As we have all witnessed in the past year, economic downturns have a tendency to unearth all the nasty bits that may be hidden on the balance sheets of major banks. Challenging times also reveal some of the deep policy schisms that stand in the way of rapid decision making.

While this region was booming and cash piles were building, airing the family laundry was kept to a minimum. That is changing. In the past few weeks, I have chaired panels at the World Economic Forum in the Dead Sea and again this week at the London Business School Middle East Day. Both events brought together top shelf ministers, policy decision makers and business leaders. They are not seeing the future through the same lens.

Governments right across the region have been reforming for the past five years, some of course at a faster pace than others. There were a half trillion dollars of investment poured into hard and soft infrastructure last year alone in an effort to play catch up for the lack of foresight and/or funds over the previous twenty years.

When the downturn took hold, there were fears that government leaders would retrench and not continue with their reforms or their spending plans. So far that has not been the case. One needs to look just at Saudi Arabia and its $400 billion dollar, five year plans to illustrate the point. The slowdown will certainly stretch out projects by three to seven years, but I don’t see the shutters coming down.

The real question is, will barriers to trade and market opening measures go up? We found out at the G20 Summit that 17 members of the group have been using existing rules of the World Trade Organization to protect some of their prized sectors. The so called “name and shame” game put forth by WTO Director General Pascal Lamy has helped put those genies back in their bottles, but we should take a closer look at who has led the charge to put up the barriers.

Rachid Rachid is now the Minister of Trade and Industry, but for years ran the MENA operations for consumer goods giant Unilever. In front of an audience of 800 or so peers, he wanted to clarify that he thought it was business not government that is holding back the train of reforms today.

For the past few years, businessmen through groups like the Arab Business Council (Minister Rachid was a founding member as a private sector man) have lobbied their governments to accelerate the pace of change, reform labor laws and lower taxes. They were clear in saying that 100 million jobs need to be created by 2020 to basically tread water, since the youth population continues to explode. If we want stability, want to create opportunity for the next generation, then they said let business do what it does best.

By and large, that is what government has done. But according to Minister Rachid, certain elements of the business community are privately lobbying for protection of their particular sector or to at least slow down the pace of change. This prompted a fairly civil but heated debate amongst panellists representing business.

Within the global community, the concept of public-private-partnerships (PPPs) has been in vogue along with corporate social responsibility initiatives. The concept is for government and business to approach some of the most challenging issues for example healthcare, education or poverty together. In the region, this partnership is showing signs of strain.

Two other participants on these panels, who have taken the opposite route from Minister Rachid and left government to join the private sector, have a different take on the challenge. While they admit the large trading families of the region have lived for too long with cosy dominance in their home markets, they expressed that there remains an underlying issue of government mistrust. Business leaders have seen governments go down the path of reform in the past, only to apply the brakes when public popularity begins to wane in the face of high unemployment from difficult reforms.

The attitude of mistrust these businessmen suggested is holding back the appetite for risk and to reinvest in their own companies to expand. Research and development spending, a good barometer of a company’s desire to break new ground, remains woefully low in the Middle East. According to consultancy Booz & Company that is running at point three percent, only a fraction of the three-four percent in OECD countries.

The business community is looking for assurances that “big brother” (the government) will not change course. Government for its part needs to reduce the role it plays in providing employment in the public sector.

Most importantly the two sides need to close the gap on what is needed for the future. Right across the region, there is constant complaint that today’s graduates are lacking the skills to fill the roles needed by the leading private sector innovators. It is the primary reason youth employment remains stubbornly high at 20-25 percent, depending on the market.

Public debate is always healthy. It was sorely missing in the region a decade or so ago. But as one observer at these meetings suggested, we can argue over what is wrong forever. It would be wiser to bring back the PPP – public-private-partnership.

Labels: London Business School, Middle East Day 2009, Minister Rachid, PPP, Public Private Partnership, Rachid Rachid, Saudi Arabia

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.

Labels: G20, Saudi Arabia

A fifty percent correction in four months! At first glance you probably think I am referring to regional equity markets. Think again.

Before one can say West Texas Intermediate, crude prices have gone from a hefty record of $147 a barrel way down to the $70 range. It may have taken too long for the G7 countries and their new partners to come together with a defined rescue package. That is on the books. The world has now decided to focus on a new chapter titled "Recession 101".

The gathering of 185 countries at the International Monetary Fund and World Bank meetings in Washington provided the outline for this new chapter. Take note of the tone by Olivier Blanchard, Director of Research for the IMF.

"Growth in advanced countries will be very close to zero or even negative until at least the middle of 2009," says Blanchard, "We predict that even the fast developing countries will grow at a substantially lower rate than they have in the recent past, 7 percent in 2008, and 6 percent in 2009."

Slower growth is not the surprise; the speed of the fall and depth of the drop are. Blanchard’s ultimate boss at the IMF, Dominique Strauss-Khan, says the institution was quick to dispel the concept of de-coupling, that no part of the world was immune to the downturn. I think most would admit today in fairness, that no one really thought that this banking crisis would be so horrific.

It has Middle Eastern central bankers cutting interest rates. Saudi Arabia lowered its benchmark rate by a half percentage point after the likes of the UAE, Bahrain and Kuwait pulled the trigger the week before. Enemy number one was inflation at the peak of summer, which was replaced by slower growth. Both surely have been substituted by lower oil revenues.

Let’s take the largest producer; Saudi Arabia. At $147 a barrel, the Kingdom brought in oil revenues of more than $1.3 billion. At $70, that quickly becomes $637 million. That is a lot of money; more than a population of 28 million can spend of course, but a great deal less than a quarter ago.

According to Saeb Eigner, founder of investment group Lonworld and author of "Sand to Silicon", most Middle Eastern oil producers have been prudent with their revenue targets. In five short years they wiped out budget deficits accumulated, in part, by financing the first Gulf War. In most cases, $40-$50 has been the yardstick. It would be more interesting to discover what targets they penciled in on the margins after seeing prices trade well over $100 for a half year.

Viennese Waltz

Oil ministers representing13 members of the OPEC cartel will hold what they call an extraordinary meeting in Vienna this Friday. They already agreed in September to trim production by a half million barrels a day. Not long before that, swing producer Saudi Arabia agreed to boost production in June to cap prices that were on their way to $147 in July. Back then, oil minister Ali al-Naimi said there was not an oil shortage, but the market was not factoring in a slowdown in demand. Not surprisingly, he was correct.

This leads us to the old debate within OPEC between the price hawks and doves. Saudi Arabia has always tried to counter balance members Iran and Venezuela, who have sought maximum revenues per barrel. The Kingdom has taken the view there is a breaking point where price undercuts demand. After we have witnessed the first hint of recession, one sees what the slippery slope looks like. OPEC has already cut its 2009 forecast for daily demand by a half million barrels a day.

This crisis did start in America. It has crossed the Atlantic hitting Britain and the European Union with full force. Export driven markets from China to Southeast Asia are feeling the pinch, with growth off one to two percentage points depending on the economy.

The real fear it seems is not $70, but what many privately say could be just around the corner. If one can see prices tumble by 50 percent, then another 20 percent is not outside the realm of possibility with investors still climbing a wall of worry.

Labels: oil, OPEC, Saudi Arabia

Labels: Ali al-Naimi, oil, oil price, Saudi Arabia