Maktoob and Bayt.com both released the results of their consumer confidence surveys in the past few days. A word of warning here: methodologies on both surveys is a bit sketchy since both are web based polls and the respondents are self-selecting. What does this mean? Well, only people with Internet access are likely to respond (so represent a relatively small sample pool from the region) and may have a particular bias or agenda that led them to fill out the survey.
All that said, both indicated declining optimism by respondents in the health of their home economies. Bayt.com's survey appears to be a bit more comprehensive and it found that by far, UAE citizens are most pessimistic on almost all fronts about current and future economic performance. Second to the UAE is Kuwait. Both polls found that Gulf residents in general as well as Jordanians and Syrians are more pessimistic than their counterparts in North Africa, particularly Morocco and Tunisia.
I'm not too sure either survey tells us much that is new, but it is interesting to learn that North Africa appears to be weathering the downturn a bit better than the Gulf. Perhaps it is an issue of managing expectations. Having never enjoyed the excessive riches of the Gulf economies, North Africans are not quite as let down by the downturn?
Links to the two surveys here: Bayt.com consumer confidence survey Press release on Maktoob survey
Monday, March 30, 2009
Monday, March 23, 2009
A Cautionary Tale for Iraq
Dunia Frontier Investments just released an excellent, detailed study on investment trends in Iraq from 2003-2009 (YTD). According to a synopsis of the report posted on the Business Middle East website, Iraq has gone through roughly three phases of investment trends since 2003: the period immediately after the US invasion was largely characterized by large lump sum EPC and service agreements in oil and gas and infrastructure awarded by the US government, mostly to US companies. Phase two, which Dunia defines as lasting from 2005-2007, saw a sharp drop off in investment as violence in the country increased. Phase three began largely after the relative drop off in violence following the surge. According to Dunia estimates, investment during this third period (and investment here must be defined as project announcements versus actual FDI flow), increased by 1500%.
As always, the devil is in the details here. FDI in Iraq, as I long suspected it might, is beginning to resemble investment flows in the rest of the Middle East. That is, many countries, from Libya to Tunisia to Egypt to Morocco to Syria, in the MENA region have become dependent on investment flows from almost a single source: UAE. In 2008, UAE announced two large real estate development plans in Iraq, which together accounted for 58 percent of new investment in the country that year. Considering that the other major concessions are service agreements in oil and gas, that number gets even larger if you isolate only for foreign direct investment.
Relying on Emirati money was not a bad bet between 2003-2008. The Egyptian and Jordanian macro economies grew at rapid in the former case and strong in the latter case rates during this period largely on the back of privatization proceeds and FDI inflows. Egyptian growth rates topped 7 percent for several quarters. Not bad for an economy that was stuck at an average of 2 percent (more or less) for close to a decade.
The bigger problem here, though, is that as the UAE economy begins to slow down (and tries to avoid a meltdown in the case of Dubai), its taste for overseas expansion is sure to wane. The most recent estimates for the UAE is that at more than half of its own domestic construction projects have been put on hold or shelved entirely with more expected this year. Emaar Properties, the country's leading real estate development firm, was recently downgraded by Standard & Poors and given a negative outlook. It has already shelved a couple of international projects, including one in Indonesia. DAMAC Properties, one of the firms investing in Iraq, has not appeared to slowdown yet, announcing earlier this month its intentions to sign $545 million in new contracts this year but it has added new fees to its agreements and laid off 200 employees late last year.
Finally, from a development perspective, relying on real estate ventures to diversify your economy has always been a dicey bet, even for the rest of the region. One could plausibly argue that in the best case scenario (in this case Egypt is a good example), real estate usually brings with it other money, especially if privatizations are in the offing. Egypt has had a tremendous amount of investment in the real estate sector but it also has been able to attract Gulf money into other industries, notably oil and gas, food processing, and transportation/logistics. If Iraq could accomplish similar interests, Gulf money is not something to look askance at. But if Iraq is only to become another Syria or Lebanon where most of the money remains in real estate (largely because of a continued distrust of foreign investment in those markets and a government unwillingness to allow for more sectors to go on the chopping block) and is subject to the whims of the global credit crunch and the saturation of real estate projects in the region, we should expect Iraq to benefit little from the new investment.
As always, the devil is in the details here. FDI in Iraq, as I long suspected it might, is beginning to resemble investment flows in the rest of the Middle East. That is, many countries, from Libya to Tunisia to Egypt to Morocco to Syria, in the MENA region have become dependent on investment flows from almost a single source: UAE. In 2008, UAE announced two large real estate development plans in Iraq, which together accounted for 58 percent of new investment in the country that year. Considering that the other major concessions are service agreements in oil and gas, that number gets even larger if you isolate only for foreign direct investment.
