Gustav Boëthius, an MEI Researcher, published an article in Singapore’s Straits Times today entitled “Springtime for Singapore Investment in Gulf Countries.” Because the GCC countries are diversifying their economies (due to the fact that hydrocarbon exports are not sustainable) as well as looking to provide private sector jobs for an increasing number of unemployed youth, opportunities for investment in such fields as petrochemicals are on the rise. “Singaporean participation in petrochemical enterprises is certain to generate lucrative dividends,” Mr. Boëthius wrote, concluding, “For Singaporean businesses and investors there is much to gain from greater focus on the Gulf States. While the ‘Arab Spring’ has had many dramatic consequences for the region, considerable opportunities for the future are also emerging.”
The article is replicated in full below.
Springtime for Singapore Investment in Gulf Countries
Considerable opportunities are emerging for Singaporean businesses in the member states of the Gulf Cooperation Council (GCC) which, confronted with both popular unrest and a changing world energy market, are compelled to pursue economic diversification and liberalisation.
The GCC’s dependence on hydrocarbon exports is unsustainable in the long run. At a time when energy consuming countries are entering a low-carbon future, oil exporting nations will need to broaden their economic base and open up to foreign investment.
Although revenues from oil and gas exports constitute a large proportion of the GDP in the GCC countries (more than 60% in the organisation as a whole), changing energy demands need not spell economic ruin for these countries. On the contrary, a green revolution could provide good incentives to move away from low-tech oil extraction and to develop the more value-added sectors of the region’s economies.
At the same time, and perhaps more urgently, the recent unrest in the region has highlighted the dangers of high unemployment to the GCC’s policy makers. The state can no longer be expected to absorb increasing numbers of unemployed youths and job opportunities have to be created in the private sector. By promoting economic diversification in the private sector, decision makers in the region can solve both problems simultaneously.
In this context, Singapore is in an excellent position to contribute to, and to benefit from, this development. Singapore currently has a considerable net import deficit in its trade with the GCC. With Saudi Arabia alone, Singapore has a net trade deficit of US$14 billion.
As the GCC economies are forced to move away from traditional hydrocarbon sales, strategic investment in GCC growth areas, and in particular the petrochemical industry, will be an effective way in which to even out this imbalance.
The petrochemical sector in the GCC has an impressive track record. The Saudi Arabian Basic Industries Corporation (SABIC) is an example of a GCC success story. The company, set up in 1976, was protected from political interference and was allowed to partner with international players, including Dow Chemicals. SABIC was backed by the Saudi state and acquired one of the most efficient corporate managements in the region.
Over the years, the company’s output has continued to grow, despite global economic downturns. The company’s output quadrupled between 1992 and 2010, when the company exported 66.8 million tonnes of chemicals. Alongside the national oil company Saudi Aramco, SABIC has become one of Saudi Arabia’s flagship enterprises, and it is emerging as one of the world’s leading producers of petrochemicals.
Singaporean participation in petrochemical enterprises is certain to generate lucrative dividends. The explosive growth in this sector has in part been facilitated by the cheap availability of chemical feedstocks in the region, making the Gulf companies more than twice as profitable as their international competitors. As the Asian leader in the field, Singapore’s petrochemical know-how gives local companies an edge in the Middle Eastern markets and increased access in this sector is likely to greatly benefit Singaporean companies.
The success of economic diversification programmes in the Middle East has largely been determined by their level of political support and cooperation with foreign companies. Regional and global developments are motivating the region’s leaders to diversify their economies, develop their business sectors and allow companies to enter foreign partnerships – hence ensuring political support for such enterprises. At a time when Singapore’s relations with the Gulf countries are strengthening, the possibilities for successful strategic industrial partnerships between Singaporean and GCC companies are growing.
Today, more than a hundred Singaporean companies are active in the GCC and many Singaporeans are working in the Middle East region. Singaporean business activities in the GCC vary, with notable examples including a US$1 billion investment in the Omani power sector, maintenance contracts for the Saudi oil industry and water sector development.
Moreover, the completion of the Singapore-GCC Free Trade Agreement (FTA) will see a dramatic reduction of trade barriers for key commodities such as petrochemicals, telecommunications equipment and halal foods, to mention but a few. It is however clear that the full potential of Singapore-GCC trade relations has not yet been realised.
For Singaporean businesses and investors there is much to gain from greater focus on the Gulf States. While the “Arab Spring” has had many dramatic consequences for the region, considerable opportunities for the future are also emerging. With some support and investment, the region has the potential to generate many more SABICs.
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