New Generation, New Challenges
(Manama) First impressions mean a great deal. Mine go back three years in Bahrain at an Arab Business Council meeting. The voice seemed nearly out of place, a mid-Atlantic accent emerged from a crowd of executives and government officials as the American-educated crown prince of the kingdom swept the room.
A big smile and warm greeting clearly mask the undertaking within the court of the crown prince to complete an economic and political reform process.
The intense heat of August is nearly enough to keep movement to a bare minimum, but we made our best efforts to see, what some in government like to describe as the Ireland of the Middle East, is up to nearly four decades after independence.
In an exclusive interview in his office, it is abundantly clear Crown Prince Sheikh Salman bin Hamad al-Khalifa is determined to protect and even enhance the role for Bahrain as a regional financial and services hub. He has accelerated, for example, a process to train workers to stave off intense competition from Dubai, Qatar, Abu Dhabi and neighboring Saudi Arabia.
“If we don't capitalize on diversifying away from oil, the real estate and brand new buildings, stunning architecturally, are not going to solve anything unless there are good people inside of them.”
His Highness is using his chairmanship of the Economic Development Board to consolidate the reform process. After three days of protests last December from the majority Shia population, he sent a letter to his father King Hamad Bin Isa Al-Khalifa, signaling that there was too much resistance to change.
“Change is a constant, change is here, change is never easy but I think it must be tackled with the right ambition. It must be tackled with the right energy as well to achieve success,” said the crown prince, “His (the king’s) reform agenda was not clearly understood by some elements and by him speaking directly to people not just in the government, but also to others in the community, I think it helped to set the record straight.”
One could easily read into that effort a high-stakes move to consolidate authority and renew a mandate to push through privitizations and labor reforms – both sensitive issues to those in government and the private sector who have resisted the change he talked about and who benefited from market protection.
Some of those same elements of society have also not fully embraced the need to spread the wealth during this time of $100 oil. The crown prince sees it quite differently, “Making sure that poverty or relative poverty, this is a very important term, is addressed here in the kingdom and distribution of wealth is managed in a more actionable manner is something that I am very focused on.”
It is a delicate balancing act, something the kingdom of Bahrain is accustomed to. Bahrain remains home to the U.S. military’s Fifth Fleet. Once a new port facility is built, the fleet will be able to spread its wings and have the existing facility to itself. The relationship with Washington goes back decades and partially explains the kingdom’s loyalty to the U.S. dollar, despite its 35 percent correction in the last few years.
“Being linked and pegged to the dollar, of which I am a strong proponent, removes any uncertainty in our revenue collection. Secondly, it facilitates regional trade because five of the six member states are pegged to the dollar,” and the crown prince finished on the diplomatic point, “Thirdly, it is something that we have taken a long view to, since 1980, so you don't quit when the going gets tough and benefit with the good times.”
Those five members of the Gulf Cooperation Council are aiming to launch their own dollar-pegged single currency in the next few years. It is a sign that members of the oil-rich group want to control their own destiny. We are witnessing that as well in the Middle East peace process with both Saudi Arabia and Qatar actively involved in talks to push that process forward.
Meanwhile, Bahrain continues to straddle relations with Washington and Tehran. This effort has been made more challenging by some of the bellicose comments coming from Iran. When asked what he thinks Iran’s intentions are when it said it can block the Straits of Hormuz, a major shipping line, the crown prince steered towards greater collective dialogue, “Only Iran knows what Iran intends with those kinds of comments. But what we certainly call for is an increased dialogue, understanding and tolerance. I hope that cooler heads will prevail and that peace and dialogue are the victors.”
That is certainly something that everyone can sign onto.
Just the Socks, please...
From CNN Correspondent Alphonso Van Marsh.
This week, MarketPlace Middle East airs my report on the privatization -- and revitalization -- of iconic Egyptian department store, Omar Effendi.
Way back in the day, Omar Effendi was THE PLACE to shop. The latest fashions, VIP service, gorgeous architecture -- sort of like a Macy’s or Saks of Egypt. Mind you, we are talking the early-- and mid-- 1900's.
Sadly, by the time I first walked though an Omar Effendi store in the 1990s, the government-run chain was infamous for the tackiest fashions, bad service, and rundown, dusty showrooms with wires hanging out of the ceiling.
The worst part of the Omar Offendi experience then: the time it takes to get out of there. Find a set of sheets to purchase, for example. Pull the king size whites off the shelf and an employee takes it from you. He slowly walks out of store showroom, with a promise to get another set from the ‘stock room’ in ‘just a minute.’ Meanwhile, you are instructed go to the counter to get an invoice. Then take the invoice to another counter to pay. Once you pay, you take the invoice back to the first counter to get it stamped. Then take the stamped invoice to a new counter to pick up the sheets. And hope that after all this time, the employee who ran off with your display sample sheets has returned from the stockroom with the color and size you requested. What? No king size left? Only queen sheets in purple? Maalesh (no worries)!? God willing you’ll have king size tomorrow? What’s that all about?
