CNNI - MME Blog

That creaking sound

noreply@blogger.com (CNN's John Defterios) — Thu, 09 Jul 2009 18:02:00 +0000

The G-8 meeting in the Umbrian hills of Italy served less to inspire unity, and more as a historical turning point, marking the passage of a tired institution.

The G-8 or “Gee-Otto” as the Italians say is misleading by both description and substance. For one, the members are no longer the leading industrialized nations, with China now the second largest economy in the world. Number two, the G-8 does not and cannot live life in isolation. In fact, 16 leaders were invited, with China’s President Hu Jintao needing to duck out early to attend to protests back home.

There was little agreement from the core G-8 on the next steps to combat the worst downturn in six decades. Germany’s Chancellor Angela Merkel called for an exit strategy from the deficit spending and pump priming to inflate the global economy.

A global climate change commitment remains challenging -– despite verbal commitments -- as the developing countries focus instead on job and wealth creation. This should not be at the expense of the environment. As mobile phone technology helped developing countries leap-frog after years of underinvestment in that sector, so too can rapidly evolving green technologies. Environmental policy is a prime example of why the G-20 is a more modern body and why the door should be shut on the creaking G-8.

We will get a better idea if the G-20 can stand on its own in September when leaders gather in the old steel town, now modern research and development hub, of Pittsburgh. One cannot miss U.S. President Barack Obama’s motivations here. Observers can almost hear him saying “You too can modernize with the times as did the old rust belt of America.”

While this summit was short on real solutions, there was a non-binding consensus on what is a quickly evolving fair price for a barrel of oil. The range of $70-80 was floated at the meeting and a spokesman for Russia’s President Dmitry Medvedev confirmed this raised few objections. Like most G-8 efforts, enforcement and follow through may be difficult, but the Goldilocks scenario –- of a price that is not too hot nor too cold –- is gathering momentum.

At the recent European Union-OPEC Meeting in Vienna, a similar consensus emerged from the closed door sessions. When oil prices slid from a peak of $147 a year ago down to $35 in December, OPEC members decided to shelve 35 of 150 projects on their books. What we have not heard since this recovery to $60 plus is whether more and more of them will come back on-line.

Middle East in Italy

Summit host Silvio Berlusconi, under fire at home for what may have happened at his private parties, wanted to use this meeting as a means to shore up poll ratings. Rather quietly, the billionaire also extended invitations to help secure Italy’s long-term energy supplies.

Leaders from Algeria, Egypt, Libya and Turkey attended this G-8 meeting. Three of the players are key natural gas exporters to Italy, the fourth, Turkey, is a key transit hub for both oil and natural gas.

A few interesting facts to be aware of: Algeria ranks fourth in natural gas exports today; a large share of that gas ends up in the Italian market. Not surprisingly perhaps, Italian contractors are playing a major role in Algeria’s natural gas development with two of the first nine tenders going to Italian companies.

There is a similar storyline playing out in Libya, where it is the largest holder of proven oil reserves in Africa, estimated at 41 billion barrels. Libya plans to expand oil production from 1.8 million barrels a day to three million in less than five years. It too is starting to ramp up natural gas production.

Prime Minister Berlusconi had a two-pronged strategy when he visited Libya last summer. He apologized for Italy’s 30-year colonial rule and committed to a $5 billion compensation package spread out over two decades. The money will be used to modernize Libya’s infrastructure and very likely cement Italy’s relationship in this neighbourhood where energy is plentiful.

Berlusconi was not reserved in saying during President Qaddafi’s recent visit to Rome last month that Italian companies should have priority or be “prima fila,” the front row, for future contracts.

The G-8 may be short on concrete solutions for the global economy, but it may very well have served a purpose for Italy and by extension the European Union when it comes to energy.

Cases for Transparency

noreply@blogger.com (CNN's John Defterios) — Thu, 02 Jul 2009 14:31:00 +0000

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.

Tremors after the Earthquake

noreply@blogger.com (CNN's John Defterios) — Thu, 25 Jun 2009 16:08:00 +0000

The temporary migration is officially underway. Arab businessmen swap 45 degree temperatures on the Arabian Peninsula for the very pleasant 25 degrees in the City of London to garner perspective for the year that was and where we go from here.
There is a certain irony in annual summer escape to London. Only nine short months ago during the third week of September, depositors in this financial capital were wondering if they could find a safe haven for their hard earned cash. This week at the Arab Banking Summit they were in their comfort zone gauging the state of their union and the state of global banking.

As one senior Arab private banker noted, we are still feeling the tremors from the earthquake. But all told, the 280 banks in the region, 80 of them in the top 1000 worldwide, are faring much better than their Far Eastern and western counterparts.
The region is still growing, which provides some comfort with projections of 2.5 percent this year, 3.5 percent next year. This allows a base from which to work through non-performing loans. But all told, regional banks are sitting atop more than $2 trillion in assets and about half of that in deposits. Leverage was not in fashion the past few years and this allowed a few in the audience to say “I told you so.” One banker kindly suggested I take off my headsets during the heated comments pointing the blame at the “Americans.”

As a long term resident of London who now spends up to ten days a month in the region, I take little offence when Uncle Sam comes under attack. But the banker made a valid point. While Wall Street is probably responsible for three-quarters of the banking crisis, the U.S. economy has had to absorb only 25 percent of the fall out. This was an equal opportunity crisis which spread its virus pretty evenly around the globe, hitting the large institutional investor and the small retail client with equal measure.

These ministers and bankers also feel the discussion of the green shoots of recovery is lulling many back into the business as usual mentality. Compensation levels were and remain out of touch with normal society; they see bonuses creeping back up again and restless shareholders seeking 10-20 percent returns on capital, when the global economy is struggling to come back.

Many of the participants talked about returning back to basics, which means knowing your customer, their appetite for risk and most importantly the bank’s appetite for risk. This is clearly where there was misalignment. The challenge now is insuring that the proper road to recovery and yes regulation is followed.

This meeting took place as the largest debt restructuring in Saudi Arabian history --some $6.3 billion to two of the largest family companies in the Kingdom is unfolding. It was revealed that BNP Paribas and Citigroup top the list of 37 creditors with exposure to this restructuring. Hard lessons still need to be learned.

These isolated incidents aside, the region has benefited greatly from traditionally high capital requirements and restrictions put in place to block exposure to the high risk instruments created over the last decade in London and on Wall Street.

So the region will be forgiven for thinking it shouldn’t follow the trends in the West. One Arab executive even pleaded with his European counterparts to avoid the gravitational pull across the Atlantic. To make a new interpretation on the famous phrase from scorned financier Ivan Boesky, greed is not good at all cost.

These bankers are eager to see the next phase of response to the crisis. There is some legitimate scepticism about whether the G20 will indeed follow up on the long laundry list of remedies to the global financial system.

Supply side economists went out of fashion long ago and there is a strong belief that the region will have a nasty aftertaste from the deficit spending within the industrialized countries right now. With high deficits to finance for years to come, less money will find its way to the region in the form of foreign direct investment.

This region continues to open up to the outside world to foster long term development, but as we work our way through the next few years, it will be funding closer to home that will need to be available.
The conservative Arab approach to banking is still paying dividends.

Iran's Missed Opportunity

noreply@blogger.com (CNN's John Defterios) — Thu, 18 Jun 2009 12:38:00 +0000

At this critical juncture, the economy is certainly not “front and center” of the protests in Iran since the future of the young republic, as some suggest, is at stake.

But make no mistake, the phrase that former Clinton political strategist James Carville coined during the 1992 U.S. presidential campaign, “it’s the economy stupid” applies here. More specifically, it is the mismanagement of vast natural resources and economic isolation due to the country’s desire to develop its nuclear capabilities that has hurt the country.

Iran, according to research from OPEC, ranks number two in proven oil reserves and number two in natural gas reserves. That puts Iran in the top slot on combined total energy reserves. Today, Iran officially says it produces 4.2 million barrels a day of crude, but actual production according to leading energy analysts is about a half million barrels a day short of that.

The reason is quite simple. Iran as a result of economic sanctions has been isolated from the essential tools for development: technology and capital. In business terms, Iran has been a political hot potato that nobody in the West was willing to touch.

