5/16/08
When sitting at the edge of the Bosporus River in Istanbul one can breathe in the true essence of what it means to straddle Europe and Asia. The city is a unique backdrop to both the modernity of today and the history of the Ottoman times.
The government of Prime Minister Recep Tayyip Erdogan too is looking both East and West today. Turkish businessmen don’t readily see themselves as part of the Middle East, but the market of 71 million consumers has grown six to eight percent in the past five years based on the ability to export its construction know how to the fast-growing Gulf countries and leveraging its position as a major trading artery in both directions.
This week a major congress of transport ministers from Far East Asia to the edge of Western Europe signed a declaration to encourage the revival of the old Silk Route. Supported by two United Nations organizations, these corridors for trade will link together up to 30 countries and eventually provide a network for seamless trade between Europe and Asia. This is good news for the countries of the Middle East, from North Africa to the six nations that make up the Gulf Cooperation Council. This will also provide further incentives for countries like Iran to open up and privatize their economies and for Gulf countries overly dependent on energy exports to diversify in the hope of creating jobs for the next generation.
While these transport ministers were busy looking forward to what can be over the next twenty years with the reconstruction of the Silk Route, they paused for nearly an hour to take in the words of Mikhail Gorbachev whose Perestroika policy actually brought a whole swath of countries out from under the umbrella of the U.S.S.R.
Gorbachev took delegates through that window in time twenty years ago when the Cold War was still real, when communism was still very much alive but there was no discussion about a Silk Route revival. As the chairman of a foundation which bears his name, Gorbachev has taken a step back to look at the bigger picture -- and the bigger challenges facing society today.
He shares with great disappointment the “possibilities that were not realized” to bring greater safety and security to society. People he said are asking what kind of future awaits them and are yearning for action on the Kyoto Protocol, the Millennium Development Goals to reduce poverty and the end-game in the Middle East after what he called a “mistaken strategy” in Iraq.
While not trying to overplay the role he and his peers at the time played -- Reagan, Thatcher, Mitterrand and Kohl -- to patch together a new world order, Gorbachev talked of a leadership vacuum today. Elected officials, especially those in Washington, he said “need a new attitude to the new world order.” That new architecture needs to include in his view India, China, Brazil and, of course, Russia.
Gorbachev was preaching to the converted when he talked about creating a “healthy vascular system for trade” from Istanbul to Moscow and beyond. But the message -- even through translation from Russian to English -- was clear. The revival of the old Silk Route needs to be supported by a new generation of leadership.
5/8/08
I stepped out onto the terrace of my hotel this week in Dubai on Jumeirah Beach to take in the landscape. To my right in the distance stood the Burj Al Arab, the iconic sail-shaped hotel. In front of me, the Palm Jumeirah, the giant mixed palm-shaped resort and villa complex. I attempted to count the cranes in front of me on the Palm and stopped at 50. If I hazard a guess, I would say there are three times that amount. Below the sound of the Ibiza bar music on the terrace, I can hear the rumbling of buildings being constructed, steel rods being delivered, concrete being poured. This is the beat of Dubai, of double digit growth and a property market that to date has not found a ceiling. Travellers to the Gulf know it is very difficult to find a hotel room these days. There are 35 thousand in Dubai today, going to 150 thousand by 2015. Neighboring Abu Dhabi has 10 thousand, going to 75 thousand by 2030. All this building is accepted without hesitation by globalists who sit poolside to take in some sun along with all the construction. Further afield on the terrace I see a table full of businessmen in sunglasses poring over their documents with refreshments in hand.
I was in Dubai this week for the Arabian Hotels and Investment Conference and in that role chaired interviews with Mohamed Ali Alabbar, Chairman of property developer Emaar, Paul Griffiths, CEO of Dubai Airports and U.A.E. Minister of Foreign Trade Shaikha Lubna al-Qasimi. Ali Alabbar has notched up $65 billion of property projects in 17 countries, Griffiths is overseeing the expansion of Dubai International Airport and then moving on to build the largest airport in the world and Shaikha Lubna is busy serving as the ambassador not only for trade, but articulating the merits of openness in the U.A.E.
