Marketplace Middle East - Blog
Avoiding April Fools Days
I have the picture in my mind. A marathon will be run in London on 2 April with a whole group of global leaders not only stumbling at the finish line, but unclear where the ribbon marking the end really is.

Welcome to the upcoming Group of 20 Summit. If we go by the expectations outlined by Britain’s Chancellor of the Exchequer, Alistair Darling, the bar is being set very low.

"We must act together not as a small group of advanced economies but globally with the emerging and developing economies.”

This was Darling's opening statement before he welcomed his peers to a preliminary meeting two hours from London. That was a warm gesture to the faster growing economies of China, India, Turkey and Saudi Arabia. To be candid, I thought those niceties were covered off in Washington back in November.

"Our common interest need not contradict a country's self-interest -- in fact, it can complement it. And it's all part of rebuilding confidence," was Darling’s effort to rightly douse the protectionist tendencies inherent during a crisis.

Beyond the broad strokes, however, the host nation is providing little to grasp onto.

Perhaps this is the classic understated nature of the British approach -- offer few clues and deliver way above expectations. However, it is a strategy that could end with a terrible train wreck if, at the close of the summit on 2 April, world leaders look like they have been "fooling" around.

The British Chancellor rightly noted we cannot expect a "complete consensus overnight." Maybe we are using a different calendar, but this crisis is at least a year and a half old.

The transatlantic alliance seems to be alive and well at this critical juncture and the new U.S. President is already spending some political capital supporting Gordon Brown.

"We've got two goals in the G20," Barack Obama stated firmly. "The first is to make sure there is concerted action around the globe to jump-start the economy. The second is to make sure we are moving forward on a regulatory reform agenda."

Prime Minister Brown’s counterparts in Europe don’t quite agree with the first statement. There is a reluctance to prime the pump even more by flooding the market with the new buzz phrase "quantitative easing."

It is difficult to define the second goal.

French President Nicolas Sarkozy outlined some big plans for a new financial architecture last autumn -- a regulatory superstructure to better track those tricky derivative products that got us into this mess.

Sarkozy wants to rebuild the Bretton Woods institutions established after World War II -- the International Monetary Fund and the World Bank -- to play hardball in the 21st Century. It is a grand concept but support to move forward seems to be in short supply.

The British hosts say there is a wide-ranging agenda on the table 2 April. That, perhaps, may be the problem.

During his address to the U.S. Congress, we heard from Mr. Brown that shutting down tax havens and eliminating bonuses to non-performing bankers are priorities.

They may be hot button issues on the fairness agenda, but they will not solve the problem of recession or freeing up capital for businesses of all sizes or for consumers with good credit to borrow.

Those are the priorities being supported by the business community -- which is keen to avoid more regulation.

In the rough and tumble world of Texan politics there is a saying, which was coined by radio commentator and former populist politician, Jim Hightower, that the only thing you will find in the middle of the road are yellow stripes and dead armadillos -- the slow-moving creatures that often get run over by cars on the vast open highways.

In the Lone Star state they like people to take a stand on the left or the right. However, for this G20 Summit straddling the fence in the middle might not be a bad idea.

These leaders don’t need to recreate the wheel, but they do need to make sure there are not big boulders in the path towards recovery.

What does this mean in reality? The G20 should be able to leave the summit table with the following:

- An agreement to continue stimulus plans that complement a path to growth
- A final finish date for the Doha Trade Round -- to avoid any worries over protectionist policies are creeping into legislation
- A real structure and timeline to make the IMF a global regulator to create like-for-like standards for banks
-A concrete strategy to identify and set aside the toxic assets that are holding back lending and therefore growth
- Equal voting rights for all members of the G20 from Brasilia to Beijing and Ankara and Riyadh in between

If you walk the streets of any financial center right now, from businessmen to consumers you hear the same refrain: “When do you think this credit crisis end?”

That is the multi-million dollar question that the G20 can help answer.


The right conservative
A broad cabinet reshuffle, some surgical appointments, and a younger voice at the helm of the central bank mark some pretty sizable changes in the Kingdom of Saudi Arabia.

There has been a great deal said already about the message King Abdullah was trying to send with his biggest cabinet move since taking power in 2005. What may have been overlooked is how the pieces of the puzzle come together.

We know that a woman, specifically Nora Al-Fayez, will become deputy education minister. That would not mark huge changes in Brussels, the United Arab Emirates or Qatar, but it certainly does in Riyadh. Overlooked recently in this process is that plans to build a $10 billion co-education university under the management of Saudi Aramco (not the Education Ministry) is going full steam ahead.

