Marketplace Middle East - Blog
12/11/08
Ripples off the Gulf

More than 30 years of conflict and rolling political crises do force a measure of discipline if you are to succeed in business under the worst of conditions.

It is in that context that we witness the strength of Lebanon’s banking system today -- the economy at home and even the country’s economy abroad. The last bit sounds a bit unusual, but rings true.

In a country of just over three million people, Lebanon remains both plugged into and dependent on its Diaspora. One third of its total economy is made up of the repatriation of earnings from the 350,000 Lebanese citizens working throughout the Gulf. The good news has been they were pumping record amounts back into their homeland; the bad news is the impact the regional slowdown will have on Lebanon next year.

The Lebanese economy in the Gulf, both the workforce and investment by the large construction companies and hoteliers, according to Finance Minister Mohamad Chatah, is larger than the domestic economy which is just shy of $30 billion.

Lebanon will likely finish 2008 on a high note, with growth above six percent. “There are indications the rate is even higher,” said Chatah the former International Monetary Fund Official in an interview from Beirut, “We used five percent for our budget projections for 2009 and we are likely to reduce that to three to three and a half percent.”

Chatah is not alarmist; in fact he is a common sense realist noting that Lebanon will fare much better than most. This is due in part from advance planning by the country’s central bank which kept banks out of investments that were riskier than many presumed.

To play off the phrase from former Citigroup CEO Chuck Prince, Lebanese banks were never on the dance floor when it came to some of the riskier products that were being traded. This Chatah says “paid dividends during the recent global turmoil.”

The finance minister does agree that Lebanese construction companies may be forced to retrench from some of the major Gulf projects on the drawing board due to the uncertainty, and he like many of his fellow economists, was reluctant to call a bottom to the economic turmoil.

“It is the $64 trillion question. Overall the response makes sense to us as economists and hopefully to the business sector, to taxpayers and to consumers.”

Lebanese construction groups, like those from Turkey and other parts of the region have been enjoying the go-go days of $100 oil. As we begin to put the wraps on 2008, many are looking to measure worst case scenarios for next year. What will push ahead or be put aside in countries from Saudi Arabia to the UAE and Qatar?

A much bigger question is what happens throughout the broader Middle East. A very different and positive trend in this economic boom has been the ability and the desire by major Gulf investors to look closer to home. Egypt, Algeria, Morocco, Lebanon and the Palestinian territories have been magnets for petrodollars.

DP World, the ports operator of Dubai World, has been at the forefront of this effort. Leveraging the Emirate’s history as a trading hub, Chairman Sultan bin Sulayam has forged deals from China to Peru. The group has pledged to invest over $700 million in Senegal, the same amount in the Sokhna Port south of the Suez Canal and at the start of November took over two port operations in Algeria.

If you have one of those classic maps of the world on the office wall, you would need 30 pins to cover DP World operations. Ten years ago, we certainly would not be having the same conversation.

That is both the blessing and the curse of this downturn. No-one is interested in picking up sticks and leaving a high growth opportunity. This phase, which many have labeled an Arab Renaissance, is built on reducing the dependency on oil revenues, diversifying their economies, restructuring education systems to match the 21st Century and building regulatory institutions alongside the gleaming, mirrored skyscrapers you find in every city.

To date, we have witnessed an intense competition amongst the major players of the region. The race to be first and the biggest will likely have to change.

Think of the classic fable "The Tortoise and the Hare," where the hare confident of winning the prize napped halfway through the race. This is no time for napping or sprinting.

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I agree, the Middle East was never going to be spared from the financial crisis. Fortunately, there is less deleveraging that must take place relative to the rest of the world. It's the residential construction site workers and private equity bankers who are worst affected. This isn't great news for Lebanon, but it suggests the process may be less protracted. It's still likely that the Middle East, and Asia for that matter, will recover faster than the developed countries if only because they have a smaller adjustment to make in their saving habits. Watch for the ties between Asia and the Middle East to tighten as the two markets look for alternatives to the developed countries. (This echoes your important point about major Gulf investors looking closer to home).
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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