Stringing together their comments from those interviews, it is abundantly clear -- using an automobile analogy here -- that the pedal remains down to the floor. The sea of cranes will be more populated and the 150 different nationalities that now live in the Emirates will remain in the Gulf in search of riches. In historical terms, it reminds me of the California Gold Rush which started in 1848. While that lasted for seven years, no one is willing just yet to call an end to this boom. There is too much money being made and yes plenty of capital available within the region itself for expansion.
My visit coincided with yet another record for oil prices this week. Based on a conservative calculation, the six Gulf States will bring in more than $400 billion dollars this year from oil. They are always searching for new ways to deploy that money and they don’t have to look far to find investors from a Middle East market of more than 300 million people.
With that heady backdrop of growth, I spent time asking these players and others if there are any landmines waiting that may bring this growth spiral down to more reasonable levels. This is the first time after many visits that developers and investors talk of a potential correction. In traditional terms, that could be a fall of 10 to 20 percent. It is also the first time that many of them privately said it would be a healthy occurrence. Investment as they all know from experience is not a one way path that always points north.
Mohammed Ali Alabbar would not be drawn into my question if we are 50, 75, 85 or 95 percent through the development of Dubai. He calmly responded that was in the hands of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai and Vice President of the U.A.E. In sum he noted, we move on opportunity if it is prudent and it makes money for his now listed company. After a decade of business, Emaar has generated annual sales of more than $10 billion and turned a profit of $1.6 billion. That certainly is not bad for a former civil servant in Dubai.
The handful of major players who are implementing the master plans for Dubai and Abu Dhabi are attempting to keep their feet on the ground. For example, Griffiths of Dubai Airports said you won’t see a great big bang rollout for the new Terminal 3 in late August, à la Terminal 5 in London. That would not be prudent and only opens 'Brand Dubai' up to problems if all does not roll out as exactly planned. BAA could have learned a bit from this approach.
The numbers tell a less than measured story. Research out this week from Proleads tracked a total of $2.8 trillion in development projects in the Middle East, about of third of that in the U.A.E. alone. Demand for plants, personnel and equipment are growing at 20 percent a year. The 'sea of cranes' will not fade into the sunset just yet, but don’t be surprised if a storm blows through town to take some of the steam out of this fast-moving locomotive of growth.
5/1/08
The U.S. Federal Reserve moved for the seventh time in the past six months taking interest rates down to two percent in the United States this week. The central bank, as is customary, put out a statement with the action underlining that financial markets remain under “considerable stress”, credit conditions “tight” and the housing market contraction still underway.
Ben Bernanke and his team at the Fed hope this will be the last of the cuts and that the worst of the credit crisis has past -- don’t be too certain about that. This is what concerns central bank counterparts in the Middle East, especially those in the Gulf States.
Watching with anxiety what is transpiring in the U.S. economy and to a lesser extent what has crossed the Atlantic to Britain, Gulf Cooperation Countries, minus Kuwait, have to follow suit due to their dollar pegs. They did and they too hope the storm front has passed – again don’t be too certain about that as well.
The problem, as we have talked about in this column, is quite different in the Gulf and it became more difficult this week in the region’s largest economy, Saudi Arabia. Inflation in the Kingdom hit a near 30 year high of 9.6 percent. The cost of rents, fuel and water surged 15.8 percent in March; other day-to-day staples saw double digit gains as well. Rents went up nearly 17 percent at the start of the year.
The United Arab Emirates, which is traditionally slow in releasing these figures, officially is seeing an inflation rate of 9.3 percent, but that goes back a half year. Other fast-growing, energy rich states are facing similar challenges. The real issue is what to do about it.
Finding an answer is not easy. For one, interest rates should be going up, not down. Number two, wages cannot keep pace with inflation, but leaders like Hosni Mubarak of Egypt know when the heat is on. He took what was an already high pay increase for civil servants of 15 percent and doubled it. The region’s most populous country is running a near double digit budget deficit, so he actions won’t be welcomed by foreign investors nor the finance ministry for that matter. And to round out the list, money supply will continue to surge as OPEC export related earnings this year surge past the $1 trillion mark.
Fuelling the Titanic
The real challenge with inflation, as central bankers and economists know, is that when it accelerates it is very difficult to slow it down. For purposes of an easy analogy, this is not a nimble racing boat, but a high speed Titanic. The real danger at hand is the threat inflation poses for the economic development cycle now underway in the Middle East. On our program we often talk about an Arab Renaissance, that growth this year, despite the downturn in the G8 countries should still be above 6 percent. That is true, but it won’t mean much if that growth is eaten away by skyrocketing prices.
