“Rebalancing of the World”
Investors were excited about the rise above 10,000 on the Dow Industrials, while many western citizens felt downright embittered by the surge in profits for money center banks, some of which recovered on the back of handouts from the U.S. and UK governments.
Somewhat lost in that mixed bag of emotions was a one year high for crude prices above $75 a barrel. That is certainly quite a leap from December of last year when the mid-$30 range was the order of business at the height of uncertainty.
We know that this latest rally is a mixture of dollar weakness and anticipation of global demand recovering. What most pundits have missed in the rally is the real demand coming out of China, where there is discussion of eight percent growth being a base to build on in the next few years.
That continued optimism out East is a nice counterbalance to the lacklustre performance -- despite euphoric market gains -- in Europe and the United States. It has those who get excited about the new drivers of the world economy talking about “rebalancing of the world.”
One such kindred spirit is Ben Simpfendorfer. By day he is a China economist for Royal Bank of Scotland and he combined his years of experience in the Middle East and East Asia to pen the “New Silk Road”, the first comprehensive look at the re-emerging trade links between the two regions.
At the heart of this bond is what the Middle East is famous for: oil and gas. Saudi Arabia produces 13 percent of the world’s daily crude output. China currently consumes nine percent of world demand and the line on the chart is moving upwards.
Prior to the western led economic shock, Simpfendorfer talked of a “Holy Trinity” -- not a religious trinity -- but an economic bond between the Middle East, China and America. The Middle East supplies energy, China exports to the U.S. and America consumer demand supports both.
The author says that trinity has been broken -- not permanently -- but perhaps for long enough to mark global rebalancing. This is very convenient for Saudi Arabia which Simpfendorfer says is looking for a way to hedge its relationship with the U.S.
China, having looked at its track record in the Saudi and Iran, has taken a view, as it has in Africa, that it will limit its presence to business and not politics. How long Beijing can sustain that position, Simpfendorfer says, remains in question. Basically, with power comes attention.
In that context, many are starting to rumble about Washington’s long term sustainability as the world’s dominant military force, which in turn may undermine the dollar over time.
The U.S. currency came under intense pressure after rumors surfaced about back door talks between Chinese, Russian and Gulf central bankers on pricing oil in other currencies. If there is a retreat in either Iraq or Afghanistan, Simpfendorfer believes that will only accelerate the long-term trend.
While the U.S. in a post-9/11 world has been faced with skepticism, China filled the gap and has become the largest supplier to the Middle East. This is not a one way relationship. On our program, we like to think of the region as a large potential single market of more than 300 million consumers. China does too.
“We have to start thinking about the world in a different way and the commercial investment links between the Eastern economies themselves are growing and strengthening,” says Simpfendorfer.
This particularly applies to what he likes to call the Islamic Corridor, stretching from East Africa through the Middle East and down into Southeast Asia. Time and again we are witness to investments between Kuwait and Malaysia, Dubai and Djibouti and there is a common comfort zone within the Muslim world that Simpfendorfer says will only grow deeper with time.
The routes that supported trade centuries ago, the Silk Road and the Spice Route, may look different in the 21st century due to modern day transport, but the same spirit is alive and well.
A View from the Top
The gleaming tower is impressive from all angles with the searing autumn sun bouncing off the mirrored glass and stainless steel. We know that when it opens the Burj Dubai will be the highest building in the world at over 800 meters, although the final height is being kept secret.
The targeted completion date was also a closely guarded secret, until I sat down with the Chairman of Emaar, Mohamed Alabar, who confidently told me he is, “shooting for (UAE) National Day” and that the December 2 goal is achievable. His team, including the CEO of his hospitality unit, seemed surprised by that statement, which sets the bar high after a half year of delays.
Dubai is a destination that has built its reputation on iconic buildings and development projects -- The Palm, The World and the sail-like Burj Al Arab. Next to the Burj Dubai is yet another landmark – “The Fountain.” Alabar invited me on an early evening tour of the fountain, which is the largest of its kind in the world.
It cost of more than $250 million to install and the jets can reach a height of 50 storeys. The entire downtown complex, which includes the giant Dubai Mall and The Address hotel, is impressive, and Alabar beams with youthful enthusiasm as he shows me around. While we walk, Alabar tells me he thought it was important to deliver the project after the global downturn, which rattled the desert foundations of Dubai.
My interview with the Emaar Chairman came during the eighth year of Cityscape, the property exhibition where in years gone by developers has money to burn. They launched multi-billion dollar projects and would splurge millions on model displays and stands. This year, the atmosphere was far more subdued and sober. Developers talked of completion dates and deliveries, not size and new products.
