Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hello and welcome to Under the Banyan Tree.
Speaker: I'm your host Fred Newman, Chief Asia Economist here at HSBC.
Speaker: Now we've got a great discussion lined up for you today.
Speaker: In a world where protectionism is on the rise, we're looking at a blossoming trade relationship with solid gains on both sides.
Speaker: Economic links between Asia and the Middle East are set to soar in the coming years.
Speaker: I've got guests from both regions with me today.
Speaker: Asia economist Justin Feng is here in the studio in Hong Kong and chief senior economist Simon Williams joins us from Dubai.
Speaker: Let's get the conversation underway.
Speaker: You're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: So, Simon, let me start with you.
Speaker: You're based in Dubai.
Speaker: Give us a sense of what's cooking in the Middle East right now.
Speaker: We tend to think of the Middle East being a major oil exporter, but a lot more is happening there at the moment.
Speaker: It's really a region that's kind of starting to wake up in economic terms into diversification.
Speaker: Give us a lay of the land of what's going on in the Middle East.
Speaker: There's a lot going on.
Speaker: Some of it's cyclical.
Speaker: So the cyclical growth story has been really strong, really, since COVID.
Speaker: The high frequency data is good.
Speaker: Sentiment here is really good.
Speaker: A look at the growth drivers and they're broad and they've got momentum.
Speaker: Consumption is running strong.
Speaker: We've got young population.
Speaker: Employment is...
Speaker: is rising.
Speaker: They're consuming huge investment programs underway across the Middle East as well.
Speaker: Saudi tends to get the headlines with its giga projects, so they are huge.
Speaker: There's big capital plans elsewhere too, and big gains in external demand, not so much for goods, but certainly for services, travel and tourism.
Speaker: in particular, is driving the economy on very, very strongly.
Speaker: No inflation, strong public finances, strong currency.
Speaker: Cyclically, in that sense, it's working well.
Speaker: But these big structural changes that I think have really marked this phase of the story out against other emerging markets and developed markets.
Speaker: So you paint a picture of a very dynamic region that's diversifying.
Speaker: I think diversification is really one of the key words when it comes to Middle Eastern economies.
Speaker: Now, Justin, let me bring you in here.
Speaker: You've looked at a lot of trade between Asia and the Middle East, and
Speaker: Of course, Asia buys a lot of energy from the Middle East.
Speaker: But do you see signs of other types of goods trade now starting to emerge, maybe tapping into what Simon was mentioning, broader consumer market, for example, in the Middle
Speaker: Right, I think you both hit on the head with diversification.
Speaker: Asia-Middle East trade relationship has traditionally been dominated by energy, but if we look at Middle East exports today to Asia, we see a lot more chemicals, plastics, rubber, precious metals that are being re-exported from the UAE to high-income consumers in China and India, for example.
Speaker: And also fertilizers, that's maybe something unexpected.
Speaker: A lot of Middle East fertilizer exports are now going to Southeast Asia for agriculture.
Speaker: So we already see that diversification away from oil and gas, in particular energy, to other areas.
Speaker: Simon, you mentioned the amazing demographics in the Middle East.
Speaker: That implies growing consumer markets.
Speaker: Do you see evidence of that kind of drawing in foreign investment as foreign, maybe Asian investors are trying to set up shop in the Middle East, trying to sell into this broader middle class?
Speaker: That is, is there a consumer market developing that is attractive for companies from Asia?
Speaker: Yeah, I mean, the populations are young and they are growing, growing quickly.
Speaker: Household formation in particular is picking up pretty rapidly.
Speaker: And I put the demographics for the Middle East against most other parts of the emerging and developed world.
Speaker: Yeah, the populations are huge, but my goodness, they are young and they continue to expand.
Speaker: quickly.
Speaker: See what I've seen in that trade relationship that Justin's describing.
Speaker: I think it's a natural symbiotic relationship, which is at the heart of it, between the world's biggest energy exporters and the fastest growing consumers.
Speaker: But like Justin, I look through the data and what I can see is trade not just growing in scale, but growing in sophistication.
