Posts Tagged economy
Booz & Company’s Joe Saddi: The Arab Spring Toppled Governments, but High Unemployment Remains the Region’s Biggest Concern
Now a year beyond the first flush of the Arab Spring movements throughout Northern Africa and other parts of the Middle East, the difficulties of economic uplift in the area are becoming apparent. In a way, the sudden successes of the uprisings, particularly in Tunisia, Egypt and Libya, mask the real long-term difficulties of laying the foundations for sustained economic viability for the region.
Joe Saddi, the chairman of Booz & Company, has long done business in the region and spoke about both the Arab Spring’s upsides and downsides at the first Wharton Middle East North Africa (MENA) business conference recently.
“I hear often the phrase, ‘The Arabs never miss an opportunity to miss an opportunity’,” said Saddi. “But now that the opportunity to have an economic success is there, we can no longer afford to do that.”
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Despite Wealthy Appearances, the Middle East’s Oil and Gas Exporters Worry about the Future of Energy
One of the great lamentations of the Western world is that its economy is being held hostage to Middle Eastern oligarchies, that the nations of the Middle East and North Africa are becoming richer and richer from monies the United States and the rest of the developed world lay at their feet.
Yet at a recent panel at the first Wharton Middle East and North Africa Business Conference, experts who have spent years looking at the oil industry, often first hand from those oil countries themselves, painted a different picture. It is one of worry about the future of oil, and a move in many places toward not only different industries, but completely different kinds of energy production.
“The challenges in the Middle East transcend oil,” said Morten Klumb, a partner at McKinsey & Company, who has spent the last six years for the firm in the Middle East, often focusing on infrastructure and real estate, not solely the oil business. The World Bank, said Klumb, estimates that the region has to spend billions of dollars on infrastructure just to get up to speed.
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Bala Balachandran, the J. L. Kellogg Distinguished Professor of accounting and information management at the Kellogg School of Management at Northwestern University, wonders how the commercial development of shale gas will forever alter Gulf economies.
“Oil reserves here are good for only 40 more years,” Balachandran tells Arabic Knowledge@Wharton. “Shale gas reserves are something like 500 years. So if that becomes economically viable, the barrel of crude oil is going to go down to $US15 dollars in three years. Then what happens to the economy here? Is there an alternative strategic plan? This is something they have to think about.”
Balachandran acknowledges that Arab Gulf countries are still flush with cash, and are investing into alternative energy technology. But technology isn’t enough by itself, he notes, nor does being wealthy help innovation.
“When you’re affluent, you are not motivated to change,” he says. “When your survival is threatened, you’ll come forward.”
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The Hormuz Strait is only 21 miles wide at its narrowest point. With shipping lanes only 2 miles wide to ferry a fifth of the world’s oil trade, it is a choke point in all senses of the word. If closed or blocked, attempts to reopen the strait would concern all of the world’s powers.
The obvious implications of any closure of the Hormuz Strait are stark. According to the U.S. Energy Information Administration, almost 17 million barrels of oil were transported daily through the Strait last year, representing nearly 20% of global oil trade. (Most Gulf oil exports now head to Asia.) A number of analysts predict prices for oil would jump 100%.
Closely neighboring Iran, most of the Arab Gulf countries would find themselves at risk and their economies under pressure. Instead of benefiting from a windfall from sudden increases in the price of oil, they would be dealing with increased security and logistical costs, a fleeing expatriate workforce, flight of investment capital and a squeeze on resource demands.
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In the tumult of the Arab Spring, the United Arab Emirates (UAE) has strived to keep itself a regional center of calm. According to a new study and emerging economic data, the strategy has paid off handsomely for the Gulf country.
A report by Dubai-based political risk consultants Geopolicity states that the UAE’s Gross Domestic Product (GDP) rose by US$62.8 billion since the regional unrest began, the highest growth among all of the oil-producing Gulf countries.
Citing data from the International Monetary Fund, the report found that “oil exporters were the winners and oil importers losers.” Arab oil producers financially benefited from the Arab Spring, as the price of oil jumped with protests, from US$90 a barrel for Brent crude to a peak of US$130 a barrel in May.
Some businesses and investors have followed the flow of money and social calm, moving money and offices into the UAE. According to Reuters , Bahrain, for instance, has seen an estimated US$20 billion in capital outflows in the first quarter of this year, with a portion of that captured by Dubai.
Though decreases in the price of oil may constrain growth, analysts caution, they add the UAE’s glitziest state is on course to continue rebounding. “Dubai in particular will continue to benefit from its safe-haven status at a time of continued Middle East unrest, providing significant tailwinds to its tourism and banking industries,” stated Farouk Soussa, chief economist for the Middle East for Citigroup Global Markets, in an analysis of the UAE’s economy.
Anecdotal reports suggest the UAE’s faltering real estate market has also received a boost partly from wealthy Arab expatriate families escaping the turmoil in their countries, buying property in Dubai and Abu Dhabi.
According to Alan Robertson, CEO of Jones Lang LaSalle MENA, in a September reporton Dubai’s real estate market, “the Arab Spring has had a positive impact on the hotel, retail and residential sectors of the Dubai market. We believe this has helped push the hotel and retail sectors into the recovery stage and that selected sectors of the residential market are also improving.”
Also contributing to the UAE’s financial health are tourists to the region who have made their way to Dubai’s faux ski slopes and dancing fountains, shunning traditional tourist destinations such as Egypt and Jordan. Hotel occupancy in Dubai was at 86% in the first half of the year, and increasingly among the new visitors to the UAE are Chinese and South Korean tourists on shopping trips, notes a report in Abu Dhabi-based newspaper The National.
The Geopolicity report notes that GDP losses for those Arab countries touched by Arab Spring protests — Tunisia, Egypt, Libya, Bahrain, Syria and Yemen – total US$20.56 billion this year, while costs to public finances for the same group reached US$35.28 billion.
Faced with the challenging price of daily necessities, people often refrain from retail spending- until they’re given an incentive not to.
Managing director of the Wharton School’s Jay H. Baker Retailing Center Erin Armendinger explained that the combination of high unemployment rates and high basic goods prices “hasn’t made people feel secure about their own financial well being.”
With financially unconfident consumers, spending is focused on necessity rather than desire. However, if the cost of a product is significantly slashed, consumers will jump on the opportunity. “When you want to get them to spend, you better give them a reason” said Armendinger.
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Concerns about the Arab Spring have prompted governments across the Arab region, from oil importers to oil exporters, to initiate quick fixes of increases in public sector wages and more generous subsidies and social benefits. It is a rollback from the pursuit of free market economic policies some countries have pursued in recent years.
Egypt, for instance, is revoking multi-million dollar deals that foreign investors had inked in previous years. Egyptian courts have scrapped several land deals and also annulled the state sale of Egypt’s iconic department store chain Omar Effendi to Saudi investment firm Amwal Al Khaleej, which took place in 2006 amid public outcry.
Previously, Egypt and its North African neighbors were hailed by the World Bank, the International Monetary Fund (IMF) and Western states for freeing the economy through lower tariffs, privatization, and other investor-friendly measures. Now, Egypt turned down an offer from the IMF for over US$3 billion in economic aid.
“Any change in economic policy will not mean a retreat from the market economy, however more intervention and regulation to increase public revenue and redistribution can be expected,” says Ibrahim Awad, professor of practice in the Public Policy and Administration Department at the American University of Cairo.
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Speaking at the International Arab Banking Summit in Rome, Jordanian Finance Minister Mohammed Abu Hammour said that the unrest in the Arab world is causing capital flight of up to $500 million a week. He said that “economic development is lagging. We need to guarantee job opportunities. This is a huge challenge … We need five million new jobs every year but we have only been able to generate three million jobs a year.”
The questions about the effect of the ‘Arab Spring’ on the region’s economy, leadership and risk management are not new, but they continue to bedevil the region. At a conference in Riyadh earlier this year, a panel of corporate leaders found themselves debating the questions before foreign investors in the wake of civil unrest in North Africa: What role can capital investment play in addressing the economic tensions behind the unrest, and what solutions exist for the Arab world’s unemployed?
And according to experts at Wharton, though regional investors maintain a long-term perspective towards the Arab world’s current political unrest, insurance premiums for exports and sovereign debt in the region are expected to climb. “There will be a generic degree of risk applied everywhere in the region,” said Neil A. Doherty, Frederick H. Ecker Professor of Insurance and Risk Management at Wharton. “Anywhere is a potential target for unrest now, all the way from Saudi Arabia to Iran.”
The tourism sector has been hit the hardest. For example, the number of tourists coming to Tunisia decreased by half after the onset of the revolution that overthrew then President Ben Ali in January. According to Mehdi Houas, the Tunisian Minister of Tourism, revenues are expected to decrease further this year by about 50 percent. Tunisian National Tourism Office Director-General Habib Ammar said that the crisis is the most serious in its history since its impacts are far greater than those of the Gulf War (1991), the effects of September 11 events and the Ghriba synagogue attack in 2002.
Egypt’s economy also nearly froze during weeks of protests that started Jan. 25 and some of its main sources of foreign exchange, including tourism, collapsed. Tourist arrivals in the first quarter fell 46% below last year, according to a report issued by Egypt’s statistics agency.