That’s the horror of a state-run businesses: everybody has got a job -- but nobody’s really working.
Little more than a year after Omar Effendi was privatized and the chain became a beneficiary of a multi-million dollar investment scheme in 2007, I went back to the same department store branch. And, oh how things have changed. Things look, well, fresh. The electronics department had banks of televisions that actually worked. Men’s clothing on clean shelves and metal hangers – available in more sizes than old-school kabiir (big) and gamousa (cow). Employees acted like they actually cared.
So I tried to buy a pair of socks. But when the Omar Effendi employee tried to take them out of my hands -- and pointed me to a counter, my eyes started to roll. Apparently, some things are slower to change. This time, however, a simple, kindly-worded protest nipped the counter-game in the bud. Pay at one counter. Get change. Socks in bag. Walk out of store. In less than ten minutes.
This ain’t your father’s Omar Effendi. Watch our profile on OF’s turnaround in the making by clicking on my story link here, or if you’ve had a similar Omar Effendi experience, tell us about it
Half way through the fight
In the spirit of the Beijing Olympics and the boxing finals, it is worth exploring whether the credit crisis afflicting primarily the G-8 countries is half way through the bout, or whether we are getting to the final round.
As sports buffs know, Olympic boxing is controlled with thick headgear and the bout is limited to four rounds of action. The damage to the athletes is limited and the action intense in a rush to score points.
I wonder if we can say the same right now for the global economy. Is further damage limited and how much more intense will it get before this fight is over?
One of the leading economists this week put a cold towel on expectations of a quick recovery and in fact, signalled that times will get worse before they get better. This was further complicated by a recovery in oil prices from their recent low of $111 a barrel.
First, let’s review the comments from Kenneth Rogoff, the former chief economist of the International Monetary Fund. At a conference while on a tour in Singapore, Rogoff said: “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.” That would put us at round two of the four round fight.
Having made his comments in Asia, the trading world had a full day to digest those comments and read between the lines on the seriousness of his thoughts.
Rogoff did not stop there. He said it wouldn’t be a minor banking player that would collapse, but a major institution, “a whopper” the economist noted.
I have heard Rogoff speak at past conferences, primarily in his official role at the IMF. Not personally, in the heat of the credit crisis contest and far from home, he spoke more freely and spoke his mind. Sometimes comments like these are brushed off to use a boxing analogy, but in a jittery market unsure of the path going forward, these landed a near knock out blow.
Rogoff rounded off his thoughts questioning the wisdom of providing too much liquidity by lowering interest rates to avert recession. The result? We are witnessing the highest inflation since 1991. This is another reason he feels the worst is yet to come.
The forecast for higher inflation was not helped by energy prices. After tumbling to a recent low of $111 a barrel (still up 68 percent this past year) leading analysts are predicting that we will move higher after this summer lull, where we saw a 20 percent correction.
I spoke to Francisco Blanch the head of Commodities Research at Merrill Lynch, who thinks we can peak out near term at $124 a barrel. The important thing in his view is the demand we are still seeing from emerging markets – including the wide belt of growth from the Middle East. Blanch said, “On the supply side we still have serious constraints particularly for oil, while on the demand side we have of course, we still have strong emerging market growth and that is all that matters in the commodity markets, what happens to emerging markets.” His research shows that regional oil consumption represents 20-30 percent of the new demand.
As it turns out, Blanch is being conservative versus his counterparts at Goldman Sachs. They were the first to call for $100 oil and are now forecasting prices of $149 a barrel near term. That is despite what Rogoff has to say about where the U.S. economy is at this juncture and how much that is influencing a slowdown in Europe and Japan, for example.
Oil and other commodity prices were under the influence of a stronger dollar, with traders lulled into the belief that the fight against the credit crisis was nearly over. They were looking at a pretty sluggish forecast for Britain, Germany and France and saying they too will struggle.
That may be true, but the U.S. economy is still the largest (albeit for another decade or so) and this is where an old boxing adage comes in useful: The bigger they are, the harder they fall.
Initial Cracks of Concern
A dozen wooden dhows one by one were sailing in the late afternoon sun in Manama harbor in the shadow of the twin towers that make up the Bahrain Financial Harbor. The scene captured one of the many stark contrasts you can find in the Gulf where tradition sits (or sails) right next to gleaming modernity.
We were in Bahrain this week working on an upcoming special for Marketplace Middle East. The temperatures were searing hot, ranging from 39 to 44 C as we covered nearly the entire island nation of just over one million Bahraini and expatriate residents.
My last visit to Bahrain was at the end of 2005 when many of the buildings were skeletons of what they are today. The World Trade Center with its three wind turbines providing a portion of its energy is the other anchor property within the burgeoning skyline.
While going from point to point for interviews and video shoots, there was a lot of give and take about where the region is going and this week’s stock market sell off triggered by a less than bullish property report from U.S. investment bank Morgan Stanley.