Speaker: as well as the needs of the Middle East going to continue to move up the value chain as the economies diversify, but also as Asia's productive capacity expands and evolves as well.
Speaker: I think it's that that we're seeing in this particular phase of that expanding and increasingly sophisticated trade relationship.
Speaker: So that's, of course, trade is one area, but then there's, of course, also investment.
Speaker: Justin, how much bilateral investment is really happening between the Middle East and Asia?
Speaker: They're both very capital-rich areas.
Speaker: Have you seen an increase in investment flows between the two regions?
Speaker: Yeah, definitely.
Speaker: We expect about $12 billion of investment increase between now and about 2035.
Speaker: Right now, investment is mostly concentrated within the Middle East countries.
Speaker: So generally, Asian countries such as Japan, China, they're typically the net outbound FDI countries, whereas the Middle East is typically receiving FDI.
Speaker: But we've also seen a lot of interest in a new emerging area such as Southeast Asia.
Speaker: A lot of sovereign wealth funds from the Gulf, for example, have this capital account surplus and are now recycling that towards outbound FDI and portfolio investments and really increasing their exposure to Asia.
Speaker: Now, there's a paradox here, isn't there, Simon?
Speaker: We have a capital-rich region in the Middle East.
Speaker: We have a capital-rich region also in most of Asia, not everywhere.
Speaker: But you talked about these big investment plants are now being rolled out in the Middle East, very ambitious investment plants.
Speaker: As a capital-rich region, why would the Middle East want to attract Asian investment into this?
Speaker: They have the capital.
Speaker: What are they looking for from Asia?
Speaker: Is it the know-how?
Speaker: Is it funding?
Speaker: What's the complementarity here when it comes to the investment?
Speaker: How does it align with some of these big, ambitious investment projects that you see develop in the Middle East?
Speaker: I think it's a two-way relationship.
Speaker: And some of what the Middle East is looking for is about funding.
Speaker: I mean, Saudi's giga projects alone are worth nearly $900 billion.
Speaker: And if you're trying to fund projects of that kind of scale, you're looking to diversify your funding base.
Speaker: But what the Middle East really wants alongside its capital is expertise.
Speaker: And particularly it wants access to tech that will allow it to grow a non-oil economy
Speaker: manufacturing industrial base and services base that can be globally competitive so you're absolutely right some of it's about funding but really what it's about is is know-how in terms of the export of capital well you know the gulf is running current account surplus that needs to find a home but there's also you know 3.5 4 trillion dollars worth of sovereign wealth already owned by those sovereign wealth funds and that is looking to
Speaker: reallocate to areas of the world where the potential gains are greater and where potential long-term growth is greater.
Speaker: I think that inevitably means a reorientation from west to east.
Speaker: And it's clear from the statements, the operations, the organizational shift for some of the regional sovereign wealth funds that Asia is absolutely the top of the list.
Speaker: So we have two regions then kind of moving capital, East and West.
Speaker: There's some common territory there.
Speaker: Simon, let me follow up quickly on this.
Speaker: You've done quite an extensive travel in Asia over the past year, you know, from your base in the Middle East now.
Speaker: And you've talked to companies, you've talked to officials in India, in China, in Korea.
Speaker: About investing in the Middle East, what's sort of the main interest that you sense?
Speaker: What is the main selling point from your side and what are sort of the questions you receive from them?
Speaker: And obviously it varies depending which market I'm in.
Speaker: But clearly the basis is it is in trade.
Speaker: And I think energy and energy security is a part of that.
Speaker: But a recognition of the mutual benefits that can come from expanding trade ties.
Speaker: The investment ties, absolutely a desire to be profitable.
Speaker: exposed to market opportunities in other parts of the world.
Speaker: I think there is strong government to government support for a deepening of those capital ties.
Speaker: And I think that's in part about shifts in broader global geopolitics that's been expressed in the changes in those bilateral ties.
Speaker: I've just come back from India.
Speaker: And, you know, the very close cultural and political connections have always been between India and the Middle East, particularly between India and the and the UAE.
Speaker: I think that's the foundation, the basis for strengthening trade ties in goods and increasingly in services and capital flows as well.
