Marketplace Middle East - Blog
Prosperity before peace?

There is an old saying in the financial community that one has to measure the risk and reward ratio each time you value an investment opportunity.

Listening to some of the participants at the Palestine Investment Conference in Bethlehem last week, one can easily hear the risks. Mideast envoy Tony Blair, in an interview with Marketplace Middle East said, “The difficulties are very obvious.”

U.S. Treasury Deputy Secretary Robert Kimmit said investing in the Palestinian Territories offered “some unique challenges.”

Both were referring to the obvious security challenges posed by roadblocks, security checkpoints and the isolation of Gaza. As one Palestinian businessman from the West Bank noted, “we feel suffocated” by the lack of movement.

We had a taste of that when we tried to cross over one of the checkpoints and the police did not think we had the right accreditation. Short of clear instructions we travelled ten minutes down the road and went through another checkpoint minus the hassle.

This is life -- this is the challenge of doing business in the West Bank and Gaza. Despite that “challenging” backdrop, there was a strong show of force in Bethlehem. As one private equity executive from Dubai aptly noted, “We need to show our support, even if it does not lead to business.”

600 delegates showed up to the first Palestine Investment Conference. It was a healthy mix of Eastern and Western players. The Arabian Gulf investment houses were in full force and in a positive signal of support signed some pretty sizable deals.

Real estate giant Qatari Diar inked a $350 million deal to build a full community. Saudi group Al Ard Al Qabeda chipped in with a $200 million agreement to construct office towers, shopping malls and a hotel, also in the West Bank. The CEO of that group summed up his risk/reward outlook by declaring, “Palestine is not the worst in the world.”

Maybe not, but it is not far off. It is difficult to do business if you cannot get your goods past a roadblock or determine whether a drive to the factory will take two hours or eight hours.

The reality is investors smell peace in the air and they are being enticed by a whole bucket full of cash committed at the Paris Donors Conference in December. Governments pledged $7.7 billion over the next three years. Ten percent of that has been released so far, with an obvious eye on whether peace talks will progress.

The early movers see opportunity and a large Palestinian diaspora ready to play its part. Three million people live in the Palestinian territories now; five million live everywhere else. They are solid business people and they want to see their homeland take off and sustain economic altitude.

It helps for example that the managing director for the World Bank in the region, Juan Daboub is one of the members of the broader Palestinian community. His grandparents came from Bethlehem. Consolidated Contractors Company (CCC) is based in Athens, Greece and is one of the top twenty construction companies in the world but the family is Palestinian. The owners of CCC, the Khourys can always be found assisting in the cause for their ancestral homeland.

They are supported by Western players who are seeking to “do good” for the Palestinian territories. Sir Ronald Cohen, formerly of private equity group Apax Partners, started the Portland Trust. He sees the territories as a “coiled up spring” ready to release energy if governments, the diaspora and investors come together to lay the foundation for lasting peace and lasting growth.

In our interview in a beautiful reconstructed palace in Bethlehem, Blair drew parallels to the peace process in Northern Ireland. His said peace and development have to run on dual tracks, “I think the two things go together, but actually what we did in Northern Ireland was we did create the breathing space.”

What Blair and the others were trying to convey is a sense of hope. If peace can be delivered it will be good for Israel and the Palestinian territories. If it can be sustained, investors from the East and West will come. Blair added: “Yes, of course you've got major political problems. You've got problems of movement, restrictions and so on, on the West Bank. But also you've got amazing tourist potential, some great industry here and a very intelligent, capable and creative workforce.”

That is all true and right now the region has the wind at its back. Lebanon is moving in the right direction. Israel is holding indirect talks with Syria and Palestinian businessmen are ready to play.

This investment conference was scheduled to take place two years ago but was called off when violence flared.

Deferred but not thrown off, the local businessmen and the diaspora pulled together for another try. Deals are happening and governments have committed funds. Now let’s hope that lasting peace will follow.

A three digit world
World Economic Forum meetings are, as one former Prime Minister put it over a nightcap, part private high-level talks, part networking and a lot of theatre. “Theatre is good just not in large doses,” he rightly declared.

That is a succinct description of what transpired in the Red Sea resort of Sharm el Sheikh this week at the World Economic Forum meeting.

There was plenty to digest and discuss, but as usual the many of the more memorable thoughts came in the networking lounge over an espresso. I spoke to the CEO of a Gulf investment authority who, during our conversation said they really want to get it right this time, since they are blessed with the “three digits.”

