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GCC-Singapore FTA Offers Hope Amid Crisis

As 2008 ended on a low amid a global financial crisis, the Free Trade Agreement (FTA) between the Gulf Cooperation Council (GCC) and Singapore formalised in December came as a whiff of fresh air. In the backdrop of the worst economic predicament in eight decades, which continues to surprise the world with varied ramifications, the pact between the powerhouses of sovereign wealth funds underscores at least four important factors.

First, the FTA signals the intention to expand international economic relations. According to Singapore Premier Lee Hsien Loong: “We are tackling immediate problems but at the same time, we are also putting in place measures which will be beneficial to our economies in the middle- to long-term, and this FTA is one example of that.”

With the GCC-Singapore trade increasing 127 per cent since 2002 to reach $42.4 billion in 2007, the FTA offers the prospect of acting as a springboard for new business opportunities for both sides. Under the agreement, 99 per cent of the Singaporean products would gain a tariff-free access to the GCC markets. Singapore-based companies will also be allowed to hold majority stakes in key sectors of the region. Singapore firms will enjoy preferential access in such fields as legal, accounting and engineering services, construction, and hospital services. In return Singapore would grant zero-tariff treatment on all GCC imports. Further, GCC firms would get similar treatment in legal services and integrated engineering services, as well as in advertising, retailing and transport services.

Second, from a broader perspective, the deal not only denoted a breakthrough in the GCC’s quest for FTAs, but also underlined the importance of free trade just when the spectre of protectionism is threatening to rear its ugly head in the West.

Third, the agreement came amid fresh concerns about the GCC-European Union (EU) FTA, which is under negotiation since 1988. Using the GCC-Singapore FTA signing ceremony as the platform, Qatar criticised the EU by saying that the “Gulf states should take a decision soon to suspend talks until the EU works out this issue...These talks would not last forever...” This was followed 10 days later by a GCC announcement: “We are suspending the negotiations until the European side agrees to sign the draft accord.”

Given the other factors influencing the FTA negotiations, the GCC countries have openly questioned the wisdom of both the United States (US) and EU mixing politics (democracy and human rights) with economic reforms. Several GCC leaders and envoys have expressed reservations about making “political concessions” to secure a FTA with any country.

Fourth and most importantly, the GCC-Singapore pact could be a gateway to boost GCC-Asia links, which is part of the Asia-Middle East Dialogue agenda that Singapore has promoted since 2005. In particular, it could serve as a catalyst for other FTAs that are being negotiated with China, India, Pakistan, Japan, Malaysia and South Korea, among others.

For example, it should be a wake-up call for the GCC-India efforts, wherein negotiations have taken longer than expected after the framework agreement was signed in 2004. It appeared then that potential loopholes had been plugged after the Bahrain-US FTA furore. The most significant agreement pertained to a provision which clarified that while the GCC will negotiate collectively, there is scope for bilateral agreements as well.

In this context, a Kuwaiti official said in early 2006 that “disagreements between the GCC and complications arising from the absence of customs union across the six countries are hampering efforts to finalise a GCC-India FTA...Laws in all the member countries are different and it is unlikely there would be any unanimity among them. However, individual FTAs would help in exchanging technology in various fields.”

This brings us back to the tack behind the GCC-Singapore pact, which was first started at a bilateral level with Qatar nearly three years ago, but was converted into a more comprehensive deal as talks progressed.

It is important to note here the health of the GCC wealth, which will drive ties with Asia. After earning $364 billion in 2007, the International Monetary Fund’s Institute of International Finance estimates that the GCC countries would have earned about $2 trillion through oil sales in the last six years. Accordingly, their public and private overseas wealth would have topped $2 trillion by the end of 2008.

It is true that the global crisis will impact most GCC oil producers. They are certain to run budget deficits in 2009, both due to production cuts and drastically low prices. What would come in handy, however, are surpluses accumulated over a six-year period when oil prices rose seven-fold compared to 2002 and, to a lesser extent, the spin-off from the nascent economic diversification.

According to a Samba Financial Group report released in November, the GCC foreign assets exceeded $900 billion in five years ending June 2008. While half the foreign assets were in the United States, the remaining was in other parts of the world, including Asia. It also stated optimistically that “the outlook for oil prices remains uncertain, but prices will average around $60 a barrel in 2009, not far below the average for 2007. A slight increase to around $75 a barrel is envisaged for 2010 as global demand begins to recover. Given this, the GCC capital outflows will amount to about $430 billion between June 2008 and June 2010.”

International strategy consultancy Celent reports that the GCC investors are altering their portfolio allocations in favour of Asian markets as developed countries appear to be the worst affected by the global meltdown. Its report “The Global Credit Crisis: Implications for the Asian Wealth Management Market” - forecasts that the GCC investors are set to increase their allocations to the Asia-Pacific region from 30 to 40 per cent. It specifically noted that the asset allocations by the region’s wealthy were moving away from riskier equity linked and real estate assets to other sectors.

This fits in well with Asia’s plans for investment opportunities, which are rooted in infrastructure. While most of the Western economies are in recession mode, China’s growth is expected to slow from double digits to about 7.5 per cent in 2009 and India’s GDP growth for 2008-2009 has been revised to 7-7.5 per cent, down from nine per cent.

In such a scenario, if both the GCC countries and Asia approach the coming years with pragmatism, flexibility and dynamism, they could convert a moment of crisis into an opportunity and ensure a win-win situation.

Dr N. Janardhan is a UAE-based analyst on Gulf-Asia affairs and can be contacted at njanardhan71@gmail.com