Published in Portfolio
George Bush Goes to the Middle East
Published by Current on 2008-01-07
President George W. Bush's nine-day overseas trip starting Tuesday doesn't include the EU, but he will be first big-name visitor to the world's newest economic powerhouse, the GU, where, if Washington plays its cards right, enormous new opportunities await U.S. companies.
That's the Common Market launched just a few days ago by the six Arab nations that form the Gulf Cooperation Council, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The six GCC countries have a combined GDP of $800 billion, and they sit on nearly 5 billion barrels of crude oil and 41.55 trillion cubic meters of natural gas reserves. These countries account for about 45 percent of the world's proven oil reserves of 1.1 trillion barrels; they also possess nearly 20 percent of proven global natural-gas reserves.
While their income from oil and natural-gas exports has been steadily rising since oil prices started shooting up after the Arab-Israeli war of 1971, last year's unprecedented surge in crude-oil prices, which hovered near $100 a barrel, fetched the GCC countries more than $700 billion in revenues - a bonanza that created such vast surpluses that, for the most part, these countries haven't quite fully figured out what to do with all this cornucopia, notwithstanding already ambitious plans to expedite economic and social development in the region.
For foreign investors - particularly Americans who have long salivated at the prospect of better competing with Europeans and Asians who have traditionally dominated projects in the petrodollar-fuelled region - the Common Market offers enhanced opportunities for regional projects in both the private and public sectors.
The GCC countries, where some 35 million people - mostly foreign workers - live, are already spending $2.6 trillion on 3,500 projects related to their infrastructure, education, health-care, real-estate, entertainment, tourism, and telecommunications, among others. (Of these projects, King Abdullah Economic City in Saudi Arabia is the largest construction project, valued at $120 billion; Dubailand, a huge entertainment complex in Dubai, will cost $110 billion; Kuwait's Silk City Project is valued at nearly $90 billion.)
But what the GCC countries plan to spend additionally over the next five years is mind boggling. And how much is that? At least $5 trillion. The city of Abu Dhabi - the U.A.E.'s capital - announced plans last week to spend $200 billion on urban development between now and 2013. These plans include a railway system, new residential and recreational areas, said Falah Mohammed Al Ahhabi, director-general of urban planning in Abu Dhabi.
"The real estate and construction sectors will witness unprecedented growth, as the plan visualizes Abu Dhabi becoming one of the largest capital cities in the world," he told reporters.
The GCC's expenditures will include not only domestic economic development, but also investments in foreign companies. For example, the Abu Dhabi Investment Authority - which poured $750 million into Citigroup not long ago making it the largest stakeholder in the financial-services behemoth - is reported to have more than $700 billion at its disposal for additional investments. And not to be outdone by its traditional Gulf rival, Saudi Arabia will soon be establishing a sovereign wealth fund, said to be capitalized at $900 billion. Dubai, too, is steadily expanding its investments abroad, with high-profile stakes in bourses such as Nasdaq, and companies such as Sony.
Of course, major investments from the Middle East are certain to be closely scrutinized by U.S. authorities. Says Eckart Woertz of the Gulf Research Institute in Dubai, "The dollar is a disaster waiting to happen; oil-price strength is fundamental; and current account surpluses of oil exporters are here to stay for a long time. So if they - and the other oil exporters, and the Asians - decide to buy more and more real stuff such as equities, gold etc., instead of increasingly worthless treasury bills, I wouldn't rule out protectionist measures and capital controls by the U.S. I think the main real reason for such protectionism will be economic, not political, although they will be, of course, a lot of talk about terrorism."
Be that as it may, U.S. companies cannot afford to ignore the GCC region. Take, for instance, the retail industry here. Led by demand for luxury goods - mainly from Europe and the U.S. - the industry exceeded $100 billion in 2007. This figure is expected to increase in 2008. According to a new report released this week by the Arab Monetary Fund, private consumption in the U.A.E. - which means spending by individuals and families on goods and services - amounted to $84 billion last year, or nearly $20,000 per capita in a country with a population of barely 4.25 million. Nearby Qatar, which has a population of about a million, placed second in consumer spending in the GCC, with an average of $12,500 per person. And Saudi Arabia, with an estimated population of 23.6 million, showed per capita consumer spending of $3,764.
