February 03, 2008
Dollars, Gulf Politics & MENA Economies, tip, tiptoeing...
Without extended commentary, I draw attention to The Financial Times report that Qatar is considering breaking the dollar peg, following Kuwait and certainly if it does so putting a nail in the coffin of the original vision of the unified Gulf currency zone.
The report, which if realized, would make Qatar the 2nd after Kuwait to break the strict dollar peg, highlights a feedback between the current American Administration's profligate fiscal policy -itself tied to a frankly delusional foreign policy that has by evident incompetence as well as imperial overreaching damaged credibility generally [never mind the exact politics]- and regional politics and policy. Make no mistake, the dollar peg has long been as much a politic as an economic statement.
Of course taking such a step in an environment like the present is economically rational - above all if one believes that one is entering a period of long term dollar weakness or instability, although a more flexible exchange regime is generically usually a better thing regardless of the specific dollar issues.
A key quote:
Qatar may host the region’s largest US military base but it is also known as a policy maverick, perhaps less daunted than most of its Gulf neighbours about taking the politically sensitive decision of severing the long-held tie to the dollar.
Kuwait last year became the only Gulf country to move from a dollar peg to a basket of currencies. It has allowed the dinar to rise 6 per cent since its decision.
Also of note is rising inflation issues in Saudiyah and of course in the Emirates. The Federal Reserve with its recent rate cuts is exporting to dollar tied economies a stagflationary policy.
I note by the way this closing comment in the article, which it so very typical of the infantilisation of Saudis:
“We import everything here in Saudi Arabia and it has all become more expensive,” says Ibrahim Abdel-Rahman, a 25-year-old banker. Like many others he blames the riyal peg to the dollar. “But the Americans will not let us drop that.”
Utter bollocks, its his own Royals that are afraid to, the current American Administration lacks the acumen to think these issues through one way or another. And in the run down of an Administration, I believe one can count on near policy paralysis given the weakness of Bush ibn Bush.
All this looks queerly familiar, rather like the 1970s, but with the US playing a role of a United Kingdom plus itself. In any case, for those of us with relatively mature memories of the 1970s, this run up now - for all its differences - has some striking familiar aspects.
For the MENA region write large, it is hard to generalize. Taking another FT article as a point of departure:
an article claiming the Gulf boom is spreading through the Arab world, which I think is at best a Gulf centered view. Or perhaps a Machreq centred view. Before commenting on the article, I would note that the Maghrebine economies, ex Algeria are rather more fundamentally tied to W. European and global developed markets exports than to the oil economies, and as such while they are deriving some (limited) investment capital from the Gulf, their general fortunes are tied to the West. Indeed, most Gulf investment capital seems to be going, in the Maghreb, into luxury / tourist real estate, markets in the Maghreb that are essentially dependent on European markets.
In the Machreq the equation is somewhat different, given more real investment (if often mediated by investment managers) of Gulf capital, but even more, a tendency to suck in labour into the Gulf from the Machreqi neighbours with higher skill sets and less of a 'privileged' attitude than Gulfies (as well as not having the tribal ties that can trump management decisions - this by the way is an enormous advantage in more modern societies in the Machreq and even more so the Maghreb, as for all the issues of nepotism and "wasta" the Maghreb, Egypt, and Lebanon [as well as usually Palestinians] do not have genuine tribal structures in urban areas that bollix up modern management and modern society. In terms of personnel management, this is a vast, vast advantage. If the Maghrebines should thank the French for anything at all it is for them setting the stage for the post-independence tendency of the French trained administrators to break the tribes, rather than the English tendency to work through them).
The Gulf oil boom is sending ripples across the Arab world as capital from the oil-rich states increasingly flows into less developed parts of the region.
From Cairo to Casablanca, Gulf investment, in sectors ranging from real estate to financial services and telecommunications, has been attracted by a liberalisation of the economies and is helping drive faster growth rates.
Well, Cairo to Casablanca has a nice note, but I think Beirut to ... Tunis? Beirut to Cairo at least. It is certainly true that as compared to economic regulation only ten years ago, most of the non-petrol economies (ex Syria) have vastly liberalized their economies, to the general improvement of investment and domestic business climate.
Gulf companies that have matured at home have been scouting for acquisitions outside their markets.
Pointing to Emaar, the Dubai real estate giant, one leading investor in the region says: “The Gulf private sector is becoming more aggressive and wants to be a global player, so companies are repeating the models they built at home in nearby markets.”
But the example is telling.
Real Estate. Or as I saw in a recent analysis / discussion in the Maghreb - probably in Morocco since the economic press actually has real debates, but I forget - in Maghreb on counts on Gulfies buying real estate and building, Europeans for investing in productive investment.
The emerging trend was highlighted in a report this week by the Institute for International Finance, which represents global financial institutions. It estimated that $60bn (£30.7bn, €41bn), or 11 per cent of the foreign assets in the Gulf Co-operation Council countries, had been invested in other parts of the Middle East and North Africa in the 2002-06 period. The GCC is made up of Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates.
Though far smaller than investments in Europe and the US, the amounts are comparable to Gulf investments in Asia, said the institute. “A greater share of GCC funds is staying in the Middle East and North Africa region, where quickening liberalisation, privatisation and regional integration ... has lured capital that would have previously headed away from the Arab world,” said the IIF report.
Probably true, but I suspect that if one decomposed (and I can't find the specific report, rather wish they had included the proper title) the components, that a significant percentage of MENA investment by the Gulf is in real estate, either directly or indirectly.
Florence Eid, partner at Pantera Capital in London, estimates that Gulf investments in the rest of the Arab world represent 13 per cent of these economies’ 2006 gross domestic product.
