Dubai Incorporated - Part 2

A lot of expatriates though understand Dubai was a bubble, they are really at a loss when it comes to other Middle Eastern countries when it comes to the global financial crisis. The following gives an overview about economies of other GCC countries. Obviously, it will not be as interesting as earlier 'Dubai Incorporated' as there weren’t headline making exciting stories about these economies. Compared to Dubai, everyone else seems dull and boring. Yet dull they are not.

Abu Dhabi

It’s the proverbial big brother of Dubai and an adjacent city state. It is ruled by Al Nahyan family. Think of them as old aristocrats compared to ‘new money’ al Maktoum family of Dubai. Whereas Dubai was busy announcing palm shaped islands, free hold properties; Abu Dhabi, relatively speaking, was sitting idle. With the temperatures rising world over, Abu Dhabi quietly paced itself to be supplier of green technology _ not so much as innovators or inventors but rather as manufacturers and testing lab _ not unlike what Taiwan was for integrated chips and electronics. They decided green technology is the future and bought stakes in companies focusing on green technology, announced a few developments that use innovative technology to be environment friendly, and set up a few industries that focused on green technology.

Moreover, unlike Dubai which is running out of oil, Abu Dhabi still sits on one of the largest oil reserves. It was not desperate to find other sources of revenue in tourism, media, or real estate. It placed the surplus oil money in their sovereign fund which invested it into private equity deals globally in financial sector as well as technological sectors such as aerospace, hi tech manufacturing, etc.

When Dubai was desperate early this year, Abu Dhabi bailed it out though its reserves but not before getting strategic stakes in Emirates Airline and other strategic companies and steering clear of anything that has to do anything with real estate of Dubai.

When rents are falling everywhere and nobody is hiring, Abu Dhabi is the only place where they are still hiring though I won’t call it a spree and rents are still going up. However, before you call your travel agent to book a flight to Abu Dhabi with a resume in hand, like all Gulf sheikhdoms, they are mainly hiring whites (or westerners).


Bahrain

Apart from Formula 1 track and being watering hole of Saudis, Bahrain has nothing to offer except financial services. Being ahead of the game as a financial capital of GCC, Bahrain had a strong central bank i.e., Bahrain Monetary Authority. Hence, when the real estate boom started and banks (commercial as well as investment) were popping up everywhere in Dubai, BMA tried keeping strict supervision.
Taking leaf out of Dubai's history, Bahrain did try to reinvent itself as tourist friendly place, having a few resorts or spas built and announcing some real estate projects targeted at rich foreigners (though no promises of residency) yet the pace was not even half that of Dubai. As such, when the bubble burst, it was not too painful.


Being a financial hub, Bahrain economy is invariably tied to the economies of wider GCC region, with financial institutions being largest employer of the country. All corporate lending as well as investment banking origination transactions were focused on most growth oriented sectors and as a consequence most affected sectors of rest of the economies with exposures focused on real estate developers in Dubai and Qatar, investment companies in Kuwait and family owned conglomerates in Saudi Arabia. The only segment they could not cater to on scale of local banks of other GCC economies was consumers and that has left them intact, for now.


Qatar

If there was a country that tried to replicate Dubai it was Qatar. Though it avoided headline grabbing developments on scale of The World or The Palm, Qatar did have some large developments on the sea front. However, since there were no promises of residency or the bank financing lax, they were immune from the speculative investors. Where Qatar did the smart thing was not follow the Dubai model completely. Dubai wanted to be an oil exchange, gas exchange, diamond exchange, gold exchange, media hub, touristic hub, trading hub, prostitution hub, money laundering hub etc whereas Qatar, being rich in gas vied to become a gas trading hub only and is developing Qatar Financial Centre firstly as a gas trading exchange and ultimately a financial exchange.

Qatar could have been a media hub as they had a lead through Jazeera news channel but they missed the opportunity. However, they are trying to become an educational hub and were successful in bringing some excellent universities to Doha; however, the jury is still out on how successful this step has been.

Nevertheless, due to their gas reserves and focused approach, Qatar is one of the very few economies of the world that will be registering a growth when the economies world over have forecasted a contraction.

Kuwait

Kuwait did not do anything. This can be gauged from the marketing campaign that Qatar launched in 1st quarter of 2008 with a simple line "yesterday Kuwait, today Dubai, tomorrow Doha". Though it pissed off Kuwaitis but it was a true depiction of how far left behind Kuwaitis are.

Kuwait has a centrally planned real estate which is already very expensive hence there was no real estate mania. Though some sky scrapers were under construction in downtown before the crisis hit, some have been completed on accelerated basis but most are under construction with work progressing at a snail’s pace or having stopped completely.
Kuwait has one of the oldest sovereign investment funds in the region as well as largest number of investment companies. These companies raise funds and invest them in western economies. With the world in growth craze before the crisis, the way Dubai announced a new skyscraper every week, new investment companies were being set up on weekly basis in Kuwait. All the sky scrapers coming up in downtown were mainly to cater to these investment companies and funded by these companies. Within last few years, investment companies diversified their portfolio by including local economies investing heavily in real estate in Dubai, Qatar and Bahrain.

When the crisis hit, Kuwait finally acquired pole position, by having not one but two defaults in the region_Investment Dar and Global Investment House. And for almost three quarter, these were the only defaults in the region with some defaults in Bahrain and Saudi Arabia finally happening last month. Kuwaiti stock market is mainly composed of Banks and Investment Companies and around 40 of latter were suspended in March this year as despite passage of three months they could not finalize their accounts (too many illiquid assets on books). Kuwaiti stock market tanked taking down local Kuwaitis with them who have invested in the stock market by borrowing heavily.
Though the markets have stabilized now, but from my personal experience, there are a lot more toxic assets on the balance sheets of these investment companies as well as Kuwaiti banks than they are letting on.


Saudi Arabia

Till last month, it was the most immune country of the region. Saudi Arabia has a large shortfall of housing for locals so before it can build apartments and condos for rich, it has to create large number of affordable housing. Hence, they did not get on the bandwagon of developing high end apartments.

However, recently they ventured into developing huge economic cities through public private partnership. Bank lending is grease that moves the private part of the partnership. With the recent high profile default by Algosaibi group and claims of fraud flying to and fro, banks have gotten jittery about lending to Saudi corporations (The Economist has an excellent coverage of the story with its consequences for the economy). Most of the corporations in Saudi Arabia are family owned and like in other GCC countries, the lending is name based; financial accounts are just a formality. Till now, bankers expected that families will respect their legacy and not default on their debts. However, the $10 billion default of Algosaibi group has shaken everyone. Western banks have all but frozen more lending in country. All local central banks have called a meeting of their banks to find out about the exposure to Saudi corporations. There are fears about private sector and how much they have invested in speculative ventures locally as well as internationally and how many banks are they going to take down with them. By one report, Algosaibi has one hundred banks lending to its various associates and subsidiaries.

With oil prices rising, the fear of budget deficits has subsided. Hence, any shortfall from private sