This summer marked the 40th anniversary of astronaut Neil Armstrong’s first steps on the moon. On July 21st 1969 he uttered the phrase, “That's one small step for man, one giant leap for mankind."

There has been hours and hours of analysis about dropping the “a” as in one small step for a man, because it formed a grammatical contradiction. Armstrong said he hoped history would grant him some leeway and again further analysis suggests that the audio signal might have been interrupted during his historic walk.

I am recalling that famous two and a half hour journey on the moon’s surface because today there is a spirited intellectual debate on whether the financial crisis of the past year will fundamentally change our approach to business, or be just an interruption on the path to globalization.

During this month, nearly every strand of the crisis is being revisited to understand where we have been and what regulatory steps will emerge at the G20 summit in Pittsburgh. But, maybe we are missing the bigger picture.

I have listened to astronauts talking about the mind-stretching image of looking at earth from space. One’s perspective, I am told, changes dramatically after such an experience and maybe that is what we should be doing ourselves right now -- looking not at what transpired in the past year or the decade that led to the asset bubble, but instead on the global puzzle being assembled.

The smart minds are looking both forwards and back. Each year I spend a few days in the Alps with a group of German industrialists and businessmen to make sense of the world today. Last year, the talks took place just two days prior to the collapse of Lehman Brothers. I went back to look at what was said then and the analysis was incredibly prescient.

The business community pointed to historic bank bailouts on a scale we have not seen before, more regulation of financial products by central banks leading to global rules and finally an effort to weed out the Madoffs of the world. The final point seems to be more difficult to police after the other well-known and recent examples of Enron, WorldCom and Tyco.

The reality is one would never have dreamed of a $1.5 trillion deficit for the U.S., that Washington must drag around like a ball and chain for years to come. Europe and the U.S. are learning, much like Japan during the lost decade of the 1990s, the long-term implications of such a financial shock to the system.

J.P. Morgan Chase bank released a study talking about a sizable lowering of the classic return on equity for banks from 15 percent down to 11 percent with higher capital requirements and stricter regulations. No doubt, banks will remain under the magnifying glass.

But the Chief Financial Officer of Siemens, Joe Kaeser is suggesting something a bit different. His company has over 400,000 employees all over the world and only recently recovered from its own shock linked to compliance practices and kickbacks in 2006. Kaeser sees this crisis as the next big step for globalization.

While the West is living on borrowed time and money, the economies of the East have re-grouped quickly. Many tried to debunk the decoupling of the East from the West, but with the divergence of growth we are witnessing today it is difficult to not believe in a higher grade of de-coupling and the bigger march towards further globalization.

Eight, five and five -- those are the expected percentage annual growth rates for China, India and Indonesia for 2009 and Chinese Premier Wen Jiabao is confident that his $9 trillion stimulus plan will maintain that expansion through 2015.

Oil in the $60-70 range should provide above average growth for the Middle East. Both China and the Middle East remain dependent on Europe and the U.S. for growth, but certainly less so than before.

The next big step in globalization for the major industrial groups means to go where opportunity presents itself. GE for example recently landed a $2.5 billion deal to build power stations in Kuwait. Siemens secured a similar size contract for a water and power operation in Saudi Arabia a few years back.

It may have felt like we all stepped off the cliff in September 2008, with many forced to ask the simple question, "Is my bank safe?" Instead of winding the clock back a year, let’s take inspiration instead from Major General Armstrong and his historic words four decades ago.

Labels: china, middle east, recession

In September 2007 western equity and capital markets were enjoying the go-go days of low interest rates, unusually robust (which turned out to be in many cases false) returns for hedge funds and consumers were borrowing heavily against their homes to fund Range Rovers and a range of boy toys.

During this window in time, the Middle East was starting to hit its stride. Most outside the region were unaware of the big and, shall I say, broader growth story that had been unfolding. Record surpluses were piling up, fortifying the already influential sovereign wealth funds.

This past week we marked our 100th program on Marketplace Middle East. Two years zipped by in part because the global economy was moving at hyper speed. It has not been a straight path forward, but a rollercoaster ride best reflected in the price of crude. We covered the ramifications of $147 oil back in July 2008 and witnessed its fall to $32 in December of the same year.

“It is has been a tremendous roller coaster ride,” said Khaldoon Al Mubarak Chief Executive of Mubadala on our first program. “The growth in Abu Dhabi, the growth in the region has been tremendous. It requires executives like me running around making sure we have the right deals, right partnerships in place and have the right sustainable growth strategies.”

The surge in prices past $100 last spring helped develop a new and almost certainly reoccurring theme, “three digit oil.” Anything over the century mark opens up a full range of possibilities. The tendency has been to compete against neighbors by building shiny new structures. In light of rapid birth rates all over the region and the burden it places on the education system, it is heartening to see that the next generation of leaders view the emphasis on construction as problematic.