Take the world’s largest gas field to illustrate the point. French energy giant Total finished off its work on phases 2 & 3 in the South Pars field at the end of last year. Negotiations on the next phase have been dragging on for a few years, until the National Iranian Oil Company signed a $4.7 billion deal with China National Petroleum Company earlier this month.

Total’s straight talking Chief Executive, Christophe de Margerie said last summer that the political risk was too great. Still trying to keep the prospects warm, a company spokesman this week said negotiations are still underway. China sees only the upside, with little political fallout due to its size and seat on the U.N. Security Council.

But China’s foray into the Iranian energy sector does not solve what has been an ongoing problem for the country. The international oil companies (IOCs), at this stage at least, possess the technology and know-how that Iran desperately needs. With technology and capital, veteran energy analyst Mehdi Varzi said Iran could be producing six million barrels a day, not four. You do the simple math, but at $70 a barrel, we are looking at another $140 million in daily revenues.

Natural gas fits into another category, but we can see neighbouring Qatar growing at least eight percent this year based on the growth generated on the other side of the same giant gas field. Iran with skilled partners should be doing the same.

Top line economic growth in Iran has been a promising 5.7 percent over the past five years, but as those in the developing world know, it is woefully short when two million young Iranians enter the workforce each year. They want opportunity, they see the world differently through the internet and they expect their leader to manage what has been handed to them, whether it is power or natural resources.

While the current President has publicly thumbed his nose at capitalism and the forces of “western” globalization, the leadership has been in fact acting in quite a capitalistic fashion. In the last few years, the government has privatized a host of strategic companies ranging from copper to telecommunications. The financial services sector opened up this year, but the government still owns and operates about three-quarters of the economy.

Recognizing that the state is not the best manager, the government passed Article 44 into law which calls for 80 percent of the economy to be in private hands in the next decade. As Tim De Borde of the London based boutique investment bank and fund manager Turquoise stated on our program, “Iran has been so isolated, but change is occurring.” That is why the fund sees opportunity and has posted average gains of 13 percent a year for the past five years with its Iranian investments.

The problem for the Supreme Leader is that change is nearly unmanageable now because Iran took too long to open up. When that finally did happen, the President and chief communicator did not inspire a lot of risk taking by the major energy companies or banks who feared probes by Washington – some of which are still open today.

Barack Obama offered an olive branch to Iran, cleverly delivered from afar before the elections. During his speech in Cairo President Obama talked about the region’s overdependence “only upon what comes out of the ground”. Many countries have accelerated the pace of reforms, based on the luxury of their energy reserves.

But in Iran, the sums have not added up. The current government has built its budget on overly optimistic energy prices and massive subsidies. As a result, capital investment to support future production has been lacking and political pressure has been building.

A market of 70 million consumers and an abundance of natural resources are appealing, but only if the risk-reward ratio is manageable. Today, it is not.

Call of the Arab Youth

noreply@blogger.com (CNN's John Defterios) — Thu, 11 Jun 2009 18:10:00 +0000

Iranians went to the polls this weekend after a thorough airing of heated exchanges during a handful of televised debates. The most prevalent topic surrounded whether incumbent President Mahmoud Ahmadinejad heightened or worsened Iran’s standing in the world.

The subject ignited the youth who took to the streets to share their views, but the campaign did little to address the issue that impacts the next generation the most, creating jobs for them in the future.

Every year two million Iranians are born in a country which is second in the region only to Turkey and Egypt in population size. Nearly two-thirds of the population is below the age of 30, the bulk of the youth, 98 percent, is between the ages of 15-24. With that backdrop, job opportunities and economic management should have taken higher priority.

Iran is a prime example of the challenge that exists throughout the region today. The accepted figure, according to the World Bank, is that 100 million jobs need to be created by 2020 for unemployment to stay where it is, since the birth rate continues to surge.

Youth unemployment is estimated at 20 percent depending on the market, meaning at least one in five is out of a job. The former foreign minister of Jordan and now the Senior Vice President for External Relations at the World Bank, Marwan Muasher said during an interview that “they (the youth) are basically fertile ground for radical ideas.”

What we are talking about here is a complete mismatch between skills provided in schools today and what is needed tomorrow, which, Muasher says, requires, “A totally changed mindset in which people are trained to question authority, to think critically; this is the basis for all innovation and creativity.”

The Middle East has enjoyed regional growth of nearly six percent a year before the downturn, but executives contend that to create the jobs needed we are looking at sustained growth of 8-9 percent for the next dozen years -- that will be hard to accomplish.

The policymakers and chief executives I spoke with are not throwing their hands up in despair. Instead, they are being proactive by taking matters into their own hands.

They single out Lebanon and Jordan as two economies that are providing the training necessary to foster talent. Not surprisingly, they are the two regional economies holding up best during this downturn, minus Qatar which floats on a sea of natural gas.

Within the Gulf Cooperation Council there is another reality, that the private sector is in competition with the public sector for workers. Government has a long standing tradition of creating jobs, even when the role is not needed.

As Tarek Sultan, Chairman and Managing Director of global logistics company, Agility, bluntly stated, "It makes it difficult for us to then propose jobs for them in the private sector if they actually have to work and spend a nine hour day doing something productive." This view is coming from a company operating in 120 countries with 34,000 employees from a base in Kuwait City.

The young leader added, "We would like to see more engagement by the GCC nationals in what we are trying to achieve." Translation: If you are willing to work hard, we have a job and opportunity for you.

To be fair, governments across the region are not sitting idle. The oil rich states in particular are boosting their education budgets by 10-30 percent to address this very issue. Some have probably spent too much money at the top end of the education chain by paying to bring over western institutions, instead of focusing first on primary and secondary education.

We should not forget that technical training is an important part of the mix. For example, Abu Dhabi is setting up an airline services hub with GE and EADS and they are already beginning their plans to train future technicians.

The new generation of regional leaders recognizes the challenge. Last summer when I interviewed the Crown Prince of Bahrain, Salman Bin Hamad Bin Isa Al-Khalifa, he acknowledged what he called an over reliance on the public sector.

As part of a process of labor reforms, the government has created a fund for training Bahrainis to match the jobs needed on the ground -- from financial services to food production.

What we want to do is make the private sector the main engine,” said the British and American educated Crown Prince. “We seek to do that by investing in our people, by transforming the role of government.”

Bahrain remains an attractive target for foreign direct investment, but the region as a whole is taking in only four percent of the total pool of $1 trillion looking for fresh opportunities.

To dent double digit youth unemployment, Middle East leaders need to capture a greater share of foreign direct investment. They must convince investors that they are up to the challenge, by ensuring the next generation of local executives will be as well.

A Fresh Start For Business

noreply@blogger.com (CNN's John Defterios) — Thu, 04 Jun 2009 15:38:00 +0000

Chalk one up for the new guy.

The 44th President is fighting more hot blazes than the whole state of California during peak fire fighting season. From bank rescue packages and auto-maker bailouts to challenges on the Korean Peninsula, the priority list is long and patience amongst his electorate is not a bottomless well.

Against that backdrop, Barack Obama visited the Middle East for the first time since taking the oath of office. He wisely laid down the foundation for the visit by welcoming leaders from Jordan, Israel and the Palestinian Authority to the White House before leaving for the Middle East.

The tone was serious but collaborative: In Cairo, the President said he brought the “goodwill of the American people,” with warm gestures in Arabic. The message: the Middle East is a priority for his administration and will not be left to the sunset of his Presidency -- a mistake repeated by his two immediate predecessors, Bush and Clinton.

A year ago I was sitting in the audience of the World Economic Forum meeting in Sharm el Sheikh with a Middle Eastern colleague taking in the speech of George W. Bush. Participants remained in awe of the trappings of the White House entourage and respectful of the office itself, but they leaned back in their seats after absorbing the tenor of the address. At the peak of daily bombings in Iraq and unrest in the Palestinian Territories, it was seen as a lesson in democracy that rang hollow.

The U.S. economic downturn was just beginning to take hold when President Bush visited Egypt but the region was in the sweet spot of economic expansion. After five years of economic reforms (encouraged by the U.S. I might add), regional leaders were enjoying average growth of six percent, $100 oil and growing surpluses. They were not expecting a tutorial on political reforms.