Relying on Emirati money was not a bad bet between 2003-2008. The Egyptian and Jordanian macro economies grew at rapid in the former case and strong in the latter case rates during this period largely on the back of privatization proceeds and FDI inflows. Egyptian growth rates topped 7 percent for several quarters. Not bad for an economy that was stuck at an average of 2 percent (more or less) for close to a decade.
The bigger problem here, though, is that as the UAE economy begins to slow down (and tries to avoid a meltdown in the case of Dubai), its taste for overseas expansion is sure to wane. The most recent estimates for the UAE is that at more than half of its own domestic construction projects have been put on hold or shelved entirely with more expected this year. Emaar Properties, the country's leading real estate development firm, was recently downgraded by Standard & Poors and given a negative outlook. It has already shelved a couple of international projects, including one in Indonesia. DAMAC Properties, one of the firms investing in Iraq, has not appeared to slowdown yet, announcing earlier this month its intentions to sign $545 million in new contracts this year but it has added new fees to its agreements and laid off 200 employees late last year.
Finally, from a development perspective, relying on real estate ventures to diversify your economy has always been a dicey bet, even for the rest of the region. One could plausibly argue that in the best case scenario (in this case Egypt is a good example), real estate usually brings with it other money, especially if privatizations are in the offing. Egypt has had a tremendous amount of investment in the real estate sector but it also has been able to attract Gulf money into other industries, notably oil and gas, food processing, and transportation/logistics. If Iraq could accomplish similar interests, Gulf money is not something to look askance at. But if Iraq is only to become another Syria or Lebanon where most of the money remains in real estate (largely because of a continued distrust of foreign investment in those markets and a government unwillingness to allow for more sectors to go on the chopping block) and is subject to the whims of the global credit crunch and the saturation of real estate projects in the region, we should expect Iraq to benefit little from the new investment.
Thursday, March 19, 2009
Lessons Learned from Ratings Agencies
The ratings agencies have been busy these days in the Gulf. Perhaps out of real concern or perhaps out of a need to be perceived as doing their jobs after failing to so spectacularly in rating US financial products, the agencies have re-opened their books on the Gulf and don't really like what they see. Standard and Poors recently downgraded Emaar Properties, perhaps the standard bearer of the "new economy" in the UAE, to a BBB+, down from an A- and gives the company a negative outlook. In its analysis, S&P cites the continued weak real estate markets in Dubai and the lingering uncertainty over the length and severity of the downturn.
Likewise, Moodys has taken a new look at Kuwait and has publicly announced the country's sovereign rating is in review for a downgrade. Among the reasons Moodys cites in its call for a review are the recent resignation of the cabinet and the dissolution of the National Assembly. To quote directly from the press release issued today, "In Moody's opinion, these events reflect an erosion of institutional strength which is of particular concern given the current challenges presented to Kuwait by the global economic and financial crisis."
Although neither the downgrade of Emaar nor the potential downgrade of Kuwait's sovereign rating should be surprising, one hopes that each country and market take away some lessons learned from the downgrade. In UAE, development needs to move away from a single track focus. Stretching yourself so thin, both from a borrowing and a profit perspective, in real estate alone has led to a host of problems for the Emirates. Besides subjecting your domestic market to inflationary pressures (cost of labor and construction materials have been accelerating) and speculation due to easy and cheap credit which in turn exacerbates the inflationary pressures, you leave your economy vulnerable to any number of possible downturns. It's a lesson that the UAE well understands now that Abu Dhabi has bailed Dubai out and may have to again. Still, I am not entirely sure it's a lesson that will prompt them to do things differently. Looking at the UAE press, there isn't a tremendous amount of self-reflection going on. No calls for tougher regulations to prevent bubbles from developing. No talk of diversifying away from real estate. Maybe it's too early to see those signs. But I hope the lesson doesn't go unheeded.
Likewise, I think Moody's has hit the nail on the head when it talks about institutional erosion in Kuwait. I would argue that it's not only because of the National Assembly, although that certainly is playing a role. But the lack of oversight and the inability of the government to anticipate troubles in its own domestic financial industry suggests that many things aren't working in Kuwait these days. Kuwait could use the opportunity of the crisis and the dissolution of Parliament to get its governing house in order but one senses that it's inertia that has and will rule the day in that country.
All in all, it's a shame that both countries don't seem to be flexible enough to learn from these painful lessons. The UAE is particularly disappointing because of all places in the Gulf, and the the Middle East quite frankly, the UAE was proving to be innovative and new. Granted, the country never left the statist model behind (in fact you could argue that with groups like Dubai World, they reinvented it), but with a dash of flash, credit, and private-public partnerships, it would seem that country in fact could become the next Singapore. It's too bad that Emirati decision makers may only be innovative on the up side and not on the down. As a result, the next time a crisis hits, they might not be so well positioned to withstand it.
