swelling populations of young people, and building vibrant new cities.
To read the full article, click on the link below:
Investing the Gulf's oil profits windfall
Kito de Boer, Diana Farrell, and Susan Lund
© The McKinsey Quarterly 2008
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