We are witnessing an unusual by-product of that approach. Support is high for the 44th President, but the bar has been set incredibly low. The unusual mix offers an opportunity to surprise people on the upside -- and Obama knows it. As he outlined to the people of Egypt and the rest of the Middle East, the countries will make a “sustained effort to listen to each other and learn from each other.”

President Obama admitted it is early days in the conversation. Don’t expect miracles but don’t expect inaction. Early in my career in Washington, they used to say on Capitol Hill “politics is business.” Business cannot prosper without the right political conditions and politicians cannot survive without the support of the business community.

The business community in the region is yearning for a peace dividend. A unified Arab front at peace with Israel could focus attention on rebuilding the Palestinian territories. Money has been pledged, but political risk has held back disbursement of funds. Arab leaders could re-direct energies spent on Israel to addressing the most pressing issue of their time, creating at least 100 million jobs in the next 10 years for the next generation.

President Obama said the region should not be fearful of globalization: “There is no contradiction between development and tradition.” He singled out the progress of both Malaysia and Dubai as examples of modern Islamic economies which have embraced the 21st century.

While it is certain that meetings in Riyadh included in-depth discussions about the recent recovery in oil prices and sustaining ample supplies during the early stages of economic recovery, the U.S. President encouraged the region to look beyond energy, noting that “education and innovation will be the currency of the future.”

This is where the President sees a role for American businessmen and educators -- as agents of change to support entrepreneurs, to encourage student exchanges and to build goodwill at the same time.

While the president spent ample time on the region’s long history and the cultural roots of Islam, he elected to leave the audience of three thousand students and dignitaries with a simple phrase in an effort to put recent history behind us, “if we are bound to the past, we cannot move forward.”

Perhaps the fresh start really is underway.

A Very Public Debate

noreply@blogger.com (CNN's John Defterios) — Fri, 29 May 2009 15:15:00 +0000

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.

The Potential Power of Peace

noreply@blogger.com (CNN's John Defterios) — Thu, 21 May 2009 14:48:00 +0000

Every four or five star hotel in Amman has a metal detector and handbag screener; the same goes for the shopping malls. As one Jordanian businessman said in a matter of fact fashion, it is the price of security. He does not mind the extra screening, frisking and the watchful eye over the passport. Without irony, he may be more accepting since he is chief executive of a company specializing in iris scan technologies for airports and even ATMs.

But imagine business without these extra precautionary measures and nuisance. Imagine business with the potential power of peace.

The hurdles to leap are higher than ever. Israel’s Prime Minister Benjamin Netanyahu seems like the reluctant bachelor who does not want to commit to marriage. The phrase “two-state solution” seems to be the no-go zone for him. It seems unlikely at this juncture that citizens of Iran will swing to the center during their mid-June elections. And Hamas and Fatah seem just as far apart now as they were when they first sat down for talks in Cairo.

However when I posed the idea of all those elements coming together to a senior advisor to King Abdullah II of Jordan, he quickly replied that the payoff would be “huge”. Barriers to movement, barriers to business and barriers to peace would tumble. Iran would find it difficult to play the role of spoiler if a two-state solution took hold. Imagine a world where Saudi Arabia, Qatar and Egypt all read from the same page.

In an interview with Gamal Mubarak while at the Dead Sea for the World Economic Forum, the Egyptian President’s son urged Israel not to go back in time.

“If we are going to be held hostage every couple of years after a change in government, on either side, that decides to start all over again, that decides to say, you know, ‘I'm not going to be committed to what has been agreed to before and let's start all over again’, we're never going to get anywhere.”

Senior Arab officials privately hold out more hope than they are publicly willing to share these days. They believe that Americans, especially Jewish Americans, have shifted in the past year and as a whole want to see peace take hold. One regional official involved in the process says the new U.S. President is sensing that change in sentiment.

After sizing up the different discussions at the Dead Sea and thereafter in Amman, one should not hold one’s breath for an overnight shift in the tectonic plates of the Middle East, but as Washington’s ambassador to the United Nations recently stated, the parties involved don’t want to be seen dithering either. There are plenty of fuses burning in the region, as well as in Afghanistan and Pakistan and action is needed.

Prior to our video reportage in Amman, I bumped into the chief executive of leading mobile group Zain Telecom, Saad al-Barrak. He was in Jordan to finalize a deal for Paltel, the Palestinian telecom group and swap shares in its Jordanian holdings. He is not letting the uncertainty of an elusive peace deal hold up business. Goodwill, al-Barrak says, is built during these difficult times, that when security arrives will pay dividends for years to come. It is the same strategy Zain has implemented in Iraq and 18 other countries.

Though doing business is not easy in red-alert zones for mobile operators, the freedom of movement and goods are not essential. One can make phone calls even when are hindered by road blocks and security checkpoints in the West Bank. Shipping hard, perishable goods is another story.

So businessmen on the ground are looking for movement from the new leadership in Israel. As Gamal Mubarak noted, “If we don't give the Palestinians some hope, a track - it's going to take time, obviously - I don't think this is going to be a positive or an encouraging start.”

As the temperature dropped on what was an unseasonably warm day in Amman, a leading businessman shared his enthusiasm for peace: with no checkpoints, and no security barriers the drive from Amman to Jerusalem would take less than an hour.

A year ago, I attended the Palestinian Investment Conference where a standing room only crowd to expressed their support for peace and invest in the territories. There has been a lot of water under the bridge since then, but that has not stopped businessmen from visualizing the potential power of peace.

Green Shoots in the Sand

noreply@blogger.com (CNN's John Defterios) — Thu, 07 May 2009 15:16:00 +0000

After a buoyant global market rally and the passing of the so-called bank stress tests in the U.S., most everyone is eager to claim that the worst is behind us and we are witnessing the green shoots of recovery.

Followers of history would have us think again. During the Great Depression investors were head-faked into believing that the initial recovery would be a lasting one -- and they licked their wounds for another four years thereafter.

This week I had the chance to co-chair the Arabian Hotel Investment Conference in Dubai and interviewed two sizable players on stage at the event – Sultan Ahmed bin Sulayem of Dubai World and Prince Sultan Salman Abudulaiz Al-Saud of the Supreme Commission on Tourism. The latter is better known for taking the big picture view of the world as an astronaut on the 1985 Discovery mission.

Both in their half hour appearances on stage gave candid assessments of where we are today. The chairman of Dubai World said he would complete all the projects under construction but would delay any new developments, including the one kilometer tower designed to surpass the world’s tallest tower, the Burj Dubai. Sultan bin Sulayem trimmed the sails of his property group Nakheel by cutting 15 percent of the workforce. “Everything that cannot be currently financed will be delayed,” said the development veteran.

Saudi Arabia’s story remains one of expansion. After six years of surpluses, the Kingdom is spending freely on education, healthcare and yes, even tourism. Prince Sultan is trying to recapture some of the $15 billion Saudi citizens spend abroad each year on holidays. At the same time, the country is modernizing its infrastructure. With a population of 28 million people, including six million ex-pats, Saudi Arabia has decided to either refurbish or open 22 domestic and international airports. This runs in parallel with a strategy to develop four new economic cities from scratch.

Marios Maratheftis of Standard Chartered told the hotel developers that the Middle East is the “most resilient region in the world.” He is certainly correct in one respect -- with the bank forecasting that the Middle East will stay above water in 2009, with growth of about 1 percent. Americans and Europeans would thank their lucky stars for that performance this year.

Having taken the business temperature as the heat surged in Dubai during my three day stint, one quickly finds out that realism has arrived in the region’s financial center. A group of attorneys stopped to share their thoughts while I was flagging down a taxi. One said they are fine as a firm this year, but if 2010 looks the same they may not survive this slowdown.

That, unfortunately, is at the heart of the challenge. Next year is not looking so bright, with credit still scarce and government and corporate debt coming due starting in the autumn. Government officials expressed their confidence that the $10 billion bond offering will go well -- and Sultan Bin Sulayem shared that view for Dubai World, with more than $4.5 billion in need of refinancing in the next year.

The region has been tested before and worked through the challenges. While touring his beach hotel complex via an electric powered abra (boat), Gerald Lawless, the Executive Chairman of Jumeirah Group, compared this economic challenge to the rapid response needed after 9/11 and the Gulf War.

Lawless, a 30 year veteran of the region, said Dubai has made a “very real assessment of where we are. We know it is pretty deep but it could have been a whole lot worse.”

Beyond the staff cuts, Dubai Inc. has had to respond in force to get visitors in place. Hoteliers like Lawless teamed up with Emirates Airlines to put forth bundled offers. Lawless says that his beach resorts had 97 percent occupancy in April -- but this came at a price, with revenue per available room down 20 percent in the first quarter.

The Jumeirah Group has big expansion plans, but the owner-operator of the iconic Burj Al Arab hotel is also taking a more measured pace. The first of six hotels planned for China has been delayed again until the spring or summer of next year. Lawless, however, plans to have 60 hotels under management by 2012, with half of them opened by then.

After the conference, I took an hour to take in “The Walk” at Jumeirah Beach, a modern boardwalk of restaurants and high end shops. Locals and tourists alike were out spending, not with the frantic pace of just a year ago, but in a more measured way.

At the start of this stroll, I stopped to take in an unusual scene in the Gulf. It was a crane with a giant wrecking ball tearing down an “old” structure. This prime location was being cleared for what seems to be another residence. It was a rare burst of new activity in a city which has been in a big rush for the past two decades, and is taking a pause to spot the green shoots of recovery in these desert sands.

Pipeline Politics

noreply@blogger.com (CNN's John Defterios) — Thu, 30 Apr 2009 09:34:00 +0000

There is a nasty tug of war going on. It does not involve two teams pulling at ropes, but two consortiums wrestling to see their pipeline prevail. This big time struggle will certainly have implications for the Middle East, but it is too early to tell just how.

The Summit on Natural Gas for Europe and Security and Partnership recently brought together 29 leaders and ministers to Sofia, Bulgaria. They signed a declaration to support the “rapid development of international gas infrastructure … to guarantee diversification of gas supplies.” Nice words indeed after Europeans saw their gas supplies interrupted every year for the past three years, but it brought us no closer on how to get there.

In case you missed the story on our program, Turkey is positioning itself as a key transit point for the Nabucco pipeline, a 3,300 kilometer project that can take gas from the Caspian Sea region to Europe. Backed by the European Union and the United States, it would cost nearly €8 billion to pull off.

In the other corner (considering this a heavyweight boxing match) is the Russian backed South Stream project, weighing in at €10 billion. Italy’s Eni is involved and would take gas from Russia, under the Black Sea, to Bulgaria and beyond. It also helps in terms of political clout that Europe’s largest economy Germany has long established ties to Moscow as well.

Turkey’s President Abdullah Gul said the “necessary political will” is there in his country to implement the project, but it does not seem to be anywhere else. As veteran oil and gas analyst Mehdi Varzi said, “I am just curious why they (Europe and the U.S.) are not putting their weight behind it.”

We are expecting a decision on whether to proceed with Nabucco by June, but in the meantime there is a lot of scrambling and lobbying going on with those who control the gas -- Azerbaijan, Turkmenistan and Kazakhstan. While this real life, high stakes drama plays out, Middle East players are beginning to show their cards on the other precious fossil fuel -- natural gas.

“Qatar is way ahead of anyone else here,” says Varzi, and that is a fair bet considering the amount of money the nation is putting into the Ras Laffan gas operation.

"Ras Laffan is the future of Qatar, simply because of the reserves. This is the gas city of the world and the gas city of Qatar," says Faisal Al Suwaidi, CEO of Qatargas.

The tiny state sits atop the largest single gas field in the world and ranks number three behind Russia and Iran in reserves. The North Field is feeding natural gas to the United Arab Emirates and Oman via the Dolphin Energy project, and loading up giant LNG tankers for markets such as Britain, with Poland knocking at the door as well.

Iran this past week sent signals that it is gearing up to develop the same field on its side of the territorial divide, South Pars. Iran’s state export gas company said China’s Sinopec may join Repsol of Spain and Royal Dutch Shell to develop the Persian LNG project. The Iranians say a decision is expected by mid-May.

Varzi, originally from Iran, says the country’s “energy development is very confusing and it arises from what I call political bickering in the country.”

It is obvious that the weight of sanctions is forcing companies to tread a fine line -- they want to be involved in future developments, but they want to see political daylight before rushing ahead. Industry analysts say we could witness the Obama effect, with the olive branch extended to Tehran, but it will take the June elections to pass before we begin to see clarity on that front.

The so-called peace pipeline is also in the mix. It could deliver gas from Iran through Pakistan to India. We have heard about it for years, but again resistance from Washington has stalled activity.

That is the backdrop for the region’s number one and two holders of reserves -- but with Saudi Arabia, UAE and Algeria all in the top ten, future prospects get interesting.

The current price scenario is complicating matters. While oil is trading at around $50 in this global slump, natural gas is at the equivalent of $20-$30 a barrel. Unlike oil, the bulk of all shipments are passing through pipelines these days, which means you need both upstream partners and downstream customers to make this equation work.

Because developments (minus Qatar) have been slow off the mark, the Middle East is not awash with available natural gas. All the buildings and desalination plants require fuel to run them – gas is the cleanest burning and cheapest alternative available.

So the headline number of the region sitting on 45 percent of the world’s gas reserves looks promising; getting it to market remains the challenge.

The Perils of 21st Century Piracy

noreply@blogger.com (CNN's John Defterios) — Fri, 17 Apr 2009 14:37:00 +0000

We are becoming experts of geography, or at the very minimum, we're intrigued by the region’s sea lanes -- and 21st century piracy off the coast of Somalia.

Needless to say, having two key arteries for hard goods and up to 40 percent of the world’s oil passing through an area can pique one’s interest.

Welcome to the Suez Canal, feeding into the Gulf of Aden and the Strait of Hormuz that funnels into the Arabian Sea. The two passageways were taken for granted until the swashbuckling style of these less-than-modern-day pirates threw trade off kilter and confidence for a loop.

We have heard from scores of experts on the subject, with the average television viewer peering into the coverage wondering the obvious: why is it that a flotilla of military vessels cannot wrestle complete control of the seas off the coast of Somalia?

Now that U.S. Secretary of State, Hillary Clinton has expressed Washington’s desire to rally for tighter international patrols and coordination, we are likely to see more action -- but also more challenges -- from the pirates.

First and foremost, in one of the poorest and least governed countries in the world, these pirates must believe the upside potential is superb, with the downside risks relatively controlled by their track record of success. According to a handful of sources, the pirates brought in about $80 million dollars last year –- with the Sirius Star carrying a $100 million payload of Saudi crude the biggest target to date.

In researching this topic you learn quite a bit along the way. Slow-moving ships are the most vulnerable, anything travelling under 16 knots. The very large crew carriers (VLCCs) are rare targets, unless carrying a huge load, which slows them down.

Martin Murphy is one who now spends his life tracking the perilous seas, and says we may be lacking perspective. He is the author of "Small Boats, Weak States, and Dirty Money: Piracy and Maritime Terrorism in the Modern World." His research indicates that no more than one percent of the ships passing through the Gulf of Aden have been either attacked or hijacked.

"The bigger impact is the psychological effect on the owners and the operators. Almost any crew man that has been pirated over any stage of their career never goes to sea again," says Murphy.

Captain Richard Phillips, as a free man, standing on soil must wonder whether his life should still be on the high seas.

When exploring the numbers, it would appear that shipping companies are steering clear of the Gulf of Aden for security reasons. Murphy invites us to think again -- he says it is more about the fees being charged by the Suez Canal Company and, therefore, the Egyptian government.

Revenues through the Suez Canal are down 21 percent year over year, partially due to those higher fees and the fact that trade is projected to be down nine percent this year, according to the World Trade Organization. The number of vessels going through the canal was down 20 percent in the same period for these very reasons.

Passage fees, according to those tracking the industry, have surged up to between $300,000 and $600,000 per vessel. Specialty piracy insurance only adds an additional cost along the way since Lloyds of London has declared large parts of the Gulf of Aden a war risk.

Sounds ominous, but again we need a bit of perspective according to Murphy. "When you compare Somali piracy to piracy in other areas of the world," says the King's College scholar, "The level of violence we see in other parts of the world, Nigeria, the Philippines, Somali piracy is uncomfortable but relatively benign."

That is certainly not our perception at the moment, but images can outgun reality anytime in this world of 24 hour news and internet activity.