The conversation continues, as I try to bluff my way through what “three digits” means. After another minute my curiosity gets the better of me and I confess my ignorance. “Three digits,” he tells me with a broad smile, “is oil -- anything over $100 and we are in three digit territory.” “We can do a lot with three digits," he adds.

There is no doubt about that and I confirm that after 20 years of covering OPEC meetings and visiting production facilities from the Gulf of Mexico to the Arabian Gulf, I know it cost about $4 to $6 per barrel for the major Middle Eastern producers to get their crude to market. To put it crudely, that is a profit of about $120 a barrel at today’s prices.

Spend it wisely

While the Gulf producers are happy to watch the savings roll in, they are very aware that the world is watching to see how they plan to use it. It was, no doubt, the number one issue on the agenda at this regional meeting. Somewhat boldly some members of the Arab community, which are not blessed with the same huge natural resources, spoke up in Sharm el Sheikh.

Egyptian Prime Minister Ahmed Nazif, the tall, silver haired reformist, noted that one cannot force money where it does not want to go, but, “I believe that real opportunities exist today in the region, whether it’s in infrastructure, whether it’s in capacity building, education and other aspects of it.” Egypt is attempting to be the back office to the Middle East – why set up in Bangalore if you can capture the diversity of language speakers and low cost in your own backyard?

A former government official from Jordan, now running a private equity group, was more direct. Reem Badran is CEO of Kuwaiti Jordanian Holding Company -- a firm funded with Gulf money. She says,"There is room for the oil producing countries to give a hand to the non oil producing countries to make these types of imbalances and gaps less and everybody would flourish at the end of the day."

There is a great deal of money from the six Gulf countries flowing into real estate development projects throughout North Africa. The key now is to expand that brief to include factories and even schools. The second most talked about issue had to be development of human capital. During the final plenary panel of the meeting which I chaired, all four leading businessmen (and woman) talked about the sense of urgency to do more. Money is being deployed into education in every market, but these businesspeople admitted they need to be more involved to insure that the skills needed are being taught in universities and vocational schools. If not, the over reliance on expatriate workers will remain. The most pressing concern, and it was reinforced on my panel, is that 100 million more people will need jobs over the next ten years.

If that is not an incentive to use the “three digits” wisely, I am not sure what is.

A History Lesson on the edge of the Silk Route

When sitting at the edge of the Bosporus River in Istanbul one can breathe in the true essence of what it means to straddle Europe and Asia. The city is a unique backdrop to both the modernity of today and the history of the Ottoman times.

The government of Prime Minister Recep Tayyip Erdogan too is looking both East and West today. Turkish businessmen don’t readily see themselves as part of the Middle East, but the market of 71 million consumers has grown six to eight percent in the past five years based on the ability to export its construction know how to the fast-growing Gulf countries and leveraging its position as a major trading artery in both directions.

This week a major congress of transport ministers from Far East Asia to the edge of Western Europe signed a declaration to encourage the revival of the old Silk Route. Supported by two United Nations organizations, these corridors for trade will link together up to 30 countries and eventually provide a network for seamless trade between Europe and Asia. This is good news for the countries of the Middle East, from North Africa to the six nations that make up the Gulf Cooperation Council. This will also provide further incentives for countries like Iran to open up and privatize their economies and for Gulf countries overly dependent on energy exports to diversify in the hope of creating jobs for the next generation.

While these transport ministers were busy looking forward to what can be over the next twenty years with the reconstruction of the Silk Route, they paused for nearly an hour to take in the words of Mikhail Gorbachev whose Perestroika policy actually brought a whole swath of countries out from under the umbrella of the U.S.S.R.

Gorbachev took delegates through that window in time twenty years ago when the Cold War was still real, when communism was still very much alive but there was no discussion about a Silk Route revival. As the chairman of a foundation which bears his name, Gorbachev has taken a step back to look at the bigger picture -- and the bigger challenges facing society today.

He shares with great disappointment the “possibilities that were not realized” to bring greater safety and security to society. People he said are asking what kind of future awaits them and are yearning for action on the Kyoto Protocol, the Millennium Development Goals to reduce poverty and the end-game in the Middle East after what he called a “mistaken strategy” in Iraq.