Alabar, arguably the largest developer in a region, was reflective about the events of last year and where we are today.
“We’ve learned the art of managing business, which has changed forever in my opinion. I thought I was conservative. I think I could have been more conservative,” adding, “I am much harsher in the operation now.”
Alabar could not address issues regarding the proposed merger between his group and the property development entities of Dubai Holdings, but he did not shy away from some of the more sensitive topics on the table these days – like Dubai’s debt.
On where demand would come from for the second tranche of the $20 billion bond offering, he said the “majority from the [UAE] government with some private sector.” Asked whether a total estimated debt of $59 billion can be serviced between now and the end of 2012, he said, “Between repayment and restructuring over the next three, four, five years, I really don’t see an issue there.”
When digging through the analyst reports, it seems a disproportionate amount of that debt sits within the empire of Dubai World and its property group Nakheel. It is weighing heavily on the Emirate overall. Dubai is eager to move on from a 40-50 percent property price-drop over the past year.
Questions remain about how certain entities will contend with that debt burden. When asked whether a major cleaning up was required, he was diplomatic and frank at the same time, “I think restructuring in all businesses is a must. We cannot do business the way we used to do. I have restructured my business and I am sure DP World is restructuring their business the way Mercedes Benz is restructuring its business. So the answer is yes.”
Alabar, like other executives, is confident that Dubai’s position as a financial services and trade hub with a more advanced infrastructure than its neighbours will allow for a faster recovery. He pointed out higher traffic numbers for Emirates Airlines recently and the return of expatriate white collar workers.
Our discussion took place while the IMF World Bank meetings were underway in Istanbul. The two organizations put out similar growth projections of between two and 2.5 percent for the UAE next year. The master developer thought that number is too conservative. The days of double digit growth are not coming back soon, but a figure about double that is what he has in mind for 2010.
During another series of conversations with executives from around the region, we talked about the “new normal” -- a new term to describe the post-downturn economy. The developed world is bracing for much slower growth for the next five years as a result of record debt levels. Many in the region are adapting to a different reality, even as they get ready to deliver on the next “biggest thing.”
The Q Factor
During a drive down Doha’s seafront Corniche, one can begin to capture the scale of endeavour in Qatar. The concept that comes to mind this week is “The Q Factor,” something that is not quite tangible yet, but is unique to the Emirate of Qatar.
For those who follow prime-time British TV closely (and I am not one of them) “The X Factor” is a hugely popular talent show franchise. It brings forward raw musical talent to compete for a major prize. “The Q Factor” is not dissimilar, because Qatar is clearly in a competition with itself and neighboring states to build out infrastructure across the spectrum -- from financial services to a new rail network -- by 2016.
I got a glimpse of the future in a cabin tucked within the Qatari Diar real estate compound. A huge trailer, designed by the German railway group Deutsche Bahn, features a state-of-the-art 3D rendering produced by film director George Lucas of the futuristic railway station.
The station, according to today’s plans, will see a number of different rail services coming together at one hub, even inter-connecting to Bahrain and Saudi Arabia. Once you step into the heat of the Gulf, you see for yourself the service tunnels being built to house the cables and the rest to support the structures.
The first phase of the gigantic project -- if all goes according to plan -- will be completed by 2016. The entire network should be polished off a decade later. One could start to imagine what the Emir of Qatar and his tight knit team have planned. The population has doubled in the last decade from 800,000 to just over 1.6 million. Officials I spoke to say we are looking at baseline population growth of at least five percent a year for the next two decades.
Financing this giant scale nation building is not a problem due to the natural gas production coming online as I write. According to energy officials, LNG production was boosted 50 percent last year and another 25 percent will be added next year. The head of the Qatari Businessmen Association Issa Abu Issa said after $80 billion of total investment, the sector will be cash flow positive by 2012. The North Field has a shelf life of 200 years, I am told on the ground, which means for the 300 thousand or so people who were born there life is good -- make that very good.
Per capita income has risen by a factor of four in the last decade, to just under $100,000 and that is projected to keep growing. While the rest of the world was fretting about the worst downturn in six decades, the government saw it as an opportunity to regroup. Inflation, which was running in double digits before the downturn, is now a more manageable three to four percent. Growth projected at 8.5 percent this year is not what one would call a major slowdown.
On the sidelines of the Economist Roundtable, which I was helping to chair, I spoke to Florence Eid of Passport Capital who talked about Qatar being nearly recession proof due to its relatively small size and large resources. This is giving “Team Qatar” plenty of creative luxury to paint a giant canvas of the future. Eid said you have to go back a century to witness such wealth creation in such a short period of time within Europe or the United States.