This brings us to another point: the lasting impact we may see as a result of the latest rounds of attacks. Security will be fortified. The pirates will raise the stakes, and new strategies to counter their attacks are being discussed.

In a post 9/11 world, I asked Murphy if it wouldn’t be wiser to deploy armed marshals on board, as some of the airlines do. "This is a lively debate within the maritime shipping community," he said, adding that the bulk of the shipping community believes that armed guards "are inappropriate for merchant vessels." Some believe putting armed guards on board will only import more danger.

If one were to take a helicopter view of the situation, using a mix of security and diplomatic tools makes the most sense. Yes, it needs to be addressed onshore with the governments (or quasi-governments); yes, a flotilla of military ships to serve as escorts should continue; and finally, some added security onboard to fend off these renegades seems not dangerous, but logical.

And finally, let’s not overlook the impact this may have on the region in general. Countries that line the Red Sea and the Gulf of Aden have active ports; even the smaller territories such as Djibouti have attracted foreign direct investment on the back of regional growth. If the pirates are not brought under control, don’t expect foreign investors to ignore the dangers that are flaring up far too often.

Round three of the G-20

noreply@blogger.com (CNN's John Defterios) — Thu, 09 Apr 2009 16:52:00 +0000

It is not easy to round up 20 leaders, have them more or less sing from the same hymn sheet and finally agree to a communiqué that was long on bold headlines but fell short in the way concrete measures.

That was the outcome of round two of the G-20 meeting in London. This, indeed, is the worst downturn witnessed in seven decades, so it may be worth viewing the road to recovery as a 15 round boxing championship.

Behind the scenes, we at CNN had a healthy debate on what the actual package was worth -- was it $750 billion or $0.5 trillion for the International Monetary Fund. Wait a second, how do we get to $1.1 trillion? In actual fact, $250 billion of that total is being set aside for trade credits, with another $100 billion for developing countries. However, the devil is in the detail. Who will have access to those funds? Moreover, who will be putting up the fresh capital to make that happen?

These are key questions that were not addressed in London, but they are waiting for round three in Washington, at the spring meetings of the IMF and World Bank to go to the next level.

Since the financial community in general (including financial journalists) is so conditioned by the former G7 process, very few tuned into the emerging voices of the 21st Century economy, notably China, Saudi Arabia and Russia –- the new surplus countries. Not one of them offered fresh funds on the new equation of $1.1 trillion.

During the deliberations, I was on the phone with a Saudi banker who was waiting for a call from the London delegation to see what may be put on the table. I was told the Kingdom was not asked to offer more funds to the big number.

Now, there are many interpretations along that front. First and foremost, China and Saudi Arabia probably feel they have offered more than their fair share; after all they are major buyers and holders of U.S. Treasury bonds. Like the Japanese, who put up $100 billion in loans to the IMF, Beijing and Riyadh could have done the same, but it seems quite clear after the dust has settled that they were not convinced to do so.

Which leaves us where in the process? Just prior to the G-20 meeting, I interviewed the First Deputy Managing Director of the IMF, John Lipsky, in Vienna. While addressing the OPEC seminar and acknowledging the vast stimulus provided by $45 dollar oil, he expressed concern that there may be stimulus fatigue in 2010. Collectively, G-20 countries have spent about 1.8 percent of their GDP to free up capital in an attempt to put air back into the economic balloon. That is a record according to Lipsky.

What is not clear from the vague language of the final communiqué in London is what happens next year. German Chancellor Angela Merkel and French President Nicolas Sarkozy made it clear they were not offering more money just yet and they wanted to move to towards a policy agreement for global financial regulation. All agreed that better regulation is needed; how to get there was not defined. So, that is big issue number two for third round of talks in Washington.

If there is a key issue number three for round three, it has to be the fate of the Doha Development Round. While in Brussels to drum up support for his efforts, WTO Director General Pascal Lamy talked of the need to ward off protectionist measures within the current rules of the Geneva-based organization and offer a bit of "blue sky" to developing countries that cannot simply open their financial taps and spend a record amount of money.

In the communiqué there was language to cover off the financial markets (investors get extremely nervous at the thought of trade barriers), but leaders were short of concrete answers or a firm timeline to get the Doha Round done and dusted. What was agreed to, cleverly inserted by Lamy and British Prime Minister Gordon Brown, was a "name and shame" game. The WTO will identify those who are erecting barriers to free trade and they will be asked politely to watch their step. Lamy will have a great deal of work to do since the World Bank identified 17 of the G-20 as being overly aggressive with their trade claims within the current WTO framework.

There are, of course, some very worrying hurdles to cross. The Paris-based OECD is projecting that the industrialized countries will decline by a record 4.3 percent. The WTO says trade is already collapsing with a record decline of nine percent projected.

These are the numbers that make up the real story that could be outshone by the glare of photo-ops, a new U.S. president and one huge headline number of $1 trillion, but this fight against a global recession will only get more challenging in the later rounds.

Bridge Builder

noreply@blogger.com (CNN's John Defterios) — Thu, 02 Apr 2009 11:47:00 +0000

A visit to the bustling city of Istanbul captures the essence of Turkey’s evolving role in the world.

The Bosphorus strait divides Europe and Asia. The giant bridge of the same name that crosses it links the two continents together.

Beyond the symbolism of the bustling city, Turkey is currently experiencing an expansion of its role as a bridge builder -- largely due to the new occupant in the White House.

It is very symbolic that Barack Obama chose Turkey as his first port of call in a Muslim country during his first 100 days in office.

Turkey remains secular, continues to knock on the European Union’s door for membership, and has a handful of relationships in the Middle East that could be vital in the peace process.

During an exclusive interview in Brussels, Turkey’s President Abudullah Gul provided more than a few glimpses into the shuttle diplomacy, with Washington’s blessing, that is now underway.

President Gul recently met with the Supreme Leader of Iran Ayatollah Ali Khamenei -- it was no accident that it was just days before President Obama reached out with his message to Iran.

"I was able to speak in a very free and sincere atmosphere. I am sure they are listening, they are deliberating and I am sure that at the end when they are convinced that all these messages are sincere, then we can see action," said Gul on the sidelines of the European Business Summit.

Asked whether the elections will need to pass before there is a response to President Obama’s olive branch, Gul said, "The politicians before the election, they have to be populists. So, therefore after the election maybe these serious issues can be handled better."

In the meantime, Turkey is sustaining its shuttle diplomacy with Israel and Syria.

Gul, it is fair to say, is very positive about the change in leadership in Washington and the gestures overall to the Middle East.

"[Middle East leaders]should not miss this opportunity because President Obama is saying we are going to listen to you. We are not going to enforce our own policies on you. This is a good starting point."

While Middle East politics evolve, Turkey is filling another role for the West -- as an energy transport hub to counterbalance the inconsistent gestures from Moscow on supplies to Europe.

Washington was a big supporter of the BTC –- the Baku, Tbilisi, Ceyhan oil pipeline that runs from Azerbaijan to Turkey’s south-eastern coast.

The next goal is the potential building of the Nabucco gas pipeline that will deliver energy from Central Asia to Austria via Turkey. There is some good old fashioned wrangling behind the scenes over transit fees and local supplies for Turkey, while Russia is busy trying to tie up the gas supplies through its network.

But the fact is Turkey will play a bigger role on this front in the next decade.

"It is a bridge between East and West," says Nobuo Tanaka, Executive Director of the International Energy Agency. "In the energy sector it certainly contributes as a very important bridge of resources of the Middle East to the West."

According to the Center for European Reform, Turkey is near 70 percent of the world’s proven reserves of natural gas. Neighboring Iran and Iraq have still not exploited their natural gas exports.

President Gul calls Turkey position in this geo-political game "a unique role."

"You have to diversify the sources. If you have the sources you should secure transportation."

This sounds simple but, of course, it is not. With Turkey eager to see accession talks to the European Union move at a more rapid pace, there are concerns in Brussels that the Turkish leadership is playing the energy card.

Turkey can help deliver energy to the West, especially Europe, but expect a price tag to be attached.

As the former President of TUSIAD, the powerful Turkish business association noted, "There are some powers, there are even some companies, that take Turkey for granted. That there is a particular role for Turkey to play and that is it. I don’t think that it will evolve that way, in that simple manner."

No one ever said straddling both sides of the fence is easy; straddling two continents is even more complicated and yes more interesting.