All this should be good news for President Bush, who's expected to be accompanied by administration officials involved with developing commercial ties to the GCC region. But will Bush pursue an economic agenda as vigorously as a political one?
The conventional wisdom in Washington seems to be that President Bush - in addition to discussing the Arab-Israeli issue with the Israelis, Palestinians and Egyptians - will want to reassure the four GCC countries he's visiting - Bahrain, Kuwait, Saudi Arabia and the U.A.E. - that the United States is fully committed to protecting them against any hegemonic plans that their non-Arab neighbor, Iran, may entertain. (The White said that Bush leaves Washington on Tuesday evening, and that the official itinerary begins in Israel on Wednesday and continues with the Palestinian stronghold of Ramallah in the West Bank; Kuwait; Bahrain; the United Arab Emirates, including Dubai and Abu Dhabi; Saudi Arabia, and Egypt. It is Mr. Bush's first trip as president to Israel or Saudi Arabia. The possible unannounced stops include Iraq and Lebanon, two of the places where Mr. Bush has pushed his "freedom agenda" for the Middle East harder than anywhere, according to The Wall Street Journal.)
But the GCC leaders, who formed their organization 26 years ago, have already reached a modus vivendi with Iran. They invited President Mahmoud Ahmadinejad of Iran to a two-day GCC summit in Doha last month, where the talks focused on building stronger economic and commercial ties to the Persian power, which has a population of 71 million. Iran has proposed a regional free-trade pact with the GCC: Of Iran's global exports of $100 billion annually, about $2 billion go to the U.A.E. - mostly agricultural products, including pistachios - while Iran imports more than $10 billion worth of electronic and other manufactured goods from the U.A.E., mainly through Dubai. Iranian officials have said that Iran has invested more than $120 billion in the U.A.E. economy through various entities.
The GCC countries are welcoming such investment, known generally as FDI, an acronym for foreign direct investment. In the U.A.E., for example, FDI last year grew by nearly 11 percent to nearly $20 billion from the 2006 figure, according to estimates by the International Monetary Fund. The new Common Market, in principle at least, creates the possibility of enhanced FDI, especially in manufacturing: the GCC countries are still essentially raw-material exporters despite some diversification.
The Common Market also opens doors for more regional commerce. Intra-GCC trade accounts for only around 7 percent; in the case of the European Union countries, the figure was two-third before economic unification.
The launch of the Common Market has its supporters as well as skeptics. For example, Dr. Woertz of the Gulf Research Institute notes that trade of goods and services has been already liberalized under the GCC customs union, which was launched in 2003, though it is not yet fully implemented.
"This makes the GCC more attractive as destination of exports, as the market is larger (once customs union is fully implemented), but one needs to hold the horses a bit: the GCC's GDP is roughly equivalent to the one of The Netherlands -- hardly a mass market. And the Asian competition has not slept in recent years," he says.
I.M.F. officials point out that barriers in GCC countries to free movement of goods, services, national labor, and capital have been largely eliminated, prudential regulations and supervision of the banking sector are being gradually harmonized; banks are now allowed to open branches in member countries; individuals and corporations of GCC countries have been granted national treatment for tax purposes; and nationals have been permitted to own real estate and invest in the stock markets of all GCC member states.
"The planned monetary union of GCC countries by 2010--an initiative to cap the integration effort initiated in the early 1980s--will reinforce the beneficial efforts of ongoing structural reforms and related macroeconomic polices," a recent I.M.F. report says. "The monetary union is likely to promote policy coordination, reduce transaction costs, and increase price transparency, resulting in a more stable environment for investment. In particular, the introduction of a common currency is likely to enhance growth prospects by contributing to the unification and development of the region's capital markets and improving the efficiency of financial services."
Common currency for the Gulf countries? Guro, anyone? Or Gulfar?
Senior Writer and Global-Affairs Columnist