Speaker: I think you've got a lot, a lot further to come.
Speaker: In fact, that reminds me, we just had a Saudi delegation in Hong Kong here, and they're really looking to list potentially companies on the Hong Kong Stock Exchange.
Speaker: So it's not just about sovereign wealth funds moving into capital into Asia, but also deepening, I guess, the financial market relationship between the two regions.
Speaker: Now, all of that sounds fantastic.
Speaker: We've talked about goods integration opportunities, investment opportunities.
Speaker: But, Justin, what are some of these obstacles in real terms, in terms of that integration?
Speaker: Yes, a lot of potential, but a lot of challenges as well.
Speaker: I think in the short term, we should pay attention to the Red Sea shipping disruptions that are still ongoing right now.
Speaker: Now, I think most of this is primarily affecting Asia's trade with Europe and North America, and not so much necessarily Asia's trade with the Middle East.
Speaker: Obviously, Asia and the Middle East lie a little bit closer in terms of their proximity.
Speaker: And there's also the availability of land routes, especially from mainland China to the Middle East.
Speaker: And of course, that's very important because mainland China is the primary manufactured goods producer that
Speaker: the Middle East new emerging middle class is rapidly consuming from.
Speaker: So I think this Red Sea shipping disruption is a shorter term risk that is manageable with the right supply chain oversight.
Speaker: But I think in terms of a longer term perspective, the bigger risk is really a stagnation in terms of trade liberalization.
Speaker: So Asia and the Middle East are two regions where the average tariff rate is still substantially higher than advanced economies, say, for example, the European Union and other advanced economies.
Speaker: So I think if we see more free trade agreements that can be concluded, that could really go a long way towards mitigating that longer term trade barrier risk.
Speaker: So you talked to some of these obstacles and of course there are initiatives to kind of facilitate trade, facilitate investment.
Speaker: Simon, you sit in Dubai.
Speaker: Have you seen a stepped up commitment by local officials to try to maybe sign free trade agreements, to have bilateral investment treaties, for example, with Asia?
Speaker: Which of the economies in the Middle East do you think are at the forefront of moving in that particular direction in order to facilitate trade and bilateral or multilateral investment between the two regions?
Speaker: No, I think that's definitely happening at some places.
Speaker: It's particularly clear in the UAE and Saudi Arabia to an extent as well.
Speaker: But the UAE is aggressively pursuing comprehensive economic partnership agreements with Asia and more broadly.
Speaker: I mean, the deal signed with India, what, two years ago, and that was concluded in under 90 days, a comprehensive economic partnership agreement concluded in just three months.
Speaker: And I think that speaks to the appetite
Speaker: on both sides for closer ties, but also just how complementary those two economies are.
Speaker: It makes sense to both parties that they work together.
Speaker: The advantages are clear.
Speaker: And that agreement is now
Speaker: now in place and is already yielding returns.
Speaker: Well, it's refreshing to hear that you can sign international agreements within three months of negotiation because in other parts of the world it certainly takes much longer than that.
Speaker: But maybe it's a great opportunity to take a quick break.
Speaker: And when we're back, we want to talk about some of the people exchanges as well, because, of course, they are part and parcel of that increased integration story between Asia and the Middle East.
Speaker: So coming back, we already talked a lot about goods integration, investment integration, for example, but of course, there's also people exchanges.
Speaker: Simon, one thing, despite the demographics in the Middle East that you've always highlighted, our sort of dream demographics in terms of young populations expanding very rapidly,
Speaker: Isn't there also ultimately a labor shortage, a human capital shortage in some parts of the Gulf, for example?
Speaker: And to what extent is that need then be filled by Asian workers, for example, immigrating?
Speaker: Have you seen a step up in this or is there a tendency towards kind of localizing some of that labor?
Speaker: I think, again, that varies economy by economy.
Speaker: But, yeah, with the openness to expatriate, Labour has always been.
Speaker: I think one of the changes we've had, particularly in the last two or three years, especially since COVID, has been a shift, a focus on trying to make that expatriate population more permanent.
Speaker: So the introduction of golden visas, for example, in the UAE, which do away with
Speaker: Now, the old sponsorship systems of the former regime and effectively give people permanent residency in countries that changes the position of expatriate workers in this economy.