“Real estate and brand new building while stunning architecturally, are not going to solve anything unless there are qualified people inside them,” said the Crown Prince of Bahrain Sheikh Salman Bin Hamad Al-Khalifa during our interview a month after oil prices hit a record high.

I am in the tent (a fairly empty one) that says the downturn, albeit painful for contractors still awaiting their payments and bankers who extended their bets, clears out the frothiness.

As the speaker of the UAE Parliament and Chairman of Mashreq Bank Abdul Aziz al Ghurair said in November when crisis started to bite, “Fundamentals of business have been built, now we can afford to reconsider where we are going next, being slowing down our growth, postponing some of projects, that’s okay.”


In sum, those who have been left standing are on firm ground and want to call the Middle East home – expat or not. The lobby of the Emirates Towers hotel may be less crowded today, but the discussions are based on prudent projections and having to do a great deal less with real estate projects.

The critical aspect of this recent and rapid downturn has been the sovereign wealth fund money staying closer to home. We are looking at a consumer market in total of nearly 500 million people. If money from the Gulf is invested in projects closer to home, barriers to investment and hard goods will continue to come down. There may even be greater impetus to create a single currency with more members in the Gulf as well.

That is not to say the SWFs have left the scene in the West. Qatar’s stakes in Porsche and Barclays Bank are two clear examples of snatching opportunities when they are presented and Abu Dhabi’s Mubadala has taken long term positions in General Electric, EADS and chipmaker AMD as it builds out its portfolio and the emirate’s industrial base. As an interesting side note, in the past two years Premier League fans know much more than they did about the Gulf and who controls the purse strings.

Regional and global private equity players are hopping on fewer planes to London, Paris and Frankfurt and instead are picking Tunisia, Jordan, Egypt and Morocco as their new destinations. Growth in all four of those countries is holding up nicely, despite the global turbulence and the tepid recoveries we are witnessing in the West.

What can we expect as we begin our work on the next 100 programs? Qatar, Saudi Arabia and the UAE will continue to drive new projects with the goal of completing not only their infrastructure build outs but their human capital development as well. Billions have been allocated, but privately government and business leaders want to see that all the plans are delivered with the results promised on the PowerPoint slides and the animation videos.

Finally, Dubai and other Middle Eastern cities are no longer dots on the map that indicate the hub and spoke transfer system of a particular carrier. We no longer think of the business day rising in Asia, skipping to Europe and finishing with a crescendo on Wall Street. The region has carved out its place, which is far beyond a passing fad or quick opportunity.

Labels: construction, middle east, oil

Global downturns have a way of forcing action. What was perhaps overly ambitious in the past could be papered over as long as investors believed in the future and money was available. The climate has changed dramatically and so too has the response from business and government.

Case in point is Emaar’s proposed merger with government run Dubai Holdings, with Dubai Properties, Sama Dubai and Tatweer under that umbrella. For those not familiar with some of the landmark projects under these property brands, they include: the Burj Dubai, Dubai Towers and the giant Dubailand entertainment complex.

For one, this will create a $53 billion entity if it comes together as planned by autumn -- sizable by any global standard. Number two, expectations have changed in the region in part because of what Dubai Inc. has done over the past few years, having introduced a greater level of transparency into the process.

The word got out that there was something in the works, so instead of waiting until the structure of the deal was complete, Emaar and others decided to flip the switch. As a result, there remains a great deal of uncertainty whether a consolidated property group will be net positive to existing shareholders.

As the desert sands settled so too did the wave of negative comments surrounding the transaction. Robert McKinnon, Managing Director of Al Mal Capital believes that "from a property market perspective it is absolutely necessary and good for the market." McKinnon says the aim by the government is to clear up the property market in two years instead of letting it linger for a decade if not longer. McKinnon raised a valid question about the valuations which will be used as part of this process. Being too generous now with valuations in the short term, will not pay dividends long term.

Ask Japanese investors what their experience was in the 1990s, which many still refer to as the lost decade. The fact the Japanese government decided to muddle through that decade without taking bolder measures though is a good lesson for everyone in the region today. This Dubai merger is designed in part to put a brave face on what has been a painful 40 percent correction in property values over the past year. Everyone will be eager to see which projects survive the merger process at the end of the day.

Even in Saudi Arabia the default by two well-known family entities in the Kingdom is being handled in a much more transparent fashion than would have been the case just a few years ago.

The Saad Group and Algosaibi restructuring of more than $6 billion in debt will incorporate nearly 40 different lenders. At least a dozen banks have come forward to say they do indeed have exposure to what many commonly refer to as the "problem" but they added it won’t be mission critical to their operations.