While not trying to overplay the role he and his peers at the time played -- Reagan, Thatcher, Mitterrand and Kohl -- to patch together a new world order, Gorbachev talked of a leadership vacuum today. Elected officials, especially those in Washington, he said “need a new attitude to the new world order.” That new architecture needs to include in his view India, China, Brazil and, of course, Russia.

Gorbachev was preaching to the converted when he talked about creating a “healthy vascular system for trade” from Istanbul to Moscow and beyond. But the message -- even through translation from Russian to English -- was clear. The revival of the old Silk Route needs to be supported by a new generation of leadership.

A sea of cranes

I stepped out onto the terrace of my hotel this week in Dubai on Jumeirah Beach to take in the landscape. To my right in the distance stood the Burj Al Arab, the iconic sail-shaped hotel. In front of me, the Palm Jumeirah, the giant mixed palm-shaped resort and villa complex. I attempted to count the cranes in front of me on the Palm and stopped at 50. If I hazard a guess, I would say there are three times that amount. Below the sound of the Ibiza bar music on the terrace, I can hear the rumbling of buildings being constructed, steel rods being delivered, concrete being poured.

This is the beat of Dubai, of double digit growth and a property market that to date has not found a ceiling. Travellers to the Gulf know it is very difficult to find a hotel room these days. There are 35 thousand in Dubai today, going to 150 thousand by 2015. Neighboring Abu Dhabi has 10 thousand, going to 75 thousand by 2030. All this building is accepted without hesitation by globalists who sit poolside to take in some sun along with all the construction. Further afield on the terrace I see a table full of businessmen in sunglasses poring over their documents with refreshments in hand.

I was in Dubai this week for the Arabian Hotels and Investment Conference and in that role chaired interviews with Mohamed Ali Alabbar, Chairman of property developer Emaar, Paul Griffiths, CEO of Dubai Airports and U.A.E. Minister of Foreign Trade Shaikha Lubna al-Qasimi. Ali Alabbar has notched up $65 billion of property projects in 17 countries, Griffiths is overseeing the expansion of Dubai International Airport and then moving on to build the largest airport in the world and Shaikha Lubna is busy serving as the ambassador not only for trade, but articulating the merits of openness in the U.A.E.

Stringing together their comments from those interviews, it is abundantly clear -- using an automobile analogy here -- that the pedal remains down to the floor. The sea of cranes will be more populated and the 150 different nationalities that now live in the Emirates will remain in the Gulf in search of riches. In historical terms, it reminds me of the California Gold Rush which started in 1848. While that lasted for seven years, no one is willing just yet to call an end to this boom. There is too much money being made and yes plenty of capital available within the region itself for expansion.

My visit coincided with yet another record for oil prices this week. Based on a conservative calculation, the six Gulf States will bring in more than $400 billion dollars this year from oil. They are always searching for new ways to deploy that money and they don’t have to look far to find investors from a Middle East market of more than 300 million people.

With that heady backdrop of growth, I spent time asking these players and others if there are any landmines waiting that may bring this growth spiral down to more reasonable levels. This is the first time after many visits that developers and investors talk of a potential correction. In traditional terms, that could be a fall of 10 to 20 percent. It is also the first time that many of them privately said it would be a healthy occurrence. Investment as they all know from experience is not a one way path that always points north.

Mohammed Ali Alabbar would not be drawn into my question if we are 50, 75, 85 or 95 percent through the development of Dubai. He calmly responded that was in the hands of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai and Vice President of the U.A.E. In sum he noted, we move on opportunity if it is prudent and it makes money for his now listed company. After a decade of business, Emaar has generated annual sales of more than $10 billion and turned a profit of $1.6 billion. That certainly is not bad for a former civil servant in Dubai.

The handful of major players who are implementing the master plans for Dubai and Abu Dhabi are attempting to keep their feet on the ground. For example, Griffiths of Dubai Airports said you won’t see a great big bang rollout for the new Terminal 3 in late August, à la Terminal 5 in London. That would not be prudent and only opens 'Brand Dubai' up to problems if all does not roll out as exactly planned. BAA could have learned a bit from this approach.

The numbers tell a less than measured story. Research out this week from Proleads tracked a total of $2.8 trillion in development projects in the Middle East, about of third of that in the U.A.E. alone. Demand for plants, personnel and equipment are growing at 20 percent a year. The 'sea of cranes' will not fade into the sunset just yet, but don’t be surprised if a storm blows through town to take some of the steam out of this fast-moving locomotive of growth.