“The pick-up in intra-regional flows has considerable implications when contrasted to the relatively small capacity of these economies to absorb investments,” she says. “While it’s too early to fully capture the impact, there are clear signs the flows are contributing to a structural transformation in the economies of these countries, which are pushing ahead with reforms.”
Egypt boasted record foreign direct investment inflows of $11.1bn in the financial year ending in June 2007, of which $5.2bn was invested in new companies and the expansion of existing companies. Some $2.5bn of that amount, or 47 per cent, was GCC money, according to investment officials.
The Egyptian figures are impressive, above all with respect to 1/2 roughly going to new firms.
And key, from EFG Hermes:
The UAE is by far the largest Gulf investor in Egypt, injecting about $3bn into the economy last year, followed by Saudi Arabia.
“I think there’s a cultural bias [from GCC investors] towards Muslim and developing markets, where they feel their capital is more welcomed, where they feel more secure, and secondly they believe these countries have good growth opportunities and they are more familiar with them,” says Philip Khoury, head of research at EFG-Hermes.
Investments in sectors such as telecommunications and construction should create thousands of jobs. But for “the more complex FDI, which tends to be generative of long-term employment opportunities, you do have to look to the west for that, the US and Europe, for example the Renault investment in Morocco,” Mr Khoury says. Long-term job creation is key throughout North Africa to tackle high unemployment.
Egypt’s gross domestic product grew by 7.1 per cent in the last financial year, up from 6.9 per cent the previous year, while Morocco’s economy has been growing at an average of 4.9 per cent this decade as it enjoys booms in real estate and tourism.
The middle paragraph really makes the statement. Telecoms can create a lot of jobs, but construction, well, it absorbs low skilled labour temporarily, but real estate speculation does not create long term growth capacity.
Analysts say not all mega-deals announced for Morocco have translated into actual investments, but the authorities are expecting Gulf inflows, which were at less than 10 per cent of total foreign direct investment in 2006, to accelerate this year.
Actually in Morocco and Tunis one has seen headliners announced quietly pull out. Lord knows with Algeria, but one suspects the same.
My lesson, in terms of successfully putting your money into the Maghreb, even if it's Machreqi money, do it from a Maghrebine or European base.
Probably rather more important for the Machreq - meaningless for the Maghreb - are the Gulf expats (white collar and labour) transfers, although transfers are notoriously poorly transformed into real growth, rather than boosting consumption in ways that are not sustainable if the transfers dry up:
Remittances from the Gulf are also on the increase as Arab workers in the region benefit from the boom. In the past financial year, remittances from the Gulf to Egypt were worth $3.1bn, compared with $1.3bn in 2003, while remittances from the US grew from about $1bn to $2.1bn over the same period.
However, in spite of the increased investment from Gulf countries, North African states still rely heavily on the west, and GCC investment is unlikely to insulate them from any slowdown in Europe or the US, Mr Khoury says.
“I think it provides a cushion, it provides some protection, but at the end of the day no [insulation],” he says. “If you look at the destination of exports, both goods and services, from these countries, it’s mostly the US and Europe. So definitely if there were to be a slowdown in Europe and the US, you will see it in the external account and eventually the domestic economies in these countries.”
Well, yeah... Oddly if Egypt were clever, it might be able to make much more money off of exports to Gulf, but Gulf consumption is rather tilted to consuming luxury to high end goods, and on low end ... well India and China have substantial advantages. Nevertheless, Egypt could do far better if it threw off its socialist dead weight past.
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Re dollar instability, my view is that the dollar will be relatively stable for the next few years against other currencies. The next one to blow, IMO, is the euro, but that's another discussion entirely.
However, floating is always better than fixed. For commodity countries like Qatar, though, you have to watch out that the currency winds up floating higher solely because of commodity exports, which is, after all, what you want to diversify away from, over the long term. A currency that's high just because your commodity export is high will choke off other exports, which kind of kills the whole point of having a floating currency regime.
I heard some commentator over here say something similar, re intra-Arab investment, to your view that North Africa is more closely tied to Western Europe: he put it that the flow of oil money was important to most of the region, with the exception of Morocco, which made my ears perk up.
Overall, it's of course a far better thing that this round's money is staying in the region, rather than being recycled through the West, as happened the last time.
The Saudi comment is amusing. I don't recall hearing or reading of any concern re the various dollar pegs in the region from the Administration. Granted, it would be big news if the Saudis were to drop theirs, given how important they're seen as being, and the drumbeat of bad news re the dollar recently. But ibn Bush (neat construction) would probably have to be given a quick Powerpoint presentation to get him up to speed on the significance. Does he even know what advantage having the world's standard currency gives him, I wonder, and what the costs are as well?
Not that he's alone far as politicians go: in a surprisingly amusing passage on the Austro-Hungarian bank's foreign currency policies in his otherwise dry-as-dust Dynamic Theory of Foreign Exchange, Paul Einzig managed to slice and dice the Libertarian's darling von Mises ("Although Mises had a well-deserved international reputation as a theoretical economist, he had no first-hand contact with the market, nor even, it seems, an adequate knowledge of its essential technical details"), and get this one in re your average politician: "I certainly would not envy the task of a Chancellor of the Exchequer who would have to explain to the House of Commons some Forward Exchange policy based on the Interest Parities theory."
Well, it was amusing in context, anyway. I guess you had to be there.
Posted by: pantom at February 8, 2008 12:04 AM
Of tangential interest, here's an article describing the currency precipice that USA and China are waddling towards arm in arm. The dollar, it appears, is everyone's problem.
Posted by: Klaus at February 9, 2008 03:55 PM
Christ I wish the UAE would depeg. I'm itching to move some moolah out of there but just can't bear to do it at the current rates.
Posted by: secretdubai at February 16, 2008 08:43 AM