The other issue is keeping workers in all those “castles in the sand” being constructed. The number is staggering; $3 trillion is either at work already or on the drawing boards. It will be very difficult to sustain those mega-projects if one cannot attract builders and very importantly laborers to get through the summer heat so they can send monies home to India, Bangladesh, Sri Lanka or Vietnam.
For Dubai and its second wave of development this, of course, will need to be addressed. But I am thinking more about Saudi Arabia in which one of the seven economic cities currently gathering momentum. The other six hold the key to the Kingdom’s future for the next generation to come.
Food for All
The region, minus the North African states, is overly dependent on imports, especially food. Gulf countries are paying for those imports with a weak dollar, which is down 35 percent against the euro in three years. The European Union is the number one market for those goods. This is where the loyalty to the dollar gets very pricey. Leaders from the United Nations and the World Bank held an emergency meeting in Switzerland this week and set up a food crisis task force aimed at helping the poorest countries deal with escalating prices.
It is hard to argue that countries seeing record oil revenues are suffering as badly as those say in Sub-Sahara Africa – that is certainly not the case – but rising prices are a real problem and will continue to be so.
4/25/08
During the rush of the Pennsylvania primary, a $100 billion mortgage bailout in London and the global wake up call of higher food prices, oil prices quietly nudged up against a new threshold of $120 a barrel.
The unlikely source for news this week came out of Rome, one of the world’s most beautiful cities and a place I fortunately called home for four years. This week producing and consuming nation representatives gathered for the International Energy Forum, where they debated what future demand may be during a period of economic slowdown.
The 13 members of OPEC, ranging from Indonesia in the east, Venezuela in the west and giant Saudi Arabia in between, provide about 30 million barrels of today’s daily demand of roughly 85 million barrels. Of the 13 countries, oil executives and analysts say only Saudi Arabia has the excess capacity to meet the needs with China and India still growing at 8 percent or more.
However, if one reads between the lines of the comments coming out of the eternal city this week, there has not been a rush by the Kingdom or other players from OPEC to invest in developing excess capacity. If you can be paid nearly $120 a barrel for your existing production or $80 if you put more oil on the market, what would you choose?
Saudi Arabia is producing roughly 9 million barrels a day. At $120 dollars, it will make over $1 billion dollars a day; at $80 dollars subtract roughly about 30 percent of that. That, as they say in the U.S., is some serious money. Knowing that simple math, G8 consuming nations have increased the calls for more production to the market. It is not as easy as basically opening the taps a bit more.
Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani who was a guest on Marketplace Middle East recently, put today’s excess capacity within the cartel at 300,000 to 500,000 barrels a day. That provides some cushion, but will not reverse the rise in prices over the past two years, for two key reasons.
While in Dubai I had a chance to talk to Martin Lovegrove Vice Chairman of Oil & Gas at Standard Chartered bank about the ingredients of the recent surge. Lovegrove broke down current demand in the market for oil overall. He reckons that $20 of the current price is a result of a 38 percent drop in the dollar since 2003. Another $20 is based on a surge of investment fund capital riding the wave of commodity prices. With equity and now real estate prices softening, the hot money has gone into, and will likely stay, in oil.
So $40 of the roughly $120 we see today has nothing to do with supply and demand.
OPEC Secretary General Abdalla Salem el-Badri tried to assuage leaders this week in Rome when he confidently stated that the cartel will be able to add another five million barrels a day to the market in the next five years.
While politicians are looking to calm consumer jitters, Badri did not seem to share their sense of urgency and said, “There are some problems, maybe a delay of a year or two … but it will come. I am not disturbed at all. I would like to assure the world that all the countries are investing.”
To do so, they are committing to spending $160 billion on infrastructure to expand production. That is about half of what Saudi Arabia takes in each year at today’s prices. The investment certainly won’t break their bank or others within the OPEC group of nations and as we now know from OPEC’s secretary general, will not erase the new target for oil traders of $120 dollars a barrel.
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During the rush of the Pennsylvania primary, a $100 billion mortgage bailout in London and the global wake up call of higher food prices, oil prices quietly nudged up against a new threshold of $120 a barrel.
