As we pointed out before currently, risky borrowers or capital-intensive projects
around the world are desperately in need of loans that are nowhere to be found.
This lack of willing
investment will mean a slowdown in growth in the areas of the world that are
dependent on foreign capital for the development of infrastructure and
industry, such as Latin America, emerging Europe and the Balkans.
Another challenge
facing world economies is the global slowdown of growth, which means a decline
in demand for goods and a resulting decline in manufacturing. This will mean a
slowdown in the Asian countries, particularly China, that are home to much of
the world’s manufacturing. The secondary impact will be on commodity-producing
states, which provide the basic materials used in the construction of
manufactured goods. These states (including most of Latin America) are facing
an export crisis as the markets dry up.
For the Persian Gulf
states that constitute the Gulf Cooperation Council (GCC), Saudi Arabia, the
United Arab Emirates (UAE), Kuwait, Bahrain, Qatar and Oman, these financial
challenges are mitigated, or entirely eliminated, by enormous oil wealth and
economies that have been carefully managed.
The GCC states are
largely insulated from the global credit crunch because they are the proud
owners of some of the world’s largest oil deposits. Saudi Arabia alone boasts
the largest oil reserves in the world, at well over 250 billion barrels, and
all of the GCC states, with the exception of Bahrain, are ranked in the top 20
of world oil producers, with Saudi Arabia and the UAE leading the pack. Saudi
Arabia alone made $194 billion from oil exports in 2007, and $212 billion (in
real dollars) between January and October 2008. The GCC states are so
capital-rich that their usual financial management strategy involves attempting
to soak up as much liquidity as possible in order to contain inflation.
Indeed, with massive
current account surpluses, the six GCC states are creditor nations, meaning
they supply capital to the rest of the world. As net providers of capital,
these countries remain much less vulnerable to a shrinking global capital pool
than net capital importers, as they can simply let up on the outflows for a bit
to recapitalize their systems.
Given that this
wealth is controlled for the most part by the GCC monarchies, much of this cash
flow goes first into government coffers. This granted every single one of the
GCC states a budget surplus, reaching as high as Kuwait’s 42 percent of gross
domestic product (GDP), in 2007 (this was before the oil price spike of 2008,
so while the fall in oil revenue will affect budgets in 2009, the impact will
not be as drastic as it would be using 2008 as a baseline). This gives Kuwait a
great deal of flexibility in dealing with financial issues as they arise.
Qatar, Oman and Bahrain all have surpluses, but they were less than 7 percent
of GDP in 2007, so although they do maintain flexibility, they are much more
limited than Kuwait.
Despite their budget
surpluses and status as net capital exporters, the GCC states do maintain
external debt, used to finance corporate projects and government functions.
However, public-sector external debt amounts to less than 30 percent of GDP for
most GCC states. The outlying state is Bahrain, which has a public-sector
external debt of around 36 percent of GDP. While this is not an insignificant
level of debt, it is far outweighed by their sources of wealth. Measures of
total external debt paint a different picture, however, and both Bahrain and
Qatar have net external debt (which includes both public and private foreign
capital borrowing) at between 50 and 60 percent of GDP. Although the UAE does
not appear to be in trouble, the Dubai emirate has incurred a massive amount of
debt in the process of overheating its real estate sector. The net impact of
this high level of borrowing is to put the emirate at a disadvantage when it
comes to seeking short-term capital to adjust to the international financial
crisis.
Much of this debt has
been caused by massive infrastructure and development projects such as Qatar’s
liquefied natural gas facilities, Dubai’s fanciful real estate explosion and
Bahrain’s attempts to convert itself into a financial mecca. Indeed, the GCC
states have used the past several decades of oil wealth to engineer massive
development projects and have become, in the process, quite reliant on foreign
direct investment (FDI) and the technology and expertise that accompany it.
Though Qatar and Kuwait are net exporters of FDI, the other four states are
importers of FDI, from Bahrain’s modest 0.51 percent of GDP to Oman’s more
substantial 4.67 percent of GDP.
Offsetting this debt
(and just about every other problem they might encounter) are the pools of
capital that the GCC states maintain. One of the most important mechanisms for
this capital accumulation, because of its political and financial implications,
is the sovereign wealth fund (SWF). These SWFs are massive investment funds
that make strategic investment choices for the GCC states. GCC SWFs maintain
holdings that range from Saudi Arabia’s relatively modest $5.3 billion to Abu
Dhabi’s massive $875 billion nest egg (and Abu Dhabi has even more money socked
away in other SWFs). These SWFs are invested primarily in the equity markets of
developed nations, and some have taken sizable stakes in Western businesses. In
addition to the SWFs, the GCC states also maintain large caches of reserves. In
Saudi Arabia, the state-owned bank SAMA (in addition to the kingdom’s SWF) has
$365.2 billion of foreign holdings, and the elite of the al-Saud family has reportedly
stashed away somewhere around $1 trillion, though exact figures are difficult
to track.