Speaker: But Asian workers are key to this.
Speaker: But Gulf workforce, the data isn't great.
Speaker: But we think about a third of the population of the of the UAE is South Asian, is Indian.
Speaker: And there's a very big Chinese population here as well on the population, which is growing fast.
Speaker: So, Justin, since I already mentioned India, mentioned either Southeast or South Asia, what are some of the key countries that actually benefit from that people-to-people exchange?
Speaker: Because we talk a lot about China's investment in the Middle East.
Speaker: We talk about maybe Korean construction companies being the Middle East.
Speaker: But then there's also other economies in Asia that actually benefit from that increasing linkage.
Speaker: What are some of those economies in Asia?
Speaker: Yeah, absolutely.
Speaker: Simon was talking about kind of from the Middle East perspective, how they benefit from the human capital that they get from, say, for example, the Indian nationals living in the UAE.
Speaker: But from the perspective of Asian economies, you have a lot of developing economies such as Bangladesh, Sri Lanka, the Philippines, and Pakistan that reap enormous remittance flows from their overseas worker population.
Speaker: that work in mostly Gulf economies as domestic helpers, construction workers, people in retail, and this forms quite a substantial amount of their GDP.
Speaker: So we had goods integration, investment integration, and now, of course, people as well.
Speaker: And we should probably add also not just workers, but also tourism going in each direction, cementing that relationship as well.
Speaker: This is very exciting.
Speaker: I think we talk, when we look at a global economy, there's always, we talk about
Speaker: protectionism bubbling up and trade restrictions.
Speaker: But I think here is an example of two very large regions coming together more closely and actually moving into more of an integrative state than we see elsewhere.
Speaker: But I wanted to ask you lastly, when you did this research, Justin, what surprised you the most when you looked at Asia Middle East corridor?
Speaker: What sort of stuck out to you in terms of the most surprising finding that you didn't expect when you started out with this project?
Speaker: I think you alluded to it earlier.
Speaker: It's this excitement around greater economic integration amid this global environment we're in where a lot of countries are leaning more towards protectionism.
Speaker: We see more national security related trade barriers, investment barriers, for example.
Speaker: But here you really have, as Simon said, two complementary regions that have all of the economic incentives to deepen their trade, investment, and people-to-people exchanges.
Speaker: And Simon, you on your travels through Asia and the Middle East, what is sort of one thing that strikes you the most in terms of the potential for Asia, Middle Eastern cooperation integration?
Speaker: Any examples of companies or any sectors that you think sort of are overlooked sometimes when it comes to this integration story?
Speaker: I guess I've got India fresh in my mind because I've just returned.
Speaker: But I think it was talking to some of the tech guys down in Bangalore, the kind of project, the work that they're doing, where they're already engaged in the Middle East, where it's just so clear to me that the demand for what they produce is going to rise across this part of the world.
Speaker: I guess the other thing that surprised me, pulling this report together, was, I guess, just totting up
Speaker: Some of the numbers are realising the scale that we're already at.
Speaker: I mean, $950 billion worth of bilateral trade between Asia and the Middle East already.
Speaker: You look at how fast these two parts of the world are growing, that natural.
Speaker: The complementarity, the potential for more than the idea, the $1.5 trillion, $2 trillion, the foreseeable future.
Speaker: That's the kind of numbers that we're working with.
Speaker: And those are impressive numbers indeed.
Speaker: I want to thank you both for coming under the banyan tree to discuss Asia, the Asia-Middle East corridor.
Speaker: And I'm sure we'll be back checking in on the state of Asia-Middle East economic relations in due course.
Speaker: So thank you very much.
Speaker: Thanks, Fred.
Speaker: Thanks, Fred.
Speaker: And that's a wrap for another week here, folks.
Speaker: Great to have you with us as always.
Speaker: And remember to listen, like and subscribe to Under the Banyan Tree and our sister podcast, The Macro Brief, wherever you get your podcasts.
Speaker: We'll see you next time.
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Speaker: We hope you enjoyed the discussion.
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