Marketplace Middle East - Blog
Tales from a port city
In a country that is not known for its openness, the port city of Jeddah provided a safe harbor for some frank discussion about the Kingdom’s future.

Regular visitors of Saudi Arabia know that Jeddah has for 1400 years served as a crossroads on the Silk Route. It has always been a merchant city where new ideas are brought into the agora and passed on.

This was in abundance at this week’s Jeddah Economic Forum, a meeting place for the past nine years and still able to bring in some heavyweight names. Capturing the most attention were the former Federal Reserve Chairman Alan Greenspan, Nobel Laureate Muhammad Yunus, and Saudi Labor Minister/ renowned author Ghazi Al-Gosaibi.

All three carried the show – the first sharing his insights on the pending recession in the United States. Greenspan said the U.S. economy was in “stall speed and the longer that goes on the greater the possibility of slipping into recession.” And the veteran of usually cautious phrases (trying to avoid the global limelight by restricting television cameras in an agreement with the organizers) said that de-pegging the Gulf currencies from the dollar would reduce pressure on inflation.

The idea was quickly rejected in the next speech by the Vice-Governor of the Saudi Arabian central bank Muhammed Al-Jasser. While he praised Greenspan for his wisdom and was a student of his works, he was bold enough to suggest that history has not proven his mentor in this case to be correct. It is a huge issue in the Gulf, with record oil prices also delivering record inflation.

It was the sort of candid give and take I was not expecting in Saudi Arabia. Time again, whether through questions from the floor on the panels I was chairing or through answers from electronic polling, participants were direct, probing and seeking solutions to the shortcomings they see in society.

Mind the Gap

What does this tell us about Saudi society today? With oil above $100 a barrel and revenues to Saudi Arabia alone predicted to top $200 billion dollars in 2008, the people want action and results. This is the biggest challenge. There is a huge gap right now between expectations and reality. Yes, Saudi Arabia plans to build seven new economic cities from scratch, with a budget of at least $100 billion. Twenty-eight billion dollars will be spent this year alone on primary and secondary schools. The aim is to develop human capital.

Skilled workers will be in demand in these new cities but they will need advanced degrees or, at the very minimum, quality technical training. The government was candid about the current problems. Both Saudi Royal Prince Turki Al-Faisal and Labor Minister Al-Gosaibi acknowledged that the reform process should have started 10 to 15 years ago. A big investment opportunity 30 years ago in Saudi Arabia was, many say, ill-conceived and now the new leader King Abdullah is acting like a man in a hurry. He should be.

Official unemployment of 12 percent downplays youth unemployment of more than double that. Fifty percent of the population is below the age of 20 and there are more on the way. They need jobs to avoid civil agitation.

The blueprint put forth by this government is ambitious -- probably the largest undertaken by a government since the rebuilding of Germany and Japan after World War II. But buildings alone, or the hardware, will be of little use if the people, the proper software, are not in place.

Perhaps this is why the participants at this year’s forum were yearning for simple solutions to their challenges, and why they afforded Nobel Laureate Yunus near rock-star status. He shared the work of Grameen Bank, lending without collateral for the poorest of the poor. It struck a chord with this audience who, despite record oil prices, feel they should have a wider swath of society enjoying the wealth. Yunus was swamped after his speech, surrounded by a pack of participants wanting to thank him for his inspiration to tackle poverty.

As I said, expectations are high in the Kingdom and the work has just begun.
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Trouble Brewing Beyond the Oil Fields

It does not take much to rattle the commodity markets these days. Despite a dramatic slowdown in the United States and within Western Europe, there is certainly enough demand and enough speculation to have a new record close for oil this week above $100 dollars a barrel.

The trigger for the final close above that benchmark was a refinery explosion. Fingers were also pointed at the falling dollar, potential unrest in Nigeria and Hugo Chavez’s unpredictable nature as the overseer of Venezuelan crude.

With the strong growth underway in the Middle East region for this year and the mammoth construction boom, prices for everything from iron ore to make steel to Arabica coffee beans to make cappuccinos are at record highs.

There is a whole basket of so-called soft and hard commodities skyrocketing – and for good reason. Demand outside of the Group of Seven countries remains strong and minor “events” create reasons for speculators to drive prices higher.

Take Kenya and the prolonged negotiations over the power sharing talks with President Mwai Kibaki, and renewed fighting in Sri Lanka between the government and the Tamil Tigers in the north. Together those two countries represent 50 percent of tea exports. Tea demand is up 12 percent over the last year. Again, don’t look to the traditional tea houses in London for the answer, but places like India and China which cannot meet domestic demand.