These pools of
capital allow the GCC states to exercise great flexibility, especially during
credit crunches. Gulf oil is controlled by the monarchies that rule each state,
and these strong governments not only can draw on their large reserves but also
can run their yearly budgets with substantial built-in surpluses. This gives
the governments a great deal of room to intervene in the local markets to
compensate for the effects of the financial crisis.
Trouble Spots
There are a couple of
notable exceptions to this relatively rosy picture. Saudi Arabia has postponed
bids on two major refinery projects until sometime in late 2009. The projects
include a $6 billion, 400,000-barrel-per-day (bpd) refinery in the Red Sea port
city of Yanbu to be built by Saudi Arabia’s state-owned oil company Saudi
Arabian Oil Co. (Aramco) and ConocoPhillips and a $12 billion joint venture
with French energy company Total for another 400,000-bpd facility in Jubail.
But these projects are hardly an issue of economic survival. Instead they are a
part of Saudi Arabia’s effort to move up the energy supply chain, from crude
production to refined products, and while these facilities would be nice to
have, their delay will not cause any sleepless nights for Saudi Arabia.
A more serious issue
for GCC states is that many of them have young banking sectors that have
trembled at tightening global liquidity and disappearing capital. Bahrain, an
island nation, has capitalized greatly on its location at the heart of the
oil-rich Persian Gulf region and has used its proximity to massive capital
flows to build a powerful banking sector. This proliferation of banks has been
shaken by the financial crisis, but true crisis is not on the horizon because
the GCC states have avoided incurring massive amounts of debt.
The impact of the
financial crisis on the oil markets is unquestionably a concern for GCC states,
and oil prices have fallen to nearly $50 a barrel after reaching highs of over
$140 per barrel earlier in 2008. But their cash reserves have given the GCC
states a great deal of staying power in the medium term. Saudi Arabia alone
raked in more than $1 billion per day when oil prices spiked. With the global
slowdown, there will certainly be a decline in the rate of cash flowing in to
the GCC states, so they will have to spend what they have wisely. In some
respects, this slowdown in cash inflow is a blessing. Until the financial
crisis broke, the biggest financial worry for these states was high inflation,
and the slowdown in growth will reduce inflationary pressure.
Among the GCC states
there are a few with their own unique challenges. In the UAE, for example,
there has been a rapid increase in corporate borrowing over the past two years.
Most of that borrowing has been to fund massive development projects in the
emirate of Dubai. These fantastical projects have included the construction of
islands in the shape of palm trees and the continents of the world. Dubai has
been planning to build the world’s largest suspension bridge across the entire
city of Dubai (connecting one suburb to another) that was to be completed in
2012. The real estate sector in Dubai, which sports the world’s only seven-star
hotel, has reached unprecedented heights of growth.
Its 10-year growth
spurt has come to an end, however, as the heavily overheated real estate sector
readjusts to something closer to reality and as bank stability is in question,
although the UAE has set up a task force to address the problem. According to
the head of the task force, Mohammed al-Abbar,
state-owned and affiliated companies owe approximately $80 billion in debts,
while the government’s assets stand at $90 billion, and state-associated
companies hold about $260 billion in assets. In addition to across-the-board
needs for refinancing, Dubai companies have suffered huge losses in the Dubai
Financial Market, which has taken the biggest hit of the GCC-state stock
markets so far this year, with losses of up to 66 percent.
Qatari firms have
also borrowed some $40 billion over the past two years to finance hydrocarbon
projects such as the construction of natural gas liquefaction plants, though
these will certainly pay for themselves as demand for liquefied natural gas
rises amid very tight market conditions. A massive outflow of equity
investments sent the Doha Securities Market for a spin as it lost 22 percent in
the first half of September. Though this serves to tighten Qatar’s credit
options, it will not have catastrophic consequences.
The massive credit
expansion in Qatar and the UAE has put the banking sectors of both countries in
a delicate position. Liquidity crises will, as a rule, hit first in the place
where commercial banking and lending has exploded the quickest. The relatively
young Qatari banking sector has been affected by this phenomenon, and the
government intervened in the banking sector by offering a $5.3 billion
investment package on Oct. 12. Similarly, the Abu Dhabi Central Bank has intervened
with $32.7 billion to ensure the liquidity of UAE banks.
According to reports
from Bahrain, the country’s Islamic lending facilities appear to be faring
better than interest-based lending facilities. The Central Bank of Bahrain is
controlling the sector’s involvement in the volatile real estate market, as a
precaution, and has been adjusting interest rates to maintain liquidity, which
appears to be holding. Similar moves have been made in Oman, although the
kingdom appears to have weathered the storm with high levels of capitalization.
As these market
fluctuations demonstrate, depending on how bad things get, the GCC states may
be forced to cut back on programs, such as Dubai’s development projects and
Saudi Arabia’s refineries. But in the end, the massive reserves they have built
up, as well as their relative financial discipline, have made the decline in
commodity prices a concern but hardly a crisis. And ongoing hydrocarbon
production capacity improvements in Saudi Arabia and other GCC states mean that
as soon as the price of oil rises again, these states will once again be
positioned to rake in stratospheric levels of oil revenue. In fact, the
financial crisis for the GCC states can be viewed as an opportunity for the GCC
states to exploit this moment of relative economic power, both internally and
on the international stage.