This effort certainly is not without growing pains. One can see what I am talking about in the West Bay section of Doha. Many of the structures have been completed, but they are not collecting income, just a lot of dust. Other buildings look as if construction has been suspended. Businessmen say that the local property market is down 20-25 percent during this downturn. They point to a difficult 2010, but remain confident that beyond that the business climate looks promising.
A CFO of a large industrial group told me that Qatar has the same challenge that other businessmen complain of these days. The government has plenty of surplus capital -- less so after the downturn -- but banks are reluctant to lend, even though sovereign capital was injected when the market turned sour. Executives say that the government responded to the global downturn with right amount of financial force and with the correct speed.
The real test comes in the next decade as more projects develop. An updated master plan is expected in early 2010 to help map out the next quarter century. Most admit too much came on stream too fast in the last five years that the growing pains are evident today. Nearly 200 projects are on the books, totalling about $82 billion.
During these go-go days in Doha, most don’t look back to the late eighties or early nineties -- pre-LNG, shall we say -- when Qatar’s debt to GDP soared above 80 percent. Times were tough, but the government, in the midst of the debt challenges, put forth their energy master plan with natural gas at the heart of that strategy.
The Q Factor is paying huge dividends today and like The X Factor has millions of viewers watching with anticipation to see how this program will finish.
The Real Deal
The G20 is coming to grips with what governments are and are not willing to do over the next year in terms of stimulus plans and regulations. Most agree that the bottom has been marked during this downturn, but that the recovery is going to be less than stellar in western eyes.
The language in London has been downright bellicose when it comes to bank bonuses and re-gigging remuneration packages -- and that is what has been coming from the regulators! Whether concrete proposals actually crystallize is another matter altogether. The reality is most leaders have one hand on the populist pulse (re-elections in the case of Britain and Germany) and the other on the wheel of a ship which has been through one heck of a storm.
Collective action, including more than a trillion dollars spent to prime the banking system, has provided us with more security, or at least the perception of more security than in September 2008. On the streets of London, we all witnessed a period of about a week when one did not know whether their financial institution would remain open. All of a sudden, depositors had to learn a great deal more about deposit insurance limits.
At the start of this year when the western led downturn started to really bite, one wave of economists boldly stated the decoupling theory widely touted the previous year had been proved to be wishful thinking. The so-called BRIC countries are export dependent and cannot excel without the support of European and U.S. demand, the collective logic concluded.
It is time for those doctors of emerging market doom to re-think their prognosis. Collectively, the U.S. and Europe will be lucky to grow between one and two percent over the next year. In contrast, China is already growing eight percent and India and Indonesia better than five and the broader Middle East around three and a half percent. This is not theory, but the real deal.
This week, I sat down with Egypt’s Trade and Industry Minister, Rachid Mohamed Rachid who continues to comb the east and west for growth opportunities on behalf of Egyptian companies. These days he is logging more long-haul trips to China and India in search of joint ventures or to recruit companies for special economic zones under development.
Rachid, as a former senior Unilever executive, is acutely aware of recessions and business cycles in general.
“Today we are not talking about theory but about facts. We are seeing numbers that are totally different than the U.S. and Europe. We are seeing prospects that are more bullish than the rest of the world.”
It is not easy to navigate larger economic tankers through these turbulent times, but that is exactly what some of these fast developing countries have done. When the export machine started to falter in China, it steered the economy to a domestic infrastructure build out -- not little league spending but some $9 trillion between now and 2017. The other billion person economy, India, was in the midst of a reconstruction plan that will see new railroads, airports and the rest built over the next two decades. Those who have travelled the roads or rails on India would not argue about the need to do more at this stage of development.
Some would contend this is good sound planning by the two future giants. The fact is that luck and good timing had a lot to do with it. The infrastructure plans were on the books and were rightly accelerated to respond to the downturn.
The storyline is not dissimilar in the Middle East. The Chief Executive of GE International Nani Beccalli-Falco points to the model of public-private partnerships in the region where there is a track record of growth.
“We are getting out [of the downturn] because the so-called emerging countries, which in my mind are not emerging anymore because they have already emerged, are really pulling the global economy,” said the finely-dressed Italian from Turin, “You think about China, you think about India, you think about the Middle East, you think about Brazil.”
So while government leaders try to develop a consensus for future action, those with capital reserves will keep their taps open on a large scale. That is, what they say in business, not theoretical but “the real deal.”
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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