At the same time, four senior cabinet ministers have been removed, and the long serving deputy of the Saudi Arabian Monetary Authority takes over as Governor. Muhammad Al Jasser is a western educated economist who has obtained his bachelors, masters and PhD in California.

“We now have somebody who is U.S. educated, and of a younger generation”, said Jane Kinninmont of the Economist Intelligence Unit, “He will be very good at putting forward the Saudi message internationally, in and beyond the region.”

The timing is not accidental. Beyond the demands of falling revenues from declining oil prices, Saudi Arabia is being called upon to play a larger role in the region and within the global economic community as it prepares for a single currency.

Back in November there were calls -- quickly rejected by the Kingdom -- to increase its contributions into the International Monetary Fund. The new Governor’s stance at the G20 meeting in London on April 2 this year will make for intriguing analysis. The position to date has been that Riyadh has done more than its fair share, but that may be in a drive to formally expand the G7 to the G20, with the Kingdom representing the Middle East.

The bottom line, in business terms, is that we should not expect a great deal of economic change from Saudi Arabia. I am calling it the right kind of conservative.

The Kingdom has remained loyal to the dollar, conservative on banking regulation and a conservative investor in relation to its foreign assets. Boring U.S. Treasury bonds were in -- taking a large stake in U.S. banks was not an option. As Kinninmont says, “Right at the moment they feel they have been vindicated with all these things.”

On the ground in Riyadh, long serving Chief Economist of SABB John Sfakianakis reaffirms that belief, "To the credit of the authorities, particularly the central bank, money has stayed and accumulated, it has not been lost unlike other countries in the region and outside."

According to one of the key architects of Saudi Arabia’s build out, Governor Amr Al Dabbagh of the Saudi Arabia General Investment Authority (SAGIA), the Kingdom will forge ahead with $400 billion dollars of spending over the next five years. That is a sizable sum considering a population of 28 million. When you land in the Kingdom you can see where it is being spent -- roads, airports, seaports, schools and four new economic cities, maybe growing to seven if the demand is there.

While there is a lot of discussion in the region and globally about retrenching during this downturn, Saudi Arabia (as well as Qatar) is using the wreckage to leverage lower prices for everything from cement to silicon. If you build while everyone else is not, the negotiating power is even greater.

Speaking of power, King Abdullah seems to be using his to streamline government operations and reduce bureaucracy. In the World Bank’s latest “Doing Business” survey the Kingdom ranked 16 out of 181 countries last year, however in the enforcing contracts category it was all the way down to 137.

“He (King Abdullah) is upping the ante as he sacks most of the key judicial leaders to get in new faces”, says Kinninmont, “This means there is pressure on the new guys to do something.” The courts and schools according to local and international observers have traditionally been the spheres of influence of the religious clerics.

This King seems to be a leader in a hurry. It explains the recent bi-lateral meetings with China to expand trade ties, record spending during a global recession and yes his biggest cabinet reshuffle to date.

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G-20 Jive
Crises have a tendency to force the hand of those who would otherwise ignore the positioning of the global economic jet stream which is blowing strong winds of change.

I had, what was intended to be, a slight detour on my way back from Davos via Geneva to London. Mother Nature extended my journey for a day, and as a result, I bumped into bankers and transport officials who saw our coverage from the World Economic Forum.

They asked bluntly, “What came out of Davos 2009?” The answer can be summed up as -- a high profile dust up between Turkey and Israel over Gaza, thanks to Prime Minister Recep Tayyip Erdogan walking out -- a couple of tough speeches from Vladimir Putin and Wen Jiabao who opened the meeting -- and towards the end of the gathering, some fresh oxygen that was pumped into the Group of 20, as leaders and delegates began to pack their bags high up in the Swiss Alps.

Before British Prime Minister Gordon Brown took the stage Friday, there seemed to be a lack of clarity in the efforts to bring 85 per cent of the global economy under one umbrella.

As one senior finance official – who asked to remain unnamed – put it on the sidelines of Davos, this decision to move forward is “well above the pay grade of the Ministers of Finance. This, John, is at the Heads of State level and requires clarity.” He asked me to take my own reality check, hinting that things cannot move that fast.

Shortly thereafter, I sounded out that discussion with Ricardo Hausmann, a leading economist from the John F. Kennedy School of Government at Harvard, who confirms there are active consultations taking place across the board.

U.S. President Barack Obama did not show up at Davos, nor did his two top finance officials, as planned, but no one was eager to jump before Washington signalled it was safe to do so. In sum, old habits, like getting U.S. support, die hard.

Hausmann made a solid point, while we flushed out the topic in the midst of hundreds of government officials and businessmen, “The G-20 jives well with the message of President Obama”. This is true. It is collective, equitable and disperses the burden of future challenges and decision making. At the same time, by its very nature of broader membership, it also dilutes power amongst those who are used to having it. Therein lays the problem.