Last week, prices for high quality Arabica coffee beans soared to a ten year high, after prices climbed 36 percent in 2007. Cocoa prices hit a 24 year high after surging 45 percent last year. Upcoming elections and civil unrest in the Ivory Coast provide plenty of “grist for the mill” (or reasons to speculate) if you are a trader of cocoa beans.
I don’t know if you are a daily scanner of the commodity section of your preferred newspaper, but right now they make for interesting reading beyond the daily staples of our diet. Platinum, iron ore and gold are all in record territory. We are seeing that major steelmakers are settling on contracts for raw supplies that are up more than 70 percent over last year. No doubt, the construction companies of the Middle East will be paying higher prices for steel plates and wire, only adding to the inflationary pressure we are seeing for real estate in the region.

The sum of all the parts is this: The rise across the board of this basket of commodities is not esoteric, “does not affect me” kind of stuff, but the real deal. While a slowdown in the West may slightly correct the imbalance of supply and demand near term, it will not solve the problem created by prosperity and a more globalized world. One thing I am not reading between the lines is the potential for the extra supplies coming onto the market to curb these prices. This applies to both quality coffee and quality crude.

Which leads me back to the recent rise of oil. Doing some quick math on Saudi Arabia, at roughly nine million barrels a day, the Kingdom brings in $6.3 billion a week in revenues from oil production; $325 billion a year. That is a great deal of money for a population of just 27 million. The government is in the midst of reallocating that money with a whole set of new economic cities, airports and universities. They don’t want to see a replay of the 1970s boom and bust scenario. There is an effort underway to build a foundation for future growth, beyond the barrel if you will.

We’ll take a closer look at that effort next week while on the ground for the Jeddah Economic Forum.
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Pillars of Strength, Pillars of Weakness

This weekend my family and I will travel to Rome for a visit linked to a mid-term school break. My wife’s family lives around the corner from the Pantheon. The Temple of the Gods dates back to 125 A.D. It is arguably one of the most impressive structures in the world.

When one walks into the Temple, the characteristics of grandeur and strength stand out. The pillars supporting the Pantheon are rock-solid, conveying stability, history, permanence. One gets the opposite feeling about today’s U.S. economy.

It is hard not to turn on the television, open a financial website or a leading newspaper without finding a banner or headline discussing the prolonged recession which may be awaiting America. While it may dominate the news, there is a tendency to use broad strokes to describe what is underway and what impact it will have outside the U.S.

Let’s tackle the first issue. Not every sector is experiencing a drop in demand. While sixteen pillars support the façade and portico of the Pantheon, two key pillars are showing signs of serious erosion in the U.S.: the housing sector and the banking sector. The White House signed into law a $170 billion stimulus package, which is designed to send a signal to both Wall Street and Main Street that Washington is responding to the challenge. As President George W. Bush declared, the U.S. can “absorb such shocks and emerge even stronger.” That is true and I witnessed that first hand in California during the 1990-91 recession. This is a case where having only 200 plus years of history versus 2000 years are a benefit. The economy takes a hit, sectors regroup and businesses move forward.

Right now we are in the evaluation phase. There is still talk within financial circles that the developing world can de-couple from the U.S. and grow strongly despite the turbulence elsewhere. The head of the International Monetary Fund, Dominique Strauss-Kahn poured cold water on that concept this week while in India, calling the theory a “very misleading idea.”

Hold on a second. The IMF cut its forecast for global growth from 4.4 percent this year to 4.1 percent. That is sizable but not catastrophic. Last year’s pace of 4.9 percent was not sustainable. Export-dependent China will slow to 9.6 percent, hardly a panic. Even in London, the Bank of England is balancing interest rate cuts against the threat of higher inflation. Investors are moaning about house price inflation rising only four percent this year; that is not a fall of 10 to 20 percent that we are witnessing in some American cities.

This is where the Middle East comes in. Enemy number one right now is inflation. You see it in wages, housing, clothing and food. It will likely lead to a de-coupling of the five remaining Gulf currencies from the dollar. But during my constant visits to the region, no one is talking about recession. Look at the price of oil. If there was a real global recession, I would expect a $20 drop in crude, not the $2 we have seen over the past month. We can comfortably expect the region to produce growth of six percent in 2008. Not bad and one would say “de-coupled” from the U.S.

What I think we are witnessing right now is not a crisis of growth but a crisis in leadership. During the recent World Economic Forum, I chaired the 2008 Economic Brainstorming Session, featuring a handful of leading economists, a handful of leading CEOs and a handful of finance ministers from the developing world.

In an electronic poll which followed a good 90 minute debate, two items led the survey of the greatest concerns. Over 18 percent signalled a lack of coordinated response and leadership to the current economic crisis as the biggest threat today. Another 18 percent pointed to mismanagement of the crisis, i.e. incorrect decision making. That is pretty alarming. In a globalized world where we are more dependent than ever on each other, those on the frontline don’t believe government and central bankers will deliver the right medicine.

