Middle East Financial Developments: Brief Status Report on Recycling Petrodollars and Broader Economic Diversification by Middle East Financial Centers

With the creation of the Qatar Financial Center (QFC) in 2005, Qatar looked beyond oil in an effort to become a world leader in economic and social transformation. The QFC is a financial and business center designed to attract international financial services institutions and major multinational corporations.

Businesses participating in the QFC are entitled to 100 percent ownership and full repatriation of profits. Qatar has been able to commit to this economic transformation thanks to its large reserves of natural gas in the northern area of the country. These reserves provide enough natural gas to supply 30 percent of the world’s exports.

Qatar is not alone. Thanks to increased regional and international interest in Middle Eastern assets, Dubai and Bahrain have also created booming financial centers. Higher oil revenues and the realignment of investments by regional investors explain the high level of capital liquidity in the region. However, it remains to be seen if multiple financial centers in one region can survive. By comparison, the financial markets in New York, London, Tokyo, Singapore, Shanghai and Frankfurt, taken as a whole, contribute to the development of the world financial market.

Fortunately, the three main financial centers in the Middle East – the QFC, the Dubai International Financial Centre (DIFC) and the Bahrain Financial Harbour (BFH) – have business and functional differences.

Qatar is a major oil exporter and has the world’s third-largest gas reserves. Its edge in securing investor confidence rests on its hydrocarbon resources. In contrast, with the expected exhaustion of Dubai’s oil reserves within this century, the country built a diversified, service-based economy relying heavily on commerce and tourism. In playing an international role in finance, Dubai is promoting itself as the Arabian Singapore. Qatar, on the other hand, is attracting major global institutions to serve its local market.

Bahrain, widely considered the first financial center in the Middle East, since the late 1970s has hosted offshore banks and heavily relied on wealthy investors from Kuwait and Saudi Arabia. With its creation of the BFH, Bahrain primarily seeks to consolidate its credentials as an Islamic banking center.

Qatar gears its approach toward boutique financial services, rather than a massive base for offshore financial professionals, like the DIFC. Qatar hopes to grow its economy and appears to be on the right track by investing oil and gas wealth into financial infrastructure development. The QFC has created a center that embraces modern laws for modern practices. Qatar based its standard on the UK Financial Services Authority model, a principles-based system already familiar to international companies. Unlike the DIFC and BFH, the QFC is offering a different option. Companies are not compelled to operate only within the boundaries of the QFC.

Pepper Points – Financial firms from every corner of the globe are flocking to the Middle East to profit from the investment and redeployment of petrodollars. Of even greater importance has been the strong presence of state-controlled investment pools known as “sovereign wealth funds” (SWFs). The International Monetary Fund estimates the total asset size of SWFs at around $2 trillion to $3 trillion, with the potential to grow to between $6 trillion and $10 trillion by 2013. Abu Dhabi alone holds one-third of the world’s current total SWF, with an estimated $900 billion. The amount of wealth in the region, paired with the sovereign wealth funds’ activity, is a strong indicator that the financial centers in the Middle East are here to stay.

SWFs’ emergence as a world financial force was manifested in the bailout of several international investment houses following the onset of the recent credit crisis.