Likewise, Moodys has taken a new look at Kuwait and has publicly announced the country's sovereign rating is in review for a downgrade. Among the reasons Moodys cites in its call for a review are the recent resignation of the cabinet and the dissolution of the National Assembly. To quote directly from the press release issued today, "In Moody's opinion, these events reflect an erosion of institutional strength which is of particular concern given the current challenges presented to Kuwait by the global economic and financial crisis."
Although neither the downgrade of Emaar nor the potential downgrade of Kuwait's sovereign rating should be surprising, one hopes that each country and market take away some lessons learned from the downgrade. In UAE, development needs to move away from a single track focus. Stretching yourself so thin, both from a borrowing and a profit perspective, in real estate alone has led to a host of problems for the Emirates. Besides subjecting your domestic market to inflationary pressures (cost of labor and construction materials have been accelerating) and speculation due to easy and cheap credit which in turn exacerbates the inflationary pressures, you leave your economy vulnerable to any number of possible downturns. It's a lesson that the UAE well understands now that Abu Dhabi has bailed Dubai out and may have to again. Still, I am not entirely sure it's a lesson that will prompt them to do things differently. Looking at the UAE press, there isn't a tremendous amount of self-reflection going on. No calls for tougher regulations to prevent bubbles from developing. No talk of diversifying away from real estate. Maybe it's too early to see those signs. But I hope the lesson doesn't go unheeded.
Likewise, I think Moody's has hit the nail on the head when it talks about institutional erosion in Kuwait. I would argue that it's not only because of the National Assembly, although that certainly is playing a role. But the lack of oversight and the inability of the government to anticipate troubles in its own domestic financial industry suggests that many things aren't working in Kuwait these days. Kuwait could use the opportunity of the crisis and the dissolution of Parliament to get its governing house in order but one senses that it's inertia that has and will rule the day in that country.
All in all, it's a shame that both countries don't seem to be flexible enough to learn from these painful lessons. The UAE is particularly disappointing because of all places in the Gulf, and the the Middle East quite frankly, the UAE was proving to be innovative and new. Granted, the country never left the statist model behind (in fact you could argue that with groups like Dubai World, they reinvented it), but with a dash of flash, credit, and private-public partnerships, it would seem that country in fact could become the next Singapore. It's too bad that Emirati decision makers may only be innovative on the up side and not on the down. As a result, the next time a crisis hits, they might not be so well positioned to withstand it.
Tuesday, March 3, 2009
Some food for thought
Rather than blog today about Middle East developments, I'd like to flag some ideas that I think can and should serve as useful frameworks in understanding the economic universe as we go forward through this crisis:
The FT ran an excellent synopsis of "what went wrong" in financial markets in yesterday's paper. It's a bit funny but a bit sad that many of the best economists have spent more time trying to understand what the past few months really means or how much worse things can get (if you are Roubini) rather than trying to understand how we get out of this. They leave that, I guess, to the bureaucrats.
But the FT article raises some concepts that I think should apply not only to banking and investment but also to how everyday analysts like myself look at the world. The article lays out the concept of disaster myopia, or, as defined by the article, the tendency to underestimate the probability of disastrous outcomes, especially for low frequency events last experienced in the distant past. The author then goes on to explain that the markets' over-reliance on "the wisdom of crowds," ratings agencies, and econometric models led to what was fundamentally a lack of independent thinking, or for a better term, creativity. No one was able to see the fundamental errors in the investment styles that predominated the market from 1998-2008.
Untangling that web will be the work of economists for decades and while the FT article attempts to start to unravel some of the multi-layered issues that lead to the current crisis, it simply cannot account for everything. But the issue of a lack of creativity when it comes to economic analysis seems to be absolutely correct. In a less charitable mood, I would almost call it a lack of common sense rather than creativity. Inevitably, it seems, economists, financial gurus, and bankers are hard wired to dismiss contrary evidence. I would say this is true as much on the upside as it is on the downside. When noted geniuses like Warren Buffet can admit to not seeing the downside risk on oil prices last year and losing billions of dollars as a result, you know you have a problem. Why is it then that we cannot recognize changes in paradigms before they get too extreme? Why does a bubble have to burst before anyone recognizes that a bubble existed in the first place? And why do economists persist on believing that the laws of nature (what goes up must come down) do not apply to economics?
I think there may be a few large issues that need to be addressed if economics is to become more flexible and dynamic a discipline as it can be. Despite the discipline's dismal record of forecasting, economists persist on seeing themselves as quasi-scientists. The more hard data we have, the better. We rely on macro statistics to determine what's happening and what's likely to happen. The problem is that macro statistics are always historic. They tell you what's happened not what's going on currently. And econometric models more often than not forecast based on a straight line from those macro indicators. They are fundamentally unable to anticipate the discontinuous event.
