The Gaza Problem

With the announcement of a cease fire in Gaza over the weekend and the withdrawal of Israeli ground forces just in time for the inauguration of Barack Obama (the timing of which cannot be coincidental), the problem of Gaza has suddenly shifted back to the Arab world.  Not surprisingly, they are already dropping the ball.  At an Arab League summit in Kuwait Monday and Tuesday, Arab leaders could not agree what to say about the situation in Gaza officially. Apparently, they found it more efficacious to argue about how much to blame the situation on Israel rather than doing anything productive to help address the calamity that has befallen the people of Gaza.  Even more pathetic than the statement (which even Amr Mussa was embarrassed about) was the League's inability to establish a mechanism for transferring reconstruction and recovery aid to the Gaza Strip.  Instead, only Saudi Arabia and Qatar vaguely promised funds and the League vaguely promised to figure out a way to get those funds to the Palestinians.  Which Palestinians is of course the problem.

The issue of Gaza is an incredibly tortured topic for most Arab leaders.  Many, particularly the less aggressive regimes, dubbed the Arab moderates in western press, tend to loath Hamas and would rather seen them go, even if it means that Palestinians living in the Strip have to suffer to achieve those goals.  The more aggressive regimes of the region prefer to egg on Hamas to stick it to the Israelis but use no opportunity or means to actually do something productive, like build a viable state there.  All sides harbor a certain and sometimes equal distaste for Fatah, believing that faction to be corrupt and untrustworthy, especially when it comes to delivering funds and acting as toady to the west when it is convenient.  Before the Palestinian parliamentary elections in 2006 which handed Hamas a clear majority, many Arab donors, with the possible exception of Saudi Arabia, were looking for ways to bypass official Palestinian bodies altogether by giving aid in the form of direct investment/charity.  Gulf countries built hospitals, schools, etc without the direct participation of the PA.  This is an issue that western policymakers and even some Israelis tend to overlook or conveniently forget since they lack any other alternative: Gaza suffering does not equate with an increase in support or a new found trust in Abbas or the PA.  In an interesting comment to a Kuwait Times article on the summit posted on Zawya this morning, one reader said, "the Arab world is divided between those people who support Hamas and those who do not; I know almost no one who supports Abbas as he is seen as a puppet."   

As if the situation isn't complicated enough, the Israeli penchant for destroying Palestinian infrastructure as soon as it is built makes donors incredibly reluctant and hamstrings any government or private group's attempt to get back on their feet.  And, of course, there is the perpetual problem of the borders.  I would argue that no Israeli politician can be considered serious about a long term solution while advocating border closures.  I know that many Israelis believe that they are safer as long as Palestinians are kept locked behind walls, but no lasting, stable, and reasonable neighbor will emerge if Palestinians are not allowed to trade and have freedom of movement.  At the very least, the Arab League, UN, and Quartet (if such an entity still exists now) should demand Palestinian control over its air and sea borders and its border with Egypt.  

At the end of the day, it's hard to determine who in fact is the worst enemy of the Palestinian people- the Israelis who keep them locked up to keep themselves "safe," the Palestinian leaders who would rather keep the loot for themselves and watch their people die as long as they can claim moral victory, or the Arab states who twiddle their thumbs and tsk and say what a shame it all is.

How Much Drag Can the UAE have?

A number of reports were released this week that cast more pallor over the UAE miracle.  First, Brad Sester and Rachel Ziemba estimate in a new report for the Council on Foreign Relations that the Gulf sovereign wealth funds likely lost as much as $82 billion in 2008, largely due to investment loses, despite record high oil prices.  ADIA, in particular, took a big hit.  Sester also estimates that the fund was never as big as other analysts projected and guesses that the fund did not exceed $330 billion by the end of 2008, down significantly from his estimates of $453 billion in 2007.  

A second report suggests that Dubai will witness a significant population outflow over the next few years as construction projects dry up.  Over 90% of Dubai's population is expat.  UBS estimates an 8% reduction in the number of expats living in the emirate in 2009 and a further 2% decline in 2010.   

Moodys issued a warning about deteriorating asset quality of loans made to Dubai developers in recent years.  The rating agency suspects that as the real estate markets continues to slow, those "opportunistic" developers who came to the market in the past 4 or 5 years might be tempted to default as property prices fall and liquidity dries up.  Moodys has downgraded its outlook on 4 UAE banks (Dubai Islamic Bank, Dubai Bank, Abu Dhabi Commercial Bank, and First Gulf Bank) because of this fear.

In a rare move, Dubai's government published a few details on the emirate's budget last week, projecting a 42% increase in government spending on infrastructure and economic services but anticipating a fiscal deficit of $1.14 billion.  Meanwhile, the emirate had to delay issuing a tranche of medium term notes worth about $4 billion citing little market demand with the credit crisis.