In a nutshell the report talks about a potential 10 percent correction in Dubai property prices by 2010. At this juncture and due to demand in other markets which are playing an intense game of catch up, they don’t see this spreading to other Gulf and North African markets – although a contagion is not ruled out.
In terms of context, a 10 percent fall is not severe and analysts I spoke with say it could be much greater. The retail market is up another 25 percent already this year and was up 79 percent since the start of 2007. The numbers are far more staggering over the past decade.
The real point is that there is now discussion about a top for the market. As business people and viewers of our program know, there is always a soft-toned discussion about what will happen next, how frothy prices are and whether neighboring countries are blindly following down the same path, not really knowing where that path may lead them.
I had that report on my mind and the subsequent market sell-off as I toured a housing development on the outskirts Bahrain. Nearly a thousand villas are going up ranging from $1 million to $2 million, pretty modest by Gulf standards, but nonetheless quite an ambitious planned community.
It also struck me on this visit, (and it is not the first time) that it is always difficult to gauge classic supply and demand in a market where desert sands are vast and new housing stock can be added when growth warrants. In London, for example, if one wants a prime property in West London, there is no extra land to build on. You either buy what is available or you don’t. As we have found out over the past year, London property is not a one way bet only pointing upwards.
There is also some context missing. If a 10 percent correction is all that is on the cards, then the downside risks are pretty low. I think U.S. homeowners would have been pretty happy to walk away with that sort of decline at the start of the credit crisis.
Supply and demand in the Dubai model and for that matter in other Gulf States are complicated by governments holding so much of the property stock themselves. Like a water tap, they can either hold back property development to prop up prices or they can let this cycle play out and let some of the excesses work their way out of the market.
Countries later in the cycle, such as Bahrain, are trying to gauge if this is the beginning of a real sell-off. If so, they need to do some of their own housekeeping on the project approval front. Most on the sands of Manama seem quite content where they are and instead want remain focused on keeping inflation at bay and getting workers trained up for the next wave of growth.
One said this report injected a “small hint of concern” but in a sector which has only known very prosperous times, a sneeze can feel like the beginning of a full blown cold.
Absence of a Summer Lull
These are the dog days of August, when historically traders from Wall Street to Sheikh Zayed Road escape for cooler climates, collect their heads and square positions for the autumn.
That practice has not held up for the past few years. The credit crisis which took hold in the U.S. this time last year proved to be the latest example of how we live in a 24/7 world, even this month.
Colleagues and friends have called in sharing tales of the various Middle East players spotted on the streets of London, as they mix business and pleasure to escape the heat.
The actions -- or inactions -- by both the U.S. Federal Reserve and the Bank of England this week are not signs that central bankers are caught up in the summer lull; in fact it is quite the opposite. The volatile mix of slow growth and inflationary pressures -- better known as stagflation -- makes it difficult for them to move either way. So the response is to stand pat for now and send signals that they are being vigilant and are fully aware that the worst may not be over.
The vote within the Federal Reserve was close to unanimous, 10-1, with one lone member of the committee urging to raise rates to head off the strong inflation. In their statement that followed, the open market committee stated that the inflation outlook remains “highly uncertain.”
Central bankers see that the housing market is not close to bouncing back and that unemployment, at 5.7 percent, is at a four year high. Americans are not feeling all that perky about the future and neither are their brethren across the Atlantic.
A consumer confidence survey put out by the Nationwide Building Society of Britain this week posted the largest drop in four years and the lowest level since the survey started. The culprits are the same as in the U.S.: weak house prices, layoffs to come and rising costs. Inflation in the country is running at 3.8 percent, nearly double the government’s target.
Interest rates may be at reasonable levels in the U.K., but banks are being stubborn about their lending. As a result, home repossessions have jumped 40 percent since 2007. The International Monetary Fund this week is now predicting growth of 1.4 percent this year and just over one percent next year, with inflation maybe peaking at five percent.
With this backdrop and despite the boost in consumer spending by our Middle East visitors this summer, I am not getting too excited by the fall 20 percent fall in crude prices or the subsequent rally in the U.S. dollar. One cannot get a good read of market sentiment during thin trading, when most senior business leaders are not at the helm or moving at the same frenetic pace.
Outside of the G-8 countries and closer to our region of focus, the Middle East, the energy market correction and the rise of the dollar are taking the heat off of policymakers to answer to calls to put more crude on the market or to reconsider the historic peg to the U.S. currency.
Neither seems to be of pressing concern at this juncture. $147 oil sparked a great deal of worry as does the quick retreat of nearly $30 off that peak, but one can see the absence of a summer lull in a different light. Perhaps we may witness the fabled “Goldilocks Scenario;” an oil decline, steady interest rates and a rising dollar which provide a mix that is not too cold, not too hot, but just right -- for now.
ABOUT THIS BLOGJohn 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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