The G-20 already exists. The fact that it does not need to be created from scratch makes the debate over membership less onerous. The gap between the haves and the have-nots, not the rich and poor, but rather the surplus and debtor countries has never been greater. So co-dependency is at its peak.

During a panel that specifically addressed global imbalances, Azman Mokhtar, Managing Director of Malaysia’s sovereign wealth fund Khazanah Nasional said, there is a danger that the world moves to the “lowest level of equilibrium”, meaning that we gravitate to lower standards of legislation, rush to print money, widen budget deficits and regret later that it could have been done differently.

Victor Halberstadt of Leiden University in the Netherlands said, the “sense of urgency to address global imbalances is not there.” Hausmann then made an illustrative point comparing the airline sector to the rolling crises every seven to ten years in the global economy. Anytime that there is a crash, the airline business dissects every bit of evidence to try and take the risk out of travel and rebuild confidence. In the financial sector it is literally every man for himself.

This is a bit worrying because of the trends that emerge during global downturns. For one, highly coveted foreign direct investment, that keeps the wheels of cross border transactions and trade well oiled, is expected to drop by up to 15 percent this year according to WAIPA, the World Association of Investment Promotion Agencies. That follows a record year for FDI of 1.8 trillion dollars. The Middle East saw its share of the pie grow to 43 billion dollars last year, a six fold increase from the year before. The last thing the region needs is for investment to dry up.

In the United Kingdom, we see workers protesting that British workers should get British jobs, and finally President Obama is rightly trying to strike “Buy American” legislation out of the bailout package.

The tendency to become protective of ones home turf is instinctual, but mistaken. In Davos, World Trade Organization Director General Pascal Lamy urged countries to pass the Doha Round to encourage more investment and lower trade barriers. I did not hear a lot of enthusiasm for that to be candid.

The reality is, no one wants to see the U.S. or other G7 countries stumble and fall. If they do, demand for hard goods from China and Japan and for oil from the Gulf and Russia will stumble as well. So, the surplus holders from the Gulf and China are likely to continue buying the debt to finance budget deficits from Washington to London.

But G7 countries should not bank on it. We know that countries from the Middle East to China have their own set of employment challenges to deal with. It is for this reason that Gordon Brown called for a “shared revolution” to bring countries under one roof in London in April. Let the power sharing begin, and hope that protectionism is put behind us.

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No economic opportunity without peace
In our business, we often look for the best way to tell the story; the best pictures to support a script, the best words to convey a sense of urgency.

Unfortunately, when it comes to the conflict in Gaza and the broader Palestinian Territories, we have seen this story before with the same dire consequences. The first images of the New Year with bodies being rushed to hospitals and children seeing the shock of battle did not inspire the thought of delivering on our own personal resolutions.

It was only a year ago when governments rallied around the hope of peace on the back of the Mideast conference in Annapolis and pledged $7.7 billion for reconstruction and development. No matter how you slice it, that is a lot of money for the three million people living in the Territories. The Palestinian Authority pledged to provide the institutional capacity to absorb the funds, root out corruption and plant the seeds for economic development.

Mideast Quartet Envoy and former British Prime Minister Tony Blair and Palestinian Prime Minister Salam Fayyad were following a path of real opportunity and real investment leading to real jobs. The next logical step being that real development would create the conditions for lasting peace. One cannot disagree with the intention, but the results are less than impressive. Beyond the horrendous casualties of conflict, unemployment is at more than 30 percent in Gaza and more than 20 percent in the West Bank.

Clare Spencer is a Middle East specialist for the think tank Chatham House in London. During an interview on Marketplace Middle East she said, "The whole approach to Gaza will have to change fundamentally after this."

Spencer says as long as Hamas is labelled as a terrorist organization by the United States and the European Union, we will continue to see a two-state economy -- one completely isolated with no movement in Gaza and the other under restricted movement with checkpoints and settlements in the West Bank. One essential difference between the two of course -- the Palestinian Authority controls the financial capital.

Beyond the money recently pledged by governments, the Palestine Investment Fund was set up back in 2002 to introduce transparency for the money coming in and to generate a return on assets for the government. The fund manager reports to the president of the Palestinian Authority, Mahmoud Abbas of the Fatah Party and a bitter rival of Hamas which now controls Gaza. All told the fund has more than $1 billion under management.

President Abbas and Prime Minister Fayyad have garnered the support of the international community as evidenced by the hundreds who showed up at the first Palestine Investment Conference last spring in East Jerusalem. One could not help being impressed by the energy and enthusiasm for lasting change.