In fairness, the world is more complex than ever. It means central bankers and leaders in the Middle East have to respond quickly to the challenges in front of them and not through the rear view mirror. The dependence on the dollar and skyrocketing real estate prices are good places to start. Initiatives have been put forward and acted upon. More are probably around the corner.
But as the Romans convey through their ever-lasting structures, let’s not overreact to the headlines. While two pillars of weakness are cause for concern, they are not yet a cause for alarm.

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21st Century Pyramids

“Build it and they will come.” The mysterious voice that Kevin Costner heard in his 1989 movie Field of Dreams is fitting for one of Egypt’s prized projects, the Smart Village.

While Costner starred in the film which sees American players from the early 20th Century reappearing on a baseball diamond cleared from an Iowa cornfield, the Smart Village has a visual link to the ancient Pyramids only ten kilometres down the road in Cairo.

But instead of dreaming back 2000 years, the technology park is designed to take Egypt into the 21st Century. A half hour drive (if one is lucky) on the Cairo/Alexandria road leads you to mirrored glass pyramids, white walls and man-made lakes. It is home to some formidable international brands in technology – Microsoft, Canon, Hewlett Packard, Vodafone, Alcatel – and some local ones as well – Orascom, Xceed and Telecom Egypt.

During an interview in Davos on CNN Marketplace Middle East, Bill Gates talked about the ability to have technology help the Middle East region leap-frog against their more developed counterparts in Asia, Europe and the United States.

“Technology I think is very important now, whether it is to broaden the economies of these countries or just help them be more efficient in things they're doing”, said the co-founder of Microsoft. “Certainly if you look at the scale of investment there, making sure that the right software is done for banking, for tourism, for energy is important.”

Egyptian Prime Minister Ahmed Nazif is big believer in the power of technology and the architect behind the Smart Village when he was Minister of Communications and Information Technology (CIT). He likes the place so much that he still spends two days a week working on the outskirts of central Cairo, in part to stay in touch with business leaders and to enjoy the peace and tranquillity. It is the complete opposite of ancient Cairo, where economic growth of the last four years has only added to the legendary traffic and honking horns.

While there is a great deal of excitement about the oil and gas driven growth in the Gulf, Egypt and its neighbours in North Africa have tied together a string of solid numbers to date. Egypt for example, continues to grow at a pace of about seven percent with its foreign direct investment surging from $300 million dollars five years ago to over $11 billion dollars last year. The World Bank has recognised this cabinet’s work by awarding Egypt with the most improved reformer in its “Doing Business” survey, for its work in simplifying regulations and cutting red-tape.

Meanwhile, at the Minister of CIT, Nazif passed the baton to Tarek Kamel, his young protégé who, with blackberry in hand, is in a rush to build on the gains. There was so much demand for the industrial park, that he has introduced Phase 4 which will be the new home of financial services companies. Over a tea in his office this week, Kamel called the Village a "flagship of development of CIT in Egypt. It reflects the public-private partnership spirit; government and private sector have invested since five years."

His next big project will take place in Maadi, a location best known for its expatriate compound. Kamel sees a big future for business processing operations (BPOs) with a huge pool of educated, but often unemployed and under-employed youth. Think of Arabic, English and French call centers for European and Middle East banks and credit card companies and you get the concept.

That is all on the drawing board right now and I am sure it is not without frustrations and challenges. Now in the fourth year of reforms, the government is eager to have solid growth and foreign direct investment create more jobs and to reduce those still living in grinding poverty. One may not see them in suburbia, but they are impossible to miss when driving to an appointment in the city.

The cabinet knows that reforms have to be felt by those at the lower end of the earnings scale. The poverty level, those living on two dollars a day or less, remains stubbornly high and long serving members of this government know that political realities require more action.

“We are deeply concerned about those in Egyptian society that are not touched by the reform directly,” Youssef Boutros Ghali, Egypt’s Minister of Finance told Marketplace Middle East. “There are people below the poverty line reaching almost twenty percent. Like all developing countries, these reform programs will trickle down but they will not trickle down overnight. They will take time to reach those less privileged in our society.”

And that is what struck me this week during my visit. While we may cherish the history, grit and chaos of Cairo, one gets the sense that the legacy carries with it a heavy burden. The Gulf countries are building new cities off of blueprints in the sand, with much smaller populations, and with no ancient buildings and historical sites to build around.

With 80 million people (and growing fast) the challenge is a big one but so is the opportunity to utilise young Egyptians to build their own Field of Dreams.

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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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