The strongest player
in the region, by far, is Saudi Arabia, and Riyadh uses its massive oil wealth
to exert political pressure throughout the region and the world. The kingdom’s
primary objective in the region is the containment of Iran and Shiite influence
as Iran tries to assert dominance over Iraq. The financial crisis has been a
huge boon in this endeavor. As a major oil exporter that has failed to achieve
the kinds of financial solvency that the GCC states have secured, Iran is
staring down the barrel of a gun as oil prices sink. Without a buffer of cash,
Iran is very poorly positioned to handle a fall in oil prices.
Though the fall in
oil prices threatens Saudi Arabia as well, the Saudi budget is set for an oil
price of $45 per barrel, and oil prices have not dropped to levels that would
threaten Saudi stability. Saudi Arabia maintains the ability to manipulate oil
prices for its own foreign policy objectives and could use them against Iran.
(Saudi Arabia is poised to assume an even more powerful position when prices
rise again if an ambitious $129 billion project to raise its oil production
capacity to 12.5 million bpd comes through as planned in 2009.)
If Saudi Arabia
chooses to pursue macro-level adjustments to oil prices in order to target
Iran, it will certainly do so cautiously. Though the kingdom has a solid
cushion of petrodollars, it still relies on oil for 75 percent of government
income. That income is necessary to meet a variety of domestic needs and to
counter Iranian moves in the region by bribing political parties and militant
groups in places like Iraq and Lebanon.
After Saudi Arabia,
Kuwait is perhaps the GCC state best positioned to weather the financial storm.
With a SWF of $264 billion, the country is very capital-rich and the government
has a huge budget surplus. There has been turmoil in Kuwait’s equity markets
and banking sector, which has prompted the kingdom to repatriate some $3.66
billion worth of SWF investments, but the government’s resources are
substantial enough to handily offset these problems. Kuwait stands to gain from
the decline of Iranian influence in the region, in terms of limiting both the
influence of its own Shiite minorities and Iran’s entrenchment in neighboring
Iraq. Kuwait’s foreign policy goals are thus in line with Saudi Arabia’s, and
Kuwait will follow the Saudi lead.
Abu Dhabi, the
largest emirate of the UAE, is the wealthiest and most tightly run ship in the
country. The UAE’s problems lie in Dubai and its excessive real estate boom of
the past decade. Dubai’s financial indiscretions have put it in a position
where it will need to be underwritten (to a certain extent) by Abu Dhabi. This
presents a strategic opportunity for Abu Dhabi to rein in the political power
and excesses of the al-Maktoum family, which rules Dubai and holds the UAE
prime ministerial post. Dubai has so far remained staunchly uninterested in Abu
Dhabi’s offers of aid, declaring that there are no negotiations between the
emirates.
Though Qatar has
found itself mildly vulnerable to the international financial crisis because of
its large debt burden, it is still in a reasonably safe financial position.
Qatar’s regional and global goals are quite ambitious, as it seeks to increase
its holdings overseas and serve as a diplomatic hub for the Middle East. Qatar
has already made moves toward acquiring major stakes in companies overseas,
including Citibank, and these kinds of activities will likely continue. For
Qatar, the danger may be in overextending itself in a time of depressed markets
and relatively little competition.
For Bahrain and Oman,
the smallest of the GCC states, their ability to take advantage of the
financial crisis is relatively limited. Bahrain is constrained by domestic
political factors as it seeks to balance the needs of active opposition
elements with its economic outlook. This will limit Bahrain’s ability to use
the economic crisis as a stepping-stone toward a larger geopolitical role in
the region. Oman, for its part, maintains a very low profile in the region and
is very unlikely to make any moves at this time.
For all of the GCC
states, the global slowdown offers investment opportunities the world over. On
the political stage, the Western states are crying out for capital injections
as their economies slow down. In fact, on a tour of the region, Deputy U.S.
Treasury Secretary Robert Kimmitt called on the Persian Gulf Arab states to
continue investing in the United States to help restore financial stability.
This represents an excellent opportunity for GCC states to charge to the rescue,
with hefty expectations for future cooperation, of course.
The United Kingdom has
also asked the GCC states to help the International Monetary Fund (IMF) assist
countries in desperate need of a bailout. Herein lies an opportunity for the
GCC states to engage in long-term financial positioning. By giving money to the
IMF, the GCC states could enhance their say in the affairs of the lending
institution and, by extension, in the geopolitical arena.
For the moment,
however, the GCC states have not responded enthusiastically to these pleas
(although Saudi Prince Walid bin Talal did announce that he would boost his
stake in Citibank just days before a U.S.-announced government bailout of the
company). Countries like Saudi Arabia and Kuwait (which have other options and
a variety of needs to balance) see only limited direct political benefit from
bailing out the West instead of investing that money at home. This is an
outlook that could change once the new U.S. administration is up and running
and able to make political deals and security guarantees.
But while there will
certainly be bumps in the road as these relatively young economies settle and
shift in the face of a turbulent world economy, responsible management of vast
oil wealth has put the GCC states in a position to weather the financial
crisis, and weather it well.
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