While their biggest customers may continue to wallow in recession into 2010, the oil-producing nations of the Persian Gulf are again luring foreign investment and looking for places to park their own wealth.
Crude prices that have stabilized above $50 a barrel mean the Middle East’s oil-rich economies are likely to pull out of the global financial crisis sooner than the rest of the world. Saudi Arabia, the largest Arab economy and the world’s biggest oil exporter, is attracting renewed interest from investors including leveraged-buyout firm KKR & Co Qatar and Abu Dhabi have returned to international capital markets. Stock markets are rallying across the region, led by Saudi Arabia, whose Tadawul All Share Index ended last week up 26 per cent for the year to date, after tumbling 56.5 per cent in 2008.
“The expected resilience of oil prices puts the Gulf countries in a relatively privileged position compared to Europe and the US,” says Eckart Woertz, an economist at the Gulf Research Center in Dubai. “In 2010, that is likely to lead to some resumption of growth, unlike in developed-market economies.”
Crude oil traded at $61.61 a barrel on the New York Mercantile Exchange at 10:33 am in Singapore — up 81 per cent from around $34 on Feb. 12. Prices will remain above $50 for the rest of this year and top $60 next year, according to the median forecast of analysts surveyed by Bloomberg.
While that’s still less than half the record $147.27 a barrel reached last July, savings built up during the boom from 2003 to 2008 are providing a cushion for most of the Gulf’s petroleum producers to get them through the worst recession since World War II.
Saudi Arabia’s economy will shrink 0.9 per cent this year, according to the International Monetary Fund’s April forecast, while the United Arab Emirates is projected to decline 0.6 per cent and Kuwait 1.1 per cent. By comparison, the US may contract 2.8 per cent, the European Union 4 per cent and Japan 6.2 per cent, the IMF says.
By next year, the IMF expects the Gulf oil states to resume expanding, with Saudi Arabia growing 2.9 per cent and Kuwait 2.4 per cent, while advanced economies as a whole have no growth.
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As a result, the six states in the Gulf Cooperation Council, which hold 40 per cent of global oil reserves, are already luring fresh capital from abroad. The Qatari joint venture of Newbury, England-based Vodafone Group Plc, the world’s largest mobile- phone company, raised about $1 billion last month in the country’s first initial public offering in nearly a year.
Gulf oil exporters “have accumulated such big financial surpluses, and with ambitious expansionary fiscal budgets, things will be OK,” National Bank of Kuwait SAK Chief Executive Officer Ibrahim Dabdoub said in a May 14 interview at the World Economic Forum in Jordan. “We have started to see some green shoots here and there.”
International investors have taken notice. A Euromoney investment conference last week in the Saudi capital of Riyadh drew 1,600 participants, including representatives of Bank of New York Mellon, HSBC and Barclays Capital. Saudis in traditional white robes and red-and-white headdresses crowded a five-star hotel along with businessmen in suits from the US and Europe.
Abu Dhabi, with more than 90 per cent of the emirates’ oil, has the best prospects in the region, along with Saudi Arabia and Qatar, the world’s largest exporter of liquid natural gas, says Simon Williams, chief regional economist at HSBC Holdings Plc in Dubai. By contrast, the picture is a good deal grimmer in Dubai, which lacks the oil reserves of its UAE partner Abu Dhabi and other neighbours. Dubai’s real-estate boom crashed last year, and it will continue to flounder, says Timothy Ash, head of emerging-market economics in London at Royal Bank of Scotland Group Plc.
The second-biggest of seven states making up the UAE, Dubai ran up debts of $80 billion and had to cancel projects including a waterfront development twice the size of Hong Kong Island. The traffic jams that clogged roads last year are gone; once-scarce taxis now sit outside residential buildings waiting for fares. Dubai property prices may fall as much as 70 per cent from their peak, UBS AG predicts.
Even in Dubai, though, Emaar Properties PJSC, the UAE’s biggest real-estate developer, says it is hiring 1,600 people for its retail, hospitality and leisure businesses, including three new attractions at Emaar’s Dubai Mall and three new hotels. And in the other Gulf economies, the presence of oil translates into a quickening of prospects.
“There is inherent stability in these markets,” says Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd.,which oversees about $100 billion globally. “Next year you will see this region outperform other emerging and global markets.”
Mostaque says he is particularly interested these days in shares of Saudi consumer companies such as Riyadh-based food producer Almarai Co.
KKR is studying Saudi investments as it aims to take advantage of the region’s “most attractive markets,” says Makram Azar, head of Middle Eastern operations. This month, KKR named Ford M Fraker, former US ambassador to Saudi Arabia, as a senior adviser.
Investors perceive diminishing risk on Gulf-region bonds, according to trading in credit default swaps. The cost of protecting against default by the Dubai government fell to 488 basis points on May 8 from a record high of 977 in February, CMA Datavision prices show. Saudi Arabia’s bond-default risk declined to about 162 basis points last week, from 335 basis points in February.
The apparent end of plans for a Gulf monetary the UAE pulled out of the project on May 20 won’t alter the region’s growth outlook because all the countries in the proposed union except for Kuwait already peg their currencies to the dollar, Woertz says.
In another sign that markets are opening up for Gulf borrowers, Qatar and Abu Dhabi raised $6 billion by selling bonds to international investors last month. Aldar Properties PJSC, Abu Dhabi’s biggest real-estate developer, sold $1.25 billion of 5-year notes May 21, becoming the first such firm in the UAE to issue debt since August.