Tour de Trade

noreply@blogger.com (CNN's John Defterios) — Thu, 26 Mar 2009 13:56:00 +0000

He walked into the Brussels hotel suite looking energetic, despite the many obstacles he is facing as World Trade Organization director general.

Fresh off a trip from Washington, where he met key players of the Obama administration, Pascal Lamy knows that finalizing the so-called Doha Trade Round, which was launched in the Qatari capital eight years ago, is not the world's number one priority these days.

Well ahead in this race to mend the global economy are: Cleaning the system of toxic assets, re-regulating the global financial system to avoid a repeat performance of the 2008 meltdown, and even trying to close down or limit the use of tax havens.

Those other issues however do not prevent the former French politician and European Trade Commissioner from performing his “Tour de Trade.”

Mr. Lamy aptly said that trade negotiations are like riding a bicycle: “either they move or they fall.” The key now, he says, is not to let them move backwards: “First thing we have to do is push back on protectionist measures which understandably appear here and there."

Having covered the final Uruguay Trade Round in Geneva where there were far fewer countries, and talks were dominated by the U.S., Europe and Japan, I know that this Doha Round is much more complex.

The key difference is that what was not covered the last time around has been swept into this attempt. More importantly, China, India and all the other developing country players are feeling emboldened by their new roles in the global economy -- they do not want to be bullied into a deal they don’t see as favourable to them.

In the G20 process, all the major players are sitting around the same table. That, in theory, should help this effort but, so far that has not been the case.

At the European Business Summit in Brussels, the largest business trade group in the European Union, Business Europe, said that 17 of the G20 have participated in some form of protectionist practices.

Director General Lamy admitted they are not breaching the rules of the WTO, but they are stretching the limits these days in various ways, like by filing more anti-dumping cases, or by nudging tariffs to protect industries such as auto-makers and textile manufacturers.

So "the DG," as his staffers refer to him, has adopted a new line that appeals in particular to developing giants like China: Don’t see the Doha Round as a process of giving up something, but as an insurance policy to protect the now vulnerable G7 countries from backing out of their commitment to free trade.

“Keeping the insurance policy which the WTO offers for the world against protectionism; that is very important at this stage, to make sure it does not move back,” said Lamy.

This is where we should watch closely. Mr. Lamy was encouraged by President Obama’s action to draw a line in the sand in terms of policy when he stood against the “Buy American” clause being put forward by the U.S. Congress.

Pushing that through would have rolled back the clock to the 1930s, when the Smoot Hawley trade act exacerbated the Great Depression. Since many compare this global depression to that one, there have been great fears that policymakers would follow the same tack, ignoring historical evidence against such a move.

But, when asked directly if Washington is committed to passage of the Doha Round, Mr. Lamy replied, “That is the general line they are taking.”

Until the President of the United States and his counterparts in the G20 jump right into the global trade "pool," don’t expect rapid movement. That was the case in the previous round, and the only real difference here is that a global recession does not lend itself to signing onto measures that may be seen to jeopardize jobs for textile workers, farmers or auto-makers.

The DG makes another valid point: While G7 countries, especially the U.S., can open up the taps to jumpstart their economies by spending a collective $2 trillion, many developing countries in Africa and Latin America cannot. Trade to them offers what Mr. Lamy calls “a bit of blue sky” -- a hope to grow their way to prosperity.

Against this backdrop, regional trade blocks should not place all their bets on the Doha Round.

The Greater Arab Free Trade Agreement has 18 countries of the region loosely agreeing, at this stage, to create their own market of nearly 350 million people. It looks promising on paper.

As Saad Hariri, leader of the Future Movement in Lebanon noted during an interview, this downturn should prompt leaders to move this process forward to create inter-Arab trade and ultimately jobs. Lebanon is applying to the WTO to join the other 11 regional states who have become members of that organization since 1995.

“Regional integration and opening trade globally are two things that have to go together,” notes Mr. Lamy. There is not the threat that regions will live in isolation as the world trade talks stall.

But how about getting past the final two or three hurdles to get a deal done in 2009?

Calmly the DG states, “We are 80 percent of the way, but we have a couple of tough nuts to crack.”

It’s Interdependence not Independence

noreply@blogger.com (CNN's John Defterios) — Thu, 19 Mar 2009 14:37:00 +0000

After the price spike of 2008 to $147 a barrel last July, politicians the world over were quick to latch onto the issue of energy security. As petrol prices surged, they felt the need to articulate a strategy for energy independence.

The new president of the U.S. put this policy at the center of his election campaign and after entering the White House did deliver on the promise to put billions of dollars into ‘green energy’. The size of the investment surged because the sector was seen as a prudent way to create jobs as part of the near $800 billion stimulus package.

I would be the last one to argue against money being invested into alternative energies, invested in conservation or for that matter efficiency in the fossil fuel sectors. The final category is rarely discussed as we assume that national oil companies (NOCs) or the major international oil companies (IOCs) are getting what they can out of each barrel in the ground, despite suggestions otherwise by some industry insiders.

At the 4^th OPEC International Seminar held in the imposing Hofburg Palace in Vienna, OPEC oil ministers and chief executives from five major NOCs looked into their crystal balls to see how they can best plan for the near and medium term.

The oil minister of the world’s number one exporter Saudi Arabia, Ali Al Naimi told us in an interview the market is close to being in balance; OPEC has put a floor under prices and that “from a material point of view I believe we have made enough cuts." That was a relief to struggling global economies who feared that OPEC producers might try to cut one more time to boost prices. But it is not all clear sailing in this environment.

The veteran oil minister and former OPEC President Rilwanu Lukman perhaps summed up the challenge at a speaker’s dinner on the eve of the seminar by saying “We need to know where the heck we are going.”

Where are we going after the cliff-like drop from $147 to $40 in the last eight months? After taking notes during the chairing of this seminar and talking to ministers on the sidelines, it would appear we collectively (producers and consumers) are doing some poor planning.

John Lipsky of the International Monetary Fund said the perfect storm of a cyclical downturn together with a financial crisis will mean that the dislocation of the global economy will much more severe than we have seen since World War II.

While OPEC did the right thing (to paraphrase the Spike Lee movie title ten years ago) by holding production steady after record production cuts in the fourth quarter, if prices do not recover as member producers hope by the end of the year, it seems clear that $100 will be back by 2013.

Presentations from the Riyadh based International Energy Forum and the Paris based International Energy Agency point to a supply/demand crunch already underway. $40-50 oil is providing a stimulus to the global economy of $1 trillion versus $100 oil last year, but all the participants here suggested that at the same time oil producers, as a result of lower revenues, will stall further investments. The basic sums for them do not add up right now. With three-quarters of proven reserves in the hands of OPEC members (primarily in the Gulf) they are being selective about their investments and financing development of non-oil priorities; the basics like schools, hospitals, roads and yes alternative energies.

The Secretary General of OPEC Abdalla El Badri told us during an interview “We cannot invest in any future capacity. This is not viable.”

The bill to get daily production up to add 64 million barrels a day of capacity needed by 2030 is now estimated by the IEA at $26 trillion dollars. Energy demand is expected to rise 45 percent in that time frame. Yes they are suggesting Brazil, Russia, India and China, the Middle East and Southeast Asia will bounce back robustly in the next two to four years and march upwards from there.

That sort of growth would be welcomed in the medium term, but until that happens we can expect some real near term problems. First and foremost, who will finance the $26 trillion dollars or say a quarter of that in the next five years if banks are clogged and national oil companies want to hold onto a greater share of revenues from the crude they own? This is the trillion dollar question. International oil companies have plenty of cash on hand to co-develop fields in oil wealthy, but cash poor oil nations, but it is not clear they will be welcomed with open arms. We have all witnessed what transpired in Russia with the re-working of elephant field projects. Shell and BP are paying a high price in that process.

Jeroen van de Veer the Dutch CEO of Royal Dutch Shell avoided the thornier joint projects and instead looked at other successes in Russia, Nigeria and Qatar, but he did outline the “new rules of the game.” It involves greater interdependence of consumers and producers and the same of IOCs and NOCs. Confrontation leads to delays; production delays lead to volatility and in the end consumers pay the bill for poor planning and friction.

