Tuesday, May 17, 2005

2005 MENA Economic Developments and Prospects

The World Bank has issued a report which, on the face of it, seems to be telling the rentier states of the Gulf what to do with all this money that they're accumulating thanks to the high oil prices . It might well have been titled "How to make hay while the sun is shining."

You can get the report here.

One theme of the report is that while things might be going well at the moment - there's nothing like oodles of cash to speed up decision-making - the lack of public accountability and specifically the lack of useful, transparent and comprehensive information means that there is no mechanism to check bad decision-making. The UAE springs to mind - after giving civil servants (read 'Emiratis') a pay rise back at the beginning of April, the government is now frantically trying to make sure that the decision doesn't translate into wage-push inflation.

It's an odd way of making economic policy. Along similar lines, the government of Dubai had to buy Chevron's subsidiary Caltex out of the national petrol station business in April because the government's insistence that petrol should be sold cheaply meant that the company, EPPCO, was losing money hand over fist. Now the government is effectively subsidising cheap petrol. Thankfully for Dubayyis, the secret police is quite effective or else it'd all end up on the black market like in Iraq.

Another interesting theme is the way that the region has turned in on itself. After the sociopolitical shock of 9/11, Westerners have been more reluctant to go to the MENA, and locals have been reluctant to go abroad. There has been a significant repatriation of capital by Gulf investors, which has flooded the region with liquidity.

The liquidity flood seems to be making the financial markets get very, very hot. IPOs and bond issues are regularly oversubscribed many, many times - at the end of April, an IPO in Aabar, which as of yet seems only to exist in brochures (al-Bayan reported on April 1 that it was 'in process of creation'), was oversubscribed 800 times.

To my untrained eye, it looks like there's a risk of a feedback loop setting into the financial markets in the Gulf, particularly in the UAE. The high levels of liquidity in the world in general mean that lenders are already underpricing risk, and there's an inordinate amount of speculation in Gulf stocks and bonds. Combine the two and you have a heady mix. As the FT's Lex Column noted on May 16:

And there are reports that some of those buying shares in Aabar were able to get loans of more than 10 times their own cash contribution to fund it. In the world's most volatile region, that sort of leverage is about the last thing that is needed.

And concerns were raised by a senior Abu Dhabi banker in Gulf News:

"I don't think banks have adhered to Central Bank regulations. Much of the money gone into the subscriptions is bank money or paper money and not the investors' own money," said Ziad Al Dabbas, the manager of National Bank of Abu Dhabi's domestic capital markets group.

A great deal of this IPO and bond issuing activity looks to me like a stealth tax for a region without taxation. Aabar looks rather like a private equity firm: its stated purpose is to aquire existing oil companies in the region. The question is, who owns the oil companies? And with 45% of its shares to be allocated to local firms and individuals (who just might include those close to the ruling families), I don't see Aabar leaving government control.

The rest of the WB report says that governments are generally reacting to the current oil boom more prudently than in previous booms, but that there is still rather a lot of work to be done. In all the economies of the region, the major problem is removing protection and subsidies, which, as Westerners also know all too well, is a pretty difficult thing to do even in a relatively prosperous economy, regardless of whether it's better for the economy or not. There is a strong risk that the oil boom will allow the region to defer its problems rather than addressing them - though in that regard the general push towards more liberal economic policies is quite encouraging. That's particularly the case in Egypt and Dubai, where hydocarbon resources are rather more limited. But overall, the regional economies have not improved anything like quickly enough to properly deal with the pressure of rapid demographic growth - for many of the rentier states, their baby boomers are just coming of age.

Watch this space, then, I suppose...

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