Finally, as if this all weren't enough bad news, the FT reports today that the threat of recession now hangs over the Gulf, one of the last regions thought to be able to manage the global downturn.  HSBC is forecasting the most severe retrenchment in GDP in 20 years.  HSBC believes that recession would be inevitable if oil drops to $25/barrel.

One can't help but wonder what the long term psychological impact of this current downturn will be for the Middle East.  True, things are made easier (if only from the perspective of justifying the downturn) by putting the numbers in global context.  This time, for better or for worse, the Middle East is linked much more closely with global fortunes than it was during the economic downturn of the 1980s.  This linkage raises the prospect of a faster recovery in coming years.  But I wonder if this will prove to be small consolation, especially when it comes to the UAE.  As I wrote in previous posts, the UAE (Dubai specifically) miracle inspired an entire region both with its audacious vision and later its funds to seek out an economic path forward that did not exclude the west but also did not rely on it for its own fortunes.  This may have been unique in the Arab world.  As Dubai is exposed as being over-extended, corrupt, and possibly without solid foundations, could other countries experimenting with economic freedoms reject all the lessons Dubai taught, even the good ones like individual, and foreign, ownership of property, a measure of cultural tolerance, openness to foreign investment, a willingness to experiment with new ideas?  For the economies of the region to be productive in the future, innovation on the personal, business, and government levels must be pursued.  The region is bound to fail if it simply tries to duplicate the development path of other countries of the world.  Dubai, if somewhat shallowly, offered a way beyond those truisms.  Let's just hope that doesn't all get lost in the coming months.

Consumer confidence in the Middle East

Mastercard recently released its twice yearly survey of consumer confidence in the Middle East. The report is thorough and makes for very interesting reading. One note of caution, however: Mastercard respondents were required to have a regular income, a bank account, and be 18 yrs or older. The survey was also conducted by phone and computer, which would have limited the respondent pool. According to the footnotes on the survey, Mastercard had about 3,400 respondents over 7 countries with several cities in some countries (for example Egypt) being polled. Included in the survey are Egypt, Kuwait, Saudi Arabia, Lebanon, Qatar, UAE, and South Africa. The questions ask the respondents to look ahead six months and forecast what their financial situation would look like.

The results of the survey were mixed but in surprising ways. Consumer confidence was down in the UAE (and below historic norms), Saudi Arabia, and Qatar but up in Lebanon and Egypt. Confidence levels also reached record highs in Kuwait. The results of the consumer confidence survey, which Mastercard has conducted for 5 years in the region, were combined this year with Mastercard's first ever index of consumer purchasing priorities in the region. Most respondents anticipated spending the most money on their children's education and dining and entertaining. (The categories were not further explained.) The exception to this were UAE respondents who anticipated spending most on property. The majority of respondents anticipated savings rates in the double digits this year. To view Mastercard's findings, use this link: Global Crisis and Consumer Confidence, Savings, and Spending Priorities in Middle East and Africa

I am not particularly surprised by the results from the UAE, especially since credit markets there really began to seize up in the autumn, directly before the survey was in the field. Likewise, consumers in Saudi and Qatar have probably been affected by the bad news coming out of the west and the dismal results of their own stock markets of late. Kuwait puzzles me to no end, however. While the country (and economy) as a whole arguably has little to worry about given Kuwait's substantial reserve position, the survey, which was conducted between mid-October to mid-November 2008, was in the field during the time that Arab Bank announced its $800 million loss requiring it to be bailed out by the government. The Kuwait stock exchange was shut down at least twice in late October when traders protested for more government action and trading was actually suspended after Arab Bank's announcement. It's hard to imagine that Kuwaiti consumers couldn't have been moved at all by this news.

Egypt and Lebanon are also a bit surprising but I imagine, for Egypt, the uptick in confidence may have come from an easing of inflation more than anything. I should note here that consumer confidence in Egypt, even with its rise, is still well below levels in the Gulf. Certainly, no one could ignore the likelihood of smaller growth and lower investment rates. In Lebanon, the uptick may have come about as a result of the decline in inflation as well as a certain calm that has descended in the country as all the players seem to be abiding by the Doha agreements.

Even with movements in confidence, one can't help but suspect that consumers in the Middle East remain relatively uneducated about global and local economic conditions. Overall confidence levels in the second half of 2008 are higher than they were in the first half (again the inflation effect, my guess), and with the exception of expectations of the economy, most are very bullish about their income, employment prospects, and quality of life for the first half of this year. It's almost as if respondents didn't anticipate a downturn in the economy having any affect on them at all. I imagine if such a poll was conducted in the west at this point, the result would be just the opposite.

Definitely something to puzzle over.

First Major Investment Bank in the Gulf Defaults

Zawya Dow Jones reported yesterday that Kuwait's Global Investment House defaulted on most of its $3 billion debt obligations.  The bank, which is listed on London's FTSE, is the largest indigenous investment bank in the Gulf by market value and manages one of the region's largest funds.  

