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Saturday, August 9, 2008

Shifting Liquidity

With the credit crunch and oil prices continuing to shake economies across the globe, the world's more prominent financial centers, most notably Wall Street and the City of London, have lost much of their luster.

From Geneva to Hong Kong, thousands working in financial industries have lost their jobs. Banks, hedge funds, and private equity groups continue to downgrade their profit forecasts and write off massive losses. Such is the price of poor investment decisions, loose monetary policy by central banks, and a casual attitude toward debt by consumers, businesses, and governments alike in North America and Western Europe.

Amidst the gloom, however, a dim light is beginning to shine in an unexpected place. Most people associate places such as Dubai, Qatar, Abu Dhabi, and Bahrain with oil. Rather fewer think of these locations -- in the very heart of the Arabic and Islamic worlds -- as emerging financial centers.

And yet these are precisely the industries beginning to appear in a part of the world that has long been overly reliant on oil production and often struggled to invest petrol-dollars in entrepreneurial, wealth-creating ways.

The reasons for the emergence of places such as the Dubai International Financial Centre are several. One is geography. As globalization continues to lift millions of Indians and Chinese out of poverty, the Gulf States increasingly constitute a vital East-West transit point for people, ideas, and capital.

The second reason is the sheer amount of capital surging through the region. A McKinsey Global Institute January 2008 report states, "At an oil price of $70 a barrel, the six nations of the GCC [Gulf Cooperation Council] would earn a cumulative $6.2 trillion by 2020, or more than triple the amount they earned from 1993 through 2006." The report further comments: "In 2006, the GCC states together had net capital outflows of $202 billion, joining China to become the world's largest sources of surplus capital."

By any standard, this is serious money. It also reflects a shift in the world's liquidity from North America and Western Europe towards East Asia.

Read it all here.

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