THE news from Dubai that Dubai World, a state-run holding company, requested moratorium, seemed to shock the world when it first burst out in late November, crushing investor confidence in the region and other major markets.
However, Dubai World’s request to delay debt payments of around US$60 billion for six months is unlikely to have a significant effect on the Korean financial market, considering Korea’s limited exposure to the Middle East region. Korean financial companies’ exposure in Dubai is estimated at US$88 million, amid a total investment of US$221 million in the UAE. Korean construction companies and financial institutions are known to have approximately US$32 million tied up in Dubai World. The Financial Services Commission and the Financial Supervisory Service held an emergency meeting on November 29, to discuss how the local financial market would be affected by Dubai’s financial malaise. One regulator at the meeting said, “Financial markets are being agitated by Dubai World’s request for moratorium, but it is not likely to develop into a global crisis as it did with the Lehman Brothers’ collapse.” However, another regulator pointed out that it could indirectly affect the local financial market as global funds invested in Dubai may sell off Korean assets.
On November 11, before the Dubai news broke out, 250 scholars, business people and analysts gathered at a Korea-Middle East Symposium on Future Growth Strategies at the Korea Chamber of Commerce and Industry to discuss and seek new ways for Korea and Middle East countries to pursue, in terms of economic growth, cooperation and strategies, etc. Participants from the Middle East included H.E. Sheikh Mohammed Bin Essa Al Khalifa, CEO of the Bahrain Economic Development Board, Ismail Hassan Mohammed, Governor of Egypt-Iran Development Bank, Adil Saeed Al Shanfari, Vice Chairman & CEO of Al Shanari Group in Oman, Essam Refaat, CEO & Editor in Chief of Egyptian Economic Magazine “Ahram Al Eqtisady” and Saleh Kh. Alfaiz, Charge d` Affaires at the Royal Embassy of Saudi Arabia, Seoul. In his welcoming address, Sohn Kyung-sik, Chairman of the Korea Chamber of Commerce and Industry said, “Until now, Korea-Middle East economic cooperation has been focused on commodities, energy and the plant industry. However, if the Middle East’s strong financial power and abundant energy sources meets with Korea’s cutting-edge technologies and industrial know-how, the two will become more efficient and cooperative partners.”
Sheikh Mohammed Bin Essa Al Khalifa, CEO of the Bahrain Economic Development Board said that the Middle East is not only focusing on energy resources development like in the old times, but also intends to stretch out to the manufacturing and service industries for diversification, and is expanding the regions’ industrial infrastructure construction in order to meet new market demands and adapt to the changing economic environment. He said, “Korea needs to set strategic and aggressive plans and make a greater effort to attract the Middle East’s oil money.”
Essam Refaat, CEO & Editor in Chief of Economic Magazine “Ahram Al Eqtisady’” of Egypt mentioned that in order to revitalize the economic cooperative relationship, it is essential that Korea and the Middle East establish bilateral investment funds which will help enlarge investment opportunities for both sides and work as a financial support medium for large scale projects. Kim Young-hak, Vice Minister of the Ministry of Knowledge Economy of Korea, which represented the Korean government at the symposium, expressed that in order to grow together in the competitive global market, Korea and the Middle East need to focus on mutual understanding and cooperation, which will eventually bring future-oriented partnership.
Oil-producing countries in the Middle East have been preparing for a future when their oil is exhausted by accumulating capital through Islamic banking and Sovereign Wealth Funds (SWF). Currently, about 40 SWFs are managing US$2-3 trillion worldwide, and this is expected to increase to US$10 trillion in four to five years. SWFs in GCC (Gulf Cooperation Council) countries, the U.A.E., Bahrain, Kuwait, Oman, Qatar and Saudi Arabia are expected to reach US$5-6 trillion by 2015. GCC, a political and economic union involving the six Arab states of the Persian Gulf has been seeking to use their oil money to expand their investment in Korea. The Middle East’s oil has transformed from a natural resource to capital and finance, turning the area’s interest to development and investment in order to build a new future for the region. The global financial crisis was an opportunity to test the strength of SWFs in the fierce global financial market, with them providing much needed assistance to foreign businesses during financially difficult times.
In January 2008, the Kuwait Investment Authority (KIA) invested US$5 billion in Citigroup and Merrill Lynch and in November 2007, the Abu Dhabi Investment Authority (AIDA) invested US$7.5 billion in Citigroup. In both cases, the banks saw foreign investment due to the downturn of the U.S. economy. In July, Korea Investment Company (KIC) signed an MOU with KIA, one of the leading SWFs in the Middle East for strategic alliance. KIC also signed an MOU with Abu Dhabi Investment Authority (ADIA) which is considered the biggest SWF in the world in early November, seeking mutual investment opportunities with ADIA. KIC will consult with AIDA when it is making investments in Asia and reciprocally AIDA will not only work with KIC on foreign projects, but will also share industrial SWF know-how.
Many Korean financial institutions are seeking ways to attract the oil money, however, the money is managed under the regulations of the Sharia, Islamic religious law. The Sharia bans the charging and taking of interest, therefore, the typical Western loan method can not be applied to Islamic money.
When dealing with Islamic money, the typical concept of a loan should be changed from taking interest by loaning money to receiving dividends from investments. The Korean government formed a task force team last March and has been working to revise related financial laws in order to adapt and utilize the unfamiliar way of dealing with Islamic funds.
GCC countries are a very critical region for Korea, since Korea imports 71.3% of its oil from GCC countries and GCC countries account for 2.4% of Korea’s total exports and 17.5% of total imports in terms of trade. It was inevitable for Korea to push for an FTA with GCC since GCC was pushing forward FTAs with several countries, such as the EU, China and Japan. According to 2006 research by KOTRA (Korea Trade Investment Promotion Agency), Korea’s exports would decrease by US$500 million if Korea’s competitor countries signed FTAs with GCC and Korea did not. When Korea’s former president, Roh Moo-hyun visited the GCC region in March 2007, both parties agreed that a Korea-GCC FTA was essential.
Currently, the Korea-GCC FTA is still in progress, with the two parties holding the third round of official talks in Seoul last July. Since the economic structures of GCC and Korea serve complementary interests and there are not many sensitive trade items between the two, the Korea-GCC FTA is not expected to burden the Korean economy. The countries pushing forward with FTAs with GCC are not only thinking of it as an expansion of trade but also as a strategic alliance to secure energy.