The news of the default doesn't come totally as a surprise for those who have been following the issue.  Two separate rating agencies downgraded the bank recently, citing the risk of default.  Still, the news comes as a blow both to the Kuwaiti financial community as well as to investment firms throughout the Gulf.  Global Investment House is a well established, reputable bank, operating across almost a dozen countries.  Some of its shareholders include Bank of New York and Dubai Capital Group.  The fact that such a large institution could not refinance its debt bodes ill for the multitude of investment banks and firms throughout the Gulf that don't have the same reputation and weight as Global Investment House. 

National Bank of Kuwait's chief economist, Randa Azar, has called on the Kuwaiti government to move quickly to restore confidence in the markets after the Global announcement.  Still, few anticipate problems for the country as a whole since Kuwait has, much like its neighbors, built a large pool of reserves during the bull run in the oil market.  Farouk Soussa of S&P told Zawya/Dow Jones that Global's announcement should not affect Kuwait's sovereign rating and Standard Chartered recently forecasted a positive, if low, growth rate for the country.  But Global's announcement, coupled with Gulf Bank's losses in November, put the emirate in a dicey predicament from an investment perspective and may intensify calls for a stronger regulatory environment in the country. 

The chief economist of Saudi SABB predicted that Global's announcement may be the first in a chain of defaults throughout the Gulf, although he believes that the number is unlikely to be as great as it is in the US and Europe.  For more on risky investment firms, check out this blog entry posted on Zawya: The Wings of an Ant

The return of the oil weapon

I suppose it was only a matter of time, given the fierceness of the attack and the total unrepentantness of the Israelis, that someone has mentioned the oil weapon in response to the Israeli invasion of Gaza. But although it makes for a fairly good sound bite on Al Jazeera, I am fairly certain no one is going to take Bahraini parliamentarians or Iranian IRGC officials very seriously on this.

The evolution of oil weapon rhetoric is somewhat interesting, however. After 1973, even talking of using the oil weapon became somewhat taboo despite the fact that the oil shock following the Yom Kippur War did a lot to establish the Saudis on the international stage as a power player. Still, conventional wisdom in Washington since then has been that the Saudis would never unleash such a terrible weapon again. The argument goes something like this: the Saudis understand that an oil embargo would hurt them as much as it would hurt consuming nations and they wouldn't want to risk their relationship with the US over it. That logic prevailed more or less until the early part of the Bush administration.

Then, in 2002, the Israelis invaded Jenin in the West Bank. Things had been looking fairly bleak for the Palestinians since the outbreak of the second intifada in 2000 but the Jenin incursion was different. With the pervasiveness of Al Jazeera's cameras, Israeli actions, which sometimes resulted in the deaths of civilians, including children, were captured and broadcast on the evening news. The Bush administration was fairly tone deaf to these actions (one might think history was repeating itself today), causing a certain amount of consternation in Gulf capitals. And for the first time since the 1970s, the words oil and foreign policy were crossing the lips of important and public Saudis. Saud al-Faysal in a press conference actually said that oil should be used to defend the interests of Arab citizens. Not exactly a complete unsheathing of the weapon but certainly closer than they had come in close to two decades. Other members of the Saudi government, including Oil Minister Ali Naimi, were quick to dismiss Saud's comments and pledged to keep the oil market well supplied.

Still, after 2002, one can't help but wonder if the Saudis could be provoked again. US Middle East peace policy has swung so wildly out of balance that the Bushies can barely bring themselves to call for restraint today. And while no one, with the possible exception of Nasrallah, is a fan of Hamas these days, it's hard to watch the ever escalating death tolls coming out of Gaza and Israel's refusal to even entertain the idea of a ceasefire and believe that no one is willing to show a little muscle to end the crisis. Still, the oil weapon is at best a deeply flawed option. It presumes that the US would hurt immediately and would be willing to put a halt to Israel's actions. Both assumptions are questionable at best.

A Few Interesting Tidbits from UAE on a Friday afternoon...

MEED is reporting a 85 percent decline in the value of contracts awarded in the UAE in the fourth quarter of 2008 compared with a year earlier. Approximately 10 percent of projects already under construction have been halted across the country, including Palm Deira, Dubai Waterfront, Dubailand, and the Trump International Hotel and Tower. (Link here)

Meanwhile, the UAE has approved a 21 percent increase in its federal budget. This increase represents the biggest in UAE history. Education and services are the chief benefactors. (Story here)

Various Emirati CEOs make their predictions for 2009 in today's Emirates Business 24/7. Needless to say, there isn't much optimism here but all are careful not to be overly pessimistic.

And because the UAE continues to have such a psychological pull over the business climate in the Gulf (and even, although to a lesser degree, the rest of the Middle East), here's a nifty little article about how the downturn in Dubai is being perceived in the Saudi press:

When a Ripple Turns into a Wave