But signs of the discontinuous events are always out there if you are able to keep an open mind. In September 2007 I listened to a trader warn of an impending disaster on Wall Street. He talked about the collusion of ratings agencies in rating CDOs, talked about the toxic assets that banks were hiding, and predicted the problem was going to grow much, much larger since those toxic assets were going to become even more toxic as sub-prime mortgages reset. The macro data did not support such analysis at the time, so his forecasts were largely dismissed. (We'll leave aside here that the data didn't support the analysis because the banks had not yet owned up to their looming balance sheet troubles.) Again, in June of last year, I heard commodities traders talk about how inflated the price of oil had become and predict that the collapse would be less likely to come from a disruption in the physical market but more from a disruption in financial markets. But, once again, despite the seemingly inexplicable run up in prices, analysts still argued that it was the fundamentals market and Chinese oil demand that were keeping prices up. That prices collapsed rapidly a few months later was something that analysts dealt with later.
A very smart and insightful colleague has for years argued that the devil is in the details. If you want to understand how the world works, there is little use to studying the macro numbers. Look for the micro stories instead. Because micro trends can add up to macro tsunami. If you need proof of that, think about how one speculator in Las Vegas, betting on the price of real estate continuing to rise, made up a market and a market took down a global financial system.
It's something to think about...
The FT ran an excellent synopsis of "what went wrong" in financial markets in yesterday's paper. It's a bit funny but a bit sad that many of the best economists have spent more time trying to understand what the past few months really means or how much worse things can get (if you are Roubini) rather than trying to understand how we get out of this. They leave that, I guess, to the bureaucrats.
But the FT article raises some concepts that I think should apply not only to banking and investment but also to how everyday analysts like myself look at the world. The article lays out the concept of disaster myopia, or, as defined by the article, the tendency to underestimate the probability of disastrous outcomes, especially for low frequency events last experienced in the distant past. The author then goes on to explain that the markets' over-reliance on "the wisdom of crowds," ratings agencies, and econometric models led to what was fundamentally a lack of independent thinking, or for a better term, creativity. No one was able to see the fundamental errors in the investment styles that predominated the market from 1998-2008.
Untangling that web will be the work of economists for decades and while the FT article attempts to start to unravel some of the multi-layered issues that lead to the current crisis, it simply cannot account for everything. But the issue of a lack of creativity when it comes to economic analysis seems to be absolutely correct. In a less charitable mood, I would almost call it a lack of common sense rather than creativity. Inevitably, it seems, economists, financial gurus, and bankers are hard wired to dismiss contrary evidence. I would say this is true as much on the upside as it is on the downside. When noted geniuses like Warren Buffet can admit to not seeing the downside risk on oil prices last year and losing billions of dollars as a result, you know you have a problem. Why is it then that we cannot recognize changes in paradigms before they get too extreme? Why does a bubble have to burst before anyone recognizes that a bubble existed in the first place? And why do economists persist on believing that the laws of nature (what goes up must come down) do not apply to economics?
I think there may be a few large issues that need to be addressed if economics is to become more flexible and dynamic a discipline as it can be. Despite the discipline's dismal record of forecasting, economists persist on seeing themselves as quasi-scientists. The more hard data we have, the better. We rely on macro statistics to determine what's happening and what's likely to happen. The problem is that macro statistics are always historic. They tell you what's happened not what's going on currently. And econometric models more often than not forecast based on a straight line from those macro indicators. They are fundamentally unable to anticipate the discontinuous event.
But signs of the discontinuous events are always out there if you are able to keep an open mind. In September 2007 I listened to a trader warn of an impending disaster on Wall Street. He talked about the collusion of ratings agencies in rating CDOs, talked about the toxic assets that banks were hiding, and predicted the problem was going to grow much, much larger since those toxic assets were going to become even more toxic as sub-prime mortgages reset. The macro data did not support such analysis at the time, so his forecasts were largely dismissed. (We'll leave aside here that the data didn't support the analysis because the banks had not yet owned up to their looming balance sheet troubles.) Again, in June of last year, I heard commodities traders talk about how inflated the price of oil had become and predict that the collapse would be less likely to come from a disruption in the physical market but more from a disruption in financial markets. But, once again, despite the seemingly inexplicable run up in prices, analysts still argued that it was the fundamentals market and Chinese oil demand that were keeping prices up. That prices collapsed rapidly a few months later was something that analysts dealt with later.
A very smart and insightful colleague has for years argued that the devil is in the details. If you want to understand how the world works, there is little use to studying the macro numbers. Look for the micro stories instead. Because micro trends can add up to macro tsunami. If you need proof of that, think about how one speculator in Las Vegas, betting on the price of real estate continuing to rise, made up a market and a market took down a global financial system.
It's something to think about...
Subscribe to:
Comments (Atom)
Posts