While this dance to greater interdependence just begins, it was fascinating to witness how dependent this group remains on the daily price of crude. Five oil ministers and one chief executive all perked up when one of their peers quoted the latest quote from the floor of the New York Mercantile Exchange while at dinner. $49.70 was the latest price -- $4 higher since OPEC decided to leave production where it is.

Oil prices rose alongside the stock market rally. The market rally was linked to the first hopes of an economic recovery in a long while. While the rhetorical gap between producers and consumers may seem at an all time high, the reality is interdependence has never been greater.

Avoiding April Fools Days

noreply@blogger.com (CNN's John Defterios) — Thu, 12 Mar 2009 15:02:00 +0000

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.

Horrific Traffic

noreply@blogger.com (CNN's John Defterios) — Thu, 05 Mar 2009 16:16:00 +0000

Our television production team entered the three room apartment in Manama, Bahrain with plans to see an empty shelter for the victims of labor abuse. What we found was quite different and heart wrenching.

Forty year old Suryavathi Rao fled the home of her employer that morning shoeless with only a nightgown and bible to her name. The years of domestic labor have taken their toll. She could easily pass for 60 if not a few years older. After working 16 hours a day, seven days a week for a year and a half, Suryavathi could not take it anymore. She said through a translator that her meagre salary of $108 a month had not been paid for six months. She complained about not being fed meals and surviving on the generosity of her neighbor another domestic worker who pulled together leftovers to get by.

Suryavathi could not get through three sentences without breaking into tears. As a result of her fleeing for protection, she has become a runaway worker with no rights. Her employer holds her passport. The best she can hope for is to get the passport back and hope that the shelter can give her enough money to buy a ticket and fly home to Southern India. It is not that simple of course, since back home Suryavathi fears she won’t be welcomed back due to her “failure” to send back money and keep a job.

This is the life of a forced labourer and the complex world of human trafficking. Technically, Suryavathi was not trafficked. She had a sponsor agency that she paid $1100 to back in India and is still charging here 5 percent a month interest on the balance. But she certainly did not expect slave like conditions when she arrived.

It is hard to think of a worst crime then the trafficking of humans. I was introduced to the cause by the First Lady of Egypt Suzanne Mubarak three years ago who heard of cases of child kidnapping, the trading of human organs and the sex trade involving teenage women.

In an exclusive interview this week in Bahrain, the First Lady explained that the more she learned, the more involved she became, “Whether it is regarded as a country of origin, transit or destination, it exists in all societies. Personally I came to realise what an insidious crime this was and how it was just really built on profit and on not only low morals, but no morals at all.”

Human trafficking and forced labor are big business. According to the United Nations International Labor Organization (ILO) 12.3 million people are a product of forced labor. Of that total, more than 2.4 million have been trafficked across borders. Total profits from this illicit trade add up to $36 billion a year according to the U.N., ranking third behind the illegal drugs and arms trade.

In large part as a result of the End Human Trafficking Now campaign of Mrs. Mubarak the last few years, more than 150 countries have signed onto protocols to combat the crime. Legislation has been passed; the next big hurdle according to the First Lady is enforcement.

“Oh definitely we have a long, long way to go yet, because the traffickers are not caught. This is an organised crime that is working you know, underground”. When reminded that for every 800 people trafficked only one is prosecuted, she admits “We need still to amend our laws; we need to draft new anti-trafficking laws.”

Having chaired two panels at this week’s “Human Trafficking at the Crossroads” conference in Manama, the other stark reality is the challenge of changing not only the laws on the books, but the mindset of the people who exploit innocent victims, either those who employ them or the middlemen who trade them.

In the Gulf of Arabia, the biggest problem according to labor officials is the treatment of domestic and construction workers. 250,000 have officially reported cases of abuse according to U.N. officials.

The fact that Bahrain hosted this conference speaks volumes of getting the subject off the taboo list. Government officials want to open up to discuss why things need to change. A year ago, the Crown Prince of Bahrain Shaikh Salman Bin Hamad Bin Isa Al-Khalifa created the Labor Market Regulatory Authority (LMRA) to consolidate a handful of ministries, get every migrant worker registered and give them the freedom to move from one employer to another if ill treated.

The effort, structure and technology are impressive – Bahraini officials admit the growing pains are daunting.

"It makes me very uncomfortable,” said the American educated Crown Prince during an interview last summer, “And what I think is the greatest protection for workers is the elimination of the sponsorship system. Sponsorship in this region is similar to servitude in the United States 400 years ago."

What is promising is that people at the very top and bottom of the “supply chain” of human trafficking are out fighting the cause. Mrs. Mubarak has targeted top business leaders to sign on the dotted line to insure that no one in their operations or within their supplier community are employing trafficked laborers. 12,000 companies have signed on in three short years.

The First Lady’s strategy was to make inroads as quick as possible. “Rather than repeating what has been done, that we should start working from the top, working with the business community, who have the resources, who have the expertise, who have the technical capabilities of helping us to do something about this scourge of human trafficking.”

There is a concern that during this global downturn the treatment of workers will become less of a priority. Right now, companies are concerned about delivering profits, but hopefully doing the “right thing” does not fall by the wayside.

In the trenches you find real heroes providing advice, food and shelter to the victims. The Migrant Workers Protection Society in Bahrain is under funded and under staffed, but three women of Indian origin have served as pillars of the operation have looked after 380 people who were desperate for help. It seems they don’t have enough fingers to plug all the leaks or loopholes while the system gets built in Bahrain.

Meanwhile, more than 200 participants at conference are looking for new strategies like a global phone hotline to make sure victims do not fall through the cracks. They are also trying to coordinate legislation and police investigations to put more perpetrators behind bars.

It is no small challenge when governments are working against organized crime rings, which are not only making big money, but to date have paid a very small price for their actions.

Financial Fire Fighting

noreply@blogger.com (CNN's John Defterios) — Thu, 26 Feb 2009 13:43:00 +0000

The disastrous results from RBS illustrate how challenging it is to mark the bottom of the market. Between the write down of the pricey purchase of ABN Amro and marking down toxic assets, the once highly successful bank tallied up a record loss of $34 billion. That is a sea of red ink which is forcing the British government to up its stake to nearly 80 percent.

I used the RBS example because everyone in government and business alike is trying to douse the flames of financial turmoil. The most dramatic example of this approach in the Middle East came from the United Arab Emirates -- which in the spirit of the term “united” took federal action to support Brand Dubai by taking 50 percent of a $20 billion bond offering.

A few days later, we heard from Nasser Al Shaikh, Director General of Dubai’s Department of Finance, who said that the government was looking at a possible stimulus plan over the next few weeks to jump start small and medium size enterprises. “The times are challenging throughout the world. Now it is up to us,” he declared at a news conference.

The re-defining of “us” in the context of the UAE is what the $10 billion bond purchase is all about. The UAE central bank pumped more than $30 billion into the banking system during the fourth quarter of 2008, but that money was not earmarked for Dubai. This latest round was.

The strategy changed back in mid-November at the top levels of government. During an interview on Marketplace Middle East back then, the Speaker of the House of the Federal National Council, Abdul Aziz Al Ghurair pointed in that direction.

“The UAE has over $600 billion in foreign currency reserves and sovereign fund investment abroad. Now, this money will have to be put into use,” said Al Ghurair. “So I think the commitment is there to support the economy of the entire country.”

Al Ghurair, who is also CEO of MashreqBank, had a message to those who were not managing their bottom line, “If the cash flow is there, and if the track record is there, people will still lend you money.”

That will mark the biggest shift going forward, the effort to evaluate companies on their merits and future growth. As one well-known banker noted over coffee this past week, “Dubai cannot fail.” He believes that it would be a defeat not only for Brand Dubai but for the entire UAE. He, by the way, is putting money behind his words, seeing the near completed infrastructure of the emirate and the financial services sector as key reasons to go into the market now.

Another leading financier who also preferred not to be named said the support from the UAE Central Bank sent the right message. This is “not a charity.” The $10 billion purchase was done on commercial terms of 4 percent a year. It was being viewed as a lot of money (about one-fifth Dubai’s GDP) but “not too much money.”

In fact, Dubai finance officials say there is no rush to go to the market to raise the other half of the funds. With no strings attached, the government can allocate funds where needed in the short-term. At the same time, bankers say this will reduce the risk premium on future borrowing this autumn when additional payments come due.

