The Ties That Bind the Middle East and Asia

The BW Middle East-Asia Leadership Forum will delve into the growing economic connections between these cash-rich and critical regions

by Brian Bremner and Assif Shameen

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Asia is home to the most economically dynamic pack of economies in the world, a sizable Muslim population, and two ascendant economic powers—China and India—with serious long-term energy needs. The energy-rich gulf states want to diversify their economies and are looking for high-return investments outside the Middle East to recycle a gargantuan sum of petrodollars.

Combine these two factors and you have one of the most interesting capital shifts in the world economy. The economic linkages—capital, trade, and mergers and acquisitions—between these regions have tightened dramatically this decade. Bilateral trade basically doubled to $240 billion during the first half of this decade.

On top of that, gulf states—United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain—could invest as much as $250 billion in Asia by the end of this decade, said Dubai International Financial Center Governor Omar bin Sulaiman during a speech he made in January citing recent research by McKinsey & Co. "Institutional and individual Middle Eastern investors are on the lookout for investment opportunities outside the region, which will offer them high returns on investment," he said.

Joining Forces

Just how far these economic ties will deepen will be one of the more remarkable stories to watch in the years ahead and will certainly be the talk in the hallways of the two-day BusinessWeek Middle East–Asia Leadership Forum that gets under way in Dubai on May 22. Though it is obviously good for energy import-dependent economies such as China, South Korea, and Japan to have close ties with the gulf region, there is more at work than just securing oil supplies.

There are huge opportunities for East Asia economies such as China, South Korea, and Japan to get a piece of the Middle East's massive infrastructure now in development. McKinsey estimates that over the next five years or so, Middle Eastern economies could spend as much as $500 billion on major infrastructure projects, education, health care, and IT.

In Dubai alone, some huge contracts have been handed out to Asian companies. Samsung snagged the primary construction contract for the building of the monstrously high Burj Dubai, a tower complex slated to reach 800 meters (2,624 feet) in height when completed in late 2008. At the same time, a man-made island resort built in the shape of a date palm tree is being constructed off the coast of Dubai by a group of Japanese companies, including Marubeni (MRBNF) and Hitachi (HIT).

Banking on Islamic Finance

For Southeast Asian financial centers such as Malaysia's Kuala Lumpur and Singapore, the evolution of Islamic finance from a novelty to a mass market phenomenon in the Muslim world is a huge opportunity, too. Islamic financial services now comprise a roughly $1 trillion market worldwide, according to credit rating agency Standard & Poor's. (S&P, like BusinessWeek, is a part of the McGraw Hill Companies.)

Islamic mortgages and investment products abide by Koranic laws that ban payment or receipt of interest and prohibit investing in or deriving revenues from businesses such as tobacco, alcohol, and gaming. And assets under management are growing on average 23% per annum or more than twice the pace of conventional global financial services assets, which grew nearly 10% last year.

Islamic banking assets already account for 12.2% of total banking assets in Malaysia. The government has said it aims to have 20% of all banking assets in Malaysia under Islamic banks by 2010. "Islamic financial services are one of the key growth engines for Malaysia," says Second Finance Minister Nor Mohammed Yakcop. "We realize that we can't compete with big financial centers like New York, London, or Hong Kong, but we are trying to carve a niche for ourselves in the area of Islamic finance."

In recent years, Malaysia has given out tax breaks and other incentives as well as relaxed rules to lure foreign institutions in the Islamic financial services arena. Middle Eastern Islamic financial concerns like Kuwait Finance House, Qatar's Asian Finance Bank, Saudi Arabia's Al-Rajhi, and Dubai Investment Group's Bank Islam all now have big footprints in Malaysia.

Singapore financial players are also moving into this arena. Southeast Asia's biggest bank, Singapore-based DBS (DBSM), recently teamed with more than 20 Middle East investors to create the Islamic Bank of Asia. It will have an initial capital base of about $418 million and focus on commercial and private banking, as well as corporate finance.

Money Magnet

China, meanwhile, is getting strategic investments from the Middle East to help upgrade its energy infrastructure. Dubai-based DP World is funding the $500 million development of a port in Tianjin, while a $5 billion refinery in the Guangdong province will be built by Kuwaiti investors.

Indeed, China likely will continue to be a money magnet for Middle East investment. Beijing is trying to shore up its energy infrastructure—and gulf countries view China and India as among their most critical customers in the 21st century. It was telling that after taking the throne in 2005, Saudi King Abdullah made his first overseas trip to China, and not to a bigger consumer of oil products, namely the U.S. The Middle East–Asia economic relationship is definitely starting to bloom.

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong. Assif Shameen covers Southeast Asia for BusinessWeek.com from Singapore.