Pressure to Move

The U.S. Federal Reserve moved for the seventh time in the past six months taking interest rates down to two percent in the United States this week. The central bank, as is customary, put out a statement with the action underlining that financial markets remain under “considerable stress”, credit conditions “tight” and the housing market contraction still underway.

Ben Bernanke and his team at the Fed hope this will be the last of the cuts and that the worst of the credit crisis has past -- don’t be too certain about that. This is what concerns central bank counterparts in the Middle East, especially those in the Gulf States.

Watching with anxiety what is transpiring in the U.S. economy and to a lesser extent what has crossed the Atlantic to Britain, Gulf Cooperation Countries, minus Kuwait, have to follow suit due to their dollar pegs. They did and they too hope the storm front has passed – again don’t be too certain about that as well.

The problem, as we have talked about in this column, is quite different in the Gulf and it became more difficult this week in the region’s largest economy, Saudi Arabia. Inflation in the Kingdom hit a near 30 year high of 9.6 percent. The cost of rents, fuel and water surged 15.8 percent in March; other day-to-day staples saw double digit gains as well. Rents went up nearly 17 percent at the start of the year.

The United Arab Emirates, which is traditionally slow in releasing these figures, officially is seeing an inflation rate of 9.3 percent, but that goes back a half year. Other fast-growing, energy rich states are facing similar challenges. The real issue is what to do about it.

Finding an answer is not easy. For one, interest rates should be going up, not down. Number two, wages cannot keep pace with inflation, but leaders like Hosni Mubarak of Egypt know when the heat is on. He took what was an already high pay increase for civil servants of 15 percent and doubled it. The region’s most populous country is running a near double digit budget deficit, so he actions won’t be welcomed by foreign investors nor the finance ministry for that matter. And to round out the list, money supply will continue to surge as OPEC export related earnings this year surge past the $1 trillion mark.

Fuelling the Titanic

The real challenge with inflation, as central bankers and economists know, is that when it accelerates it is very difficult to slow it down. For purposes of an easy analogy, this is not a nimble racing boat, but a high speed Titanic. The real danger at hand is the threat inflation poses for the economic development cycle now underway in the Middle East. On our program we often talk about an Arab Renaissance, that growth this year, despite the downturn in the G8 countries should still be above 6 percent. That is true, but it won’t mean much if that growth is eaten away by skyrocketing prices.

The other issue is keeping workers in all those “castles in the sand” being constructed. The number is staggering; $3 trillion is either at work already or on the drawing boards. It will be very difficult to sustain those mega-projects if one cannot attract builders and very importantly laborers to get through the summer heat so they can send monies home to India, Bangladesh, Sri Lanka or Vietnam.

For Dubai and its second wave of development this, of course, will need to be addressed. But I am thinking more about Saudi Arabia in which one of the seven economic cities currently gathering momentum. The other six hold the key to the Kingdom’s future for the next generation to come.

Food for All

The region, minus the North African states, is overly dependent on imports, especially food. Gulf countries are paying for those imports with a weak dollar, which is down 35 percent against the euro in three years. The European Union is the number one market for those goods. This is where the loyalty to the dollar gets very pricey. Leaders from the United Nations and the World Bank held an emergency meeting in Switzerland this week and set up a food crisis task force aimed at helping the poorest countries deal with escalating prices.

It is hard to argue that countries seeing record oil revenues are suffering as badly as those say in Sub-Sahara Africa – that is certainly not the case – but rising prices are a real problem and will continue to be so.

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.
Friday: 08:15, 19:45
Saturday: 05:45
Sunday: 07:15
    What's this?
CNN Comment Policy: CNN encourages you to add a comment to this discussion. You may not post any unlawful, threatening, libelous, defamatory, obscene, pornographic or other material that would violate the law. Please note that CNN makes reasonable efforts to review all comments prior to posting and CNN may edit comments for clarity or to keep out questionable or off-topic material. All comments should be relevant to the post and remain respectful of other authors and commenters. By submitting your comment, you hereby give CNN the right, but not the obligation, to post, air, edit, exhibit, telecast, cablecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comment(s) and accompanying personal identifying information via all forms of media now known or hereafter devised, worldwide, in perpetuity. CNN Privacy Statement.