This debt restructuring is a tricky one for Saudi regulators and for the region in general. As family entities and not publicly traded companies, Saudi central bank officials say the long arm of the law may in these cases have limited jurisdiction. Unless laws were broken, regulators in this more transparent environment will not likely play a major part in the process.

Officials told me there is no systemic risk to the banking system, but it will indeed be painful for those who chose to lend at such prolific levels. It does not take a genius to read between the lines, that government bank bailouts won’t be in the works even if this first round of numbers is lower than the final tally in a few months time.

What perhaps has not changed, if we use the Emaar merger and the debt restructuring as our benchmarks, is the desire by government officials to remain behind the scenes as both plans take shape. It is not difficult to reach officials on the phone or approach them in person, but few if any want to be on the record before they feel all the paperwork is in order and they are confident the worst is behind us.

In this era of globalization and internet chatter, the region is indeed introducing greater transparency, but full disclosure may still be a ways off.

Labels: downturn, middle east, transparency

Labels: barack obama, egypt, middle east, Palestinian reconstruction

"Starting today, we must pick ourselves up, dust ourselves off and begin the work of remaking America."

The words of the 44th U.S. President Barack Obama echoed through the Washington Mall. The pixie dust has settled on the inauguration. The new President has settled into the Oval Office and the work has begun in earnest.

Some felt a little let down by Barack Obama’s acceptance speech. They say it lacked the flair of his election night victory speech. I think many missed the point. I did an informal poll of businessmen and policy wonks and they all agreed with my simple premise -- this was a speech given by the Chief Executive, not the Commander in Chief. It is not the time to rally the troops, but get down to business.

The 47-year-old leader has a steep hill to climb, but he has plenty of support behind him and a bank full of goodwill abroad. After a day of celebration basking in the bright winter skies of the nation’s capital, he hit the phones calling four leaders in the Middle East. It was a classy touch and a strong signal that the region will be high on his priority list.

The challenge for this President is that he is sailing right into the eye of a colossal storm. Financial markets are good lead indicators for the next nine to 12 months ahead. They are pointing to more trouble, not less.

Our animal instinct is to think the worst, but hope for the best. This week I sat down with veteran Jordanian central banker, Umayya Toukan, to size up the impact of this downturn on the Kingdom. He is confident that Jordan, a small but reform led economy, can still grow better than four percent this year, depending on "how quickly confidence can be restored."

Toukan referred back to that nasty autumn week when banks and markets collapsed in a sea of toxic assets. He described it as an investor "panic attack". Rational thinking went out the door and survival instincts kicked in. Putting to rest those "voices" of irrational thinking Toukan says, it will take time and a period of stability.

Financial markets are not giving President Obama a honeymoon period. It seems Congress will move swiftly to approve an $800 billion plus stimulus package. Add more than $1 trillion for bank and insurance fund bailouts, and one is talking about a sizable long term burden on the U.S. economy.

This massive spending package on infrastructure and green technologies will bring the major economies together like never before. No one wants to see the U.S. sputter for long (nor Europe for that matter), so China, Japan and the Gulf countries are likely to remain loyal buyers of U.S. and European government debt.

But right now, the grand assumption is that 2009 will be terrible and that 2010 will be a year of recovery for the United States. Laura Tyson, a transition adviser for President Obama and former chair of the National Economic Council in the Clinton Administration told me in London that, "The U.S. recovery is going to be slower, longer and subdued." She too believes that the last to fall in this downturn, the developing countries from the Middle East to Asia, will be the first to recover.

"We have had a crisis which has demonstrated that the world is highly inter-dependent," says the economist from University of California at Berkeley. Those countries, she added, with giant surpluses need to "continue to stimulate their own economies and serve as stabilizing investors in the global economy."

Tyson was referring to China which sits on an estimated $1.9 billion of total reserves, and the GCC countries with a collective stockpile of $1.4 billion. Tyson a year ago in Davos expressed concern that the sovereign wealth funds might institute a "Trojan horse" strategy. They have been passive investors to date, but no one really understood their long term aims. After the signing of the so-called Santiago principles sign last October, she was clearly less concerned. Tyson even expressed the need for Washington to be more transparent in this process of state capitalism by the U.S. Treasury department in the financial bailout.

On the sidelines at the World Economic Forum, leaders will continue their work on the new financial architecture. The Group of 20 will gather again at the end of April here in London and will try to define who will lead and how they will lead. No doubt, decision making will be more collective, but the U.S. will still be in the front of this pack, during this re-balancing of the global economy, the new, inspiring President/Chief Executive Barrack Obama will not want to go at it alone.