A significant gesture at the conference was a pledge by Arab investment funds -- enjoying the fruits of $100 oil at the time -- to participate in the process. This was led by two real estate funds from Qatar and Saudi Arabia announcing projects of $500 million in the West Bank. I am curious to see if those deals and others on the drawing board will see the light of day after this latest twist in the long running script.

There was greater political significance behind the Arab investment. Money was pledged in part because regional leaders were hoping for a greater say in the Arab Peace Initiative and the peace process overall, according to Spencer. Basically, "We too will put our money on the table as long as our voice is heard as well," is the subtext here.

Of late, it has been Presidents Mubarak of Egypt and Sarkozy of France in an unusual East-West tandem presenting solutions to begin the long road back from conflict and tensions. That is a welcomed change, but it is just the start.

No one thinks for a minute that the timing of this conflict was accidental, just before the transition in Washington to an Obama White House. If dealing with economic repression is not enough, add a long-running dispute that has heated up to the mix.

Since mid-2007 the collective approach by the West has been to isolate Gaza as long as Hamas held political sway. What we have learned in the past two weeks is that this policy not only failed to deliver peace, it also failed to deliver opportunity for those in Gaza and the West Bank.

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Emptying the Tool Box
After a relatively slow response to the gravity of the credit crisis in September, central bankers around the world are utilizing some serious fire-power to counter a global slowdown.

The U.S. Federal Reserve led the way with a sizable half percentage point cut, bringing the discount rate down to just one percent. U.S. Fed Chairman Ben Bernanke noted the bank is prepared to bring rates even lower to unlock lending to consumers and businesses.

Three regional central banks -- Kuwait and Bahrain -- followed suit cutting their key rates to help rekindle confidence, while a handful of Asian central banks, most notably China, did the same.

The timing is crucial. Countries are quickly trying to sing from the same hymn sheet before they gather in Washington on November 15th for an emergency summit, shortly after a new president has been elected in the United States. The meeting will be held under the auspices of the G20, which includes emerging markets countries from Asia to Latin America, with two Middle Eastern members, Saudi Arabia and Turkey.

Leading up to the U.S. elections, John McCain’s campaign used Joe Wurzelbacher, affectionately labelled “Joe the Plumber,” to contend that Barack Obama’s tax policy would hinder small business. The Toledo-based plumber was worried that he will have fewer options in his tool box to expand.

The tool box is an apt analogy for the world’s central bankers. They have used outright capital injections and share purchases of banks, cut interest rates on multiple occasions and now are looking to construct a new financial architecture to monitor and govern financial markets. They will have very few tools to reach for if commercial banks don’t start loosening up lending.

Seeing there is the same liquidity shortage in other countries, the U.S. central bank will provide $30 billion each to Brazil, Mexico, Singapore and South Korea. Hard money is being supported by a great deal of high profile diplomacy.

Robert Kimmitt, Deputy U.S. Treasury Secretary, concluded a four country Gulf tour to Saudi Arabia, the United Arab Emirates, Qatar and Kuwait in an effort to enhance dialogue with those who manage sizable sovereign wealth funds. Kimmitt said that these fund managers are “actively looking at U.S. opportunities.”

In this climate, there is less emphasis in Washington on who owns the Chrysler Building in New York (Abu Dhabi) and the debate over Dubai World and its attempted ports purchase seems a distant memory.

Not to be outdone, U.K. Prime Minster Gordon Brown crossed paths in the air with Kimmitt for his own tour. It is pretty smart business. Middle East sovereign funds have an estimated $2 trillion under management and can serve as key players as both equity and bond investors when it is needed most.

It is a bit too early to tell which way the funds are leaning today. On our programme we have been exploring the high profile investments into China and Southeast Asia over the past year by sovereign funds and Middle Eastern companies.

Saeed Ahmed Saeed Chief Executive of Dubai based property group Limitless said Asia provides “all the opportunities that would be expected as a return on investment.” Four out of ten of his international investments this year have gone to Southeast Asia. I used the example of Limitless, because it will be fascinating to see where the money will gravitate in the future which depends on how this financial drama will unfold in the coming months.

According to Morgan Stanley, their benchmark emerging market index has dropped more than 40 percent in the past month alone, but over the last decade the markets that make up the index far outpaced their peers in the U.S. and Europe. The reason is quite simple; many of these governments had to learn a difficult lesson ten years ago during the financial crisis which swept through Asia, Russia and Latin America. They are better prepared today than ever before.

Let’s hope that in a post-election environment and after pulling out a lot of arsenal to combat the slowdown that the Group of 20 can offer concrete solutions that work for all the members to move forward.

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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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