Florence Eid of London-based Passport Capital was in Dubai when the new strategy was announced. “It is certain that the vote of confidence through the bailout package, the debt package is a very strong vote,” noted the economist. “But there is going to be a lag between this and the real economy.”

Eid is referring to the 25 percent drop in real estate prices already on the books. The head of the Dubai Real Estate Authority said that rents could drop by 40 percent by the end of 2009. Eid also noted that we should wait to see what happens at the end of the school year. If expatriates vote with their feet and leave, that will undermine the real economy.

Brand Dubai has been built on confidence and a dream. This applies to financial services, the airline sector, the giant Jebel Ali airport and most importantly the property market. Step by step UAE finance officials are trying to put fires out by providing liquidity to the federal system and so far to one key emirate. Everyone is keen to see if there will be future flare ups as the region and the globe attempt to navigate extremely rugged terrain.

The right conservative

noreply@blogger.com (CNN's John Defterios) — Thu, 19 Feb 2009 17:57:00 +0000

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.

Destruction in demand

noreply@blogger.com (CNN's John Defterios) — Fri, 13 Feb 2009 10:31:00 +0000

"It is too easy to be pessimistic," is how one senior financial executive from the Gulf put it over dinner in London. My accountant from New York is taking negativity to the extreme, saying he has only invested in land, having no faith in financial instruments.

It is challenging at best to see the glass half full at this juncture. Even with stimulus packages being cobbled together, two key ingredients -- confidence and capital -- are clearly missing. As a result, this slowdown is spreading far and wide.

During an exclusive interview with Marketplace Middle East this week in London, the Secretary General of OPEC Abdalla Salem El-Badri pointed to the challenge ahead, "There is destruction in demand; there is no doubt about it."

The Secretary General says the worst case scenario is that demand drops by up to a half million barrels a day this year. The International Energy Agency is projecting consumption will drop by double that amount -- or a million barrels a day. If that is the case, daily demand will be below 85 million barrels a day, and holding onto $40 a barrel will be difficult.

El-Badri, as the great equalizer in the organization, is trying to prod producers inside the 12-member group and outside, amongst the key Non-OPEC players, to trim their sails. "We really need more from our member countries," says El-Badri, noting that 800,000-900,000 barrels still need to come off the market to hit the promised cuts of 4.2 million barrels a day, announced back in December.

Once those cuts are delivered, "if the market did not react, I think we have to balance the market,” said El-Badri. He pointed to the amount of stock, which today is floating on the sea or sitting in bunkers. "The stock at this time is about 57 days. This is five days above the 52 day average; if we want to take the five days out of the stock, then we have to cut more." That is as clear as it gets, whether the group that controls 40 percent of the world’s supplies is prepared to do more.

At this juncture, they are the only players doing so. The IEA still believes that non-OPEC production will go up by 400,000 barrels a day this year. OPEC is not keen to play the role of swing producer all the time or in this case of "swing reducer."

"I am taking this opportunity to ask Norway and Mexico to join us, because if the market collapses, it is not to the benefit of anybody," said El-Badri. This follows consultations with Russia’s President, Dmitry Medvedev, to do the same. This is a case where market share may override near term revenue shortfalls.

The International Monetary Fund, in a special regional report, notes that Middle East producers could see their revenues drop by $400 billion in 2009 due to demand destruction. The IMF urged oil producers to spend their way through the downturn so that the infrastructure build-out continues and confidence remains. The Fund sees regional growth at 3.6 percent this year, down from 6.3 percent in 2008. That is certainly not bad, and is a dream-like scenario compared to Europe or the United States right now.

The Secretary General, like many others, is hoping that the emergency actions taken today will mark the bottom of the cycle by mid-year, with the first hints of recovery by the close of 2009. I believe that is the best case scenario.

Lower interest rates, stimulus plans and tax cuts don’t do a whole lot if businesses cannot get access to capital. That is the quandary today. In the meantime, medium and long term planning and investments are being shelved.

"Because of demand destruction, and also because of financial problems, we are postponing about 35 of our projects from 150 projects, and I think that if this price continues, more projects will be delayed," said El-Badri. The reality is that no one seems willing to pony up more money if they don’t see revenues bouncing back to justify it. That is why there seems to be a building consensus to find what we have talked about on our programme, "The Goldilocks Scenario."

"I think that $40 will not permit us to invest to have a reasonable price where you can invest, where you can have another source of energy then from $70-$80 a barrel, is fair," said El-Badri.

There was a hint of disagreement within the Organization on this point. The President of the group Chakib Khelil thought that $40 was a "good price for the moment." Privately others said it is too painful for those desperate for revenues and probably counting on $60 or more.

As El-Badri noted we should be thinking a few years down the road, "There will be no additional capacity when the economy will pick up. Then you will not find additional capacity."

G-20 Jive

noreply@blogger.com (CNN's John Defterios) — Thu, 05 Feb 2009 17:24:00 +0000

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.

A barrel of trouble

noreply@blogger.com (CNN's John Defterios) — Fri, 30 Jan 2009 12:31:00 +0000

A year ago, the village of Davos was abuzz with oil at $100 a barrel. The heads of the sovereign wealth funds were sizing up new investment opportunities, and the power that comes with three-digit oil -- anything above the century mark.

Wow, have things changed. Prices have dropped that amount in the last six months and from what we heard at the panel I chaired here at the World Economic Forum, the worst has not come just yet.

OPEC’s Secretary General Abdalla Salem El Badri made it clear that the cartel is waiting to see by mid-February what impact their cuts will have on prices. “We have to review this number and see how the market is going to react to this,” he said, but added the punch line, “If we still have some downward problems, then of course OPEC would not hesitate to take some quantities out of the market.”

The Secretary General was responding to the latest figures from the International Monetary Fund showing that global growth will only be a half of one percent in 2009, the worst performance since World War II.

Before the close of 2008, the IMF was predicting growth of 2.2 percent. The latest review takes into account the erosion of the Chinese economy. Premier Wen Jiabao told leaders here in the Swiss Alps that, indeed, China is facing major dislocation.

The head of BP, Tony Hayward, came up with a more blunt assessment for the year ahead: “If you take the more pessimistic view of the world, which would say there would be effectively no growth in the world at all in 2009, then I think demand loss of perhaps up to one million barrels a day will be more likely. So, it depends entirely upon the success that the world has of getting the economies of the world moving again.”

China is pouring $600 billion into that effort. The U.S. Congress signed off another $825 billion on top of the nearly $1 trillion in financial bailout funds over the past year. There is a spending spree going on, but there is no real sign yet that it will deliver the desired results.

None of the three oil-producing players on the panel, which also included the President of Azerbaijan Ilham Aliyev, would be drawn into the question of whether the bottom of the market has already been reached. They did agree, however, a price below $50 will erode investment into future production. No one was crying into their soups, but they warned if prices don’t bounce back, when demand recovers, shortages and high prices will return.

We then moved into the question about what is the magic number for future production to come on-line. The world’s largest producer Saudi Arabia declared recently that $75 would suit everyone just fine after the downturn. All three agreed a band of between $60-$80 is ideal and they had the support of the CEO of India’s largest industrial group, Mukesh Ambani and the chief executives of power producer EDF and biofuel supplier Bunge.

Even as the economy continues to sputter and more layoffs are announced, there is still a lack of consensus to build a new financial architecture. In the halls of the congress centre, I am hearing very little about G-20 cooperation and advancing this idea that oil producers and consumers should enhance their dialogue to gauge demand, spot production shortfalls and yes, plan better for the time that demand collapses.

The latter is what we are faced with today. From mid-September, when the real signs of economic calamity set in to this Davos meeting, prices have fallen $80 a barrel.

Forty dollars a barrel seems to be the new base on which to build on, but don’t bank on it. While in Davos, they could find agreement on where they would like to see prices going, no one could really answer when that will happen.

Yes we hope

noreply@blogger.com (CNN's John Defterios) — Fri, 23 Jan 2009 10:09:00 +0000

"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.

Open up the Taps

noreply@blogger.com (CNN's John Defterios) — Thu, 15 Jan 2009 17:35:00 +0000

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.

No economic opportunity without peace

noreply@blogger.com (CNN's John Defterios) — Thu, 08 Jan 2009 13:51:00 +0000

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.