Labels: Abu National Energy Company, barack obama, Laura Tyson, middle east, World Economic Forum

John Keynes is not a household name. If there is any confusion, he is not being talked about for a record transfer in football, nor is he someone caught up in a Wall Street scandal. But just adding his middle name -- Maynard -- offers more clarity and, probably reminds us of his seminal work.

John Maynard Keynes is perhaps looking down upon us with a big grin upon his face. The 20th century economist was an advocate of big intervention, specifically the role of government to use the economic toolbox to mitigate the impact of downturns. These days we have different labels for what we are witnessing: prolonged recession, depression, or even repression. Keynes' theory utilized many times over the past seven decades, was later coined "Keynesian economics." It is being practiced with full force today.

A year ago, this writer and a long list of economic specialists were supporting the concept of decoupling. That is, the fast growing countries from Latin America to Asia -- with the Middle East, of course, included -- would continue their economic march while the United States and other industrialized economies cratered.

As Fred Bergsten, Director of the Peterson Institute for International Economics rightly pointed out we would witness the opposite. His argument was that the world will re-couple due to the interdependency of trade, capital and energy flows.

As a result, it is not only finance ministers in Washington, London, Brussels, Paris and Berlin dusting off their books and reading the works of Keynes, but those from Beijing, Delhi and Riyadh too. Big spending is in, budget deficits are a necessity and debt is not a worry.

Hold on a second -- not everyone is taking on water in their economic boats. The big savers of the world like China, Japan and Germany can breathe a little easier as can their counterparts in the Middle East.

“The region was saving for a rainy day,” says Middle East economist Marios Maratheftis of Standard Chartered Bank, “Gulf countries have the surpluses they can use, the ammunition to use now to cushion their economies.”

Since the rapid global growth days of 2004 when China revved up demand for oil and the U.S. was humming along, the region has been stockpiling reserves. During this window, an estimated $1 trillion was transferred to the region in terms of surplus oil and gas revenues. That sum is providing a nice cushion today, so regional governments are going into the red in terms of their annual budgets to insure their economies don’t do the same.

Maratheftis admits there are many unknowns in the region. He and many of his counterparts are predicting economic recovery in 2010. After talking to a number of leading bankers on background, I would -- excuse the pun -- not bank on this recovery.

Kuwait and the United Arab Emirates, according to Standard Chartered, seem the most vulnerable in terms of a potential recession with forecasts of zero growth and a half percent growth respectively.

At this juncture, governments are planning prudently with budgets based on oil prices of between $30-$60 a barrel. For example, the world’s largest producer, Saudi Arabia built its plan on a price of $37 for their local crude according to SABB, a division of HSBC. Seeing the growth tapering off, the Kingdom increased spending by nearly 25 percent in 2008.

Dubai recently unveiled their first official budget deficit of 1.3 percent of GDP -- a luxury in comparison to the West -- and increased spending by 42 percent.

Maratheftis believes the “budget deficits are fully justified; they are manageable and if anything they could be even larger.”

This may mean that they are probably written in pencil and not pen this fiscal year. If the economic smoke signals are worsening as many anticipate, regional leaders will go back to their monetary taps, make a few counter clockwise turns, and put more money into their budgets.

To date, the focus of that spending is similar to the stimulus package being finalized by the incoming occupant of the White House. Regional budgets have been big on infrastructure (perhaps too big), healthcare and education. These are the pillars of diversification, and they reduce over-dependency on energy.

It is difficult to get reliable numbers on actual surpluses in the region. Some are in foreign exchange reserves, others in general accounts and even more tucked away in a variety of sovereign wealth funds. While the world got used to seeing the initials SWF over the past year, they may begin to look for SDF instead, as in sovereign development funds.

The Chief Economist and Group Global Head of Research for Standard Chartered was an early mover tracking the shifts in these capital flows. Gerard Lyons says: “One actually saw a significant shift and therefore over the last year we’ve seen a greater demand within countries for the sovereign funds to spend more of their money at home.

“The next few months will reinforce that trend, namely sovereign funds, still wealthy, will be required to keep more of their money at home and spend more of their investment income at home.”

Governments are already re-deploying assets as is evidenced by these budgets. We don’t hear nearly as much about Middle East bargain hunting in London or New York for banks or trophy hotels and office buildings.

It is an evolving strategy with a domestic tilt and one that would have John Maynard Keynes smiling.

Labels: decoupling, john maynard keynes, middle east, recession, swf

Labels: Dubai, middle east, oil, U.S. banking crisis

Labels: Dubai, economy, middle east, property, U.S. banking crisis

Labels: Bahrain, Crown Prince Sheikh Salman bin Hamad al-Khalifa, middle east