Investment and trade connectivity between the Middle East and Asia is ramping up on the back of commodity (oil and gas) end-markets for the Middle East shifting from West to East as a primary destination. It is a trend that can only have one trajectory: onwards.
Historically, capital flows from the Middle East (predominantly Gulf Cooperation Council - GCC) region had, for more than five decades, focused on the Western markets of Europe and North America. This was the flip side of the oil trade coin, which saw the West collectively ranking as the largest importer of Gulf crude while offering high-grade recycling outlets for petrodollars.
What led to this dramatic shift in the weight of global oil importers is manifold: the rise of Asian economies, led mainly by China and India, and the relative decline in demand from the United States and Europe on the back of shifting energy policies in these countries, not to mention the shale revolution that resulted in the US effectively becoming a net exporter of oil.
These combined forces have rendered Asia the world’s largest oil importer of GCC oil and gas output. Today, more than half of Qatari and Saudi exports, mostly crude oil and liquefied natural gas, go to Asia, with key end-markets being the economies of China, India, Korea and Japan.
Diversified investment corridor
Complementing this steady shift eastbound, investments from the region into Asia have until recently focused solely on the energy sector, for example, building stakes in refining and marketing, in effect securing access for crude end-markets. A case in point would be the 2019 sale of a stake in Hyundai Oilbank to Saudi Aramco for US$1.2 billion.
However, for the past five years, the destination of Gulf flows has been broadening into other industries including autos (particularly electric vehicles), consumer, power, and industrials, among others, such that oil and gas do not make it into the top five sectors in aggregate.
Overall, this newly diversified investment corridor has resulted in US$25 billion merger and acquisition deal flows over the five-year period across multiple industries beyond the conventional.
Some of the more notable transactions in recent years that point to this trend include: Alat of Saudi Arabia acquiring a stake in China’s Lenovo for US$2 billion (technology); CYVN Holdings of Abu Dhabi making a US$1.1 billion strategic investment in NIO Inc of China (EV); and Abu Dhabi’s ADQ investing in India’s Tata Motors’ EV subsidiary.
While such mega deals offer lucrative long-term investment opportunities in growth sectors, they also come with substantial research and development and technology transfer aspects.
One key part of the strategic collaboration between Alat (a subsidiary of the Public Investment Fund) and Lenovo is the formation of a new PC and server manufacturing facility in Saudi Arabia. This will serve the wider Middle East and Africa region and benefit from the kingdom’s clean energy and sustainable manufacturing initiatives.
Financial cooperation deepening
Enhanced financial and monetary cooperation is complementing the trend towards deeper economic integration between GCC and Asian economies.
The three-year local-currency swap agreement signed between China and Saudi Arabia in 2023 (worth around US$7 billion) is a clear signal that both regions are taking economic ties to new strategic levels.
This is in response to geopolitical dislocations as well as internal considerations, especially that Saudi Arabia, the United Arab Emirates and others plan to diversify away from oil dependency as part of their own ambitious economic transformations.
This shift eastward will be further strengthened by a proposed economic corridor connecting the Middle East to India.
Nearly 30% of multinationals surveyed by Citi recently said they were pursuing a “China Plus One” strategy as they build more resilience, with other Asian nations being the primary countries named in their expansion plans.
However, China is, and is likely to remain, an integral part of the global supply chain complex – a role that took decades to establish through the ambitious Belt and Road Initiative, and will only be strengthened by the expansion of the Brics bloc.
The 2023 Brics Summit announced a historic expansion, with plans to admit five new members: Saudi Arabia, the UAE, Egypt, Ethiopia and Iran. Most recently, Turkey has submitted a request to join the bloc.
Notwithstanding the stated Brics mission to create a “more representative, fairer international order” and a “reinvigorated and reformed multilateral system”, this expansion will certainly serve to further accelerate flows between the wider economies of the Middle East and Asia.
It will also open investment flows in the other direction, with major regional economies fast diversifying and aiming to attract more foreign direct investment.
Osama Naji El-Ali is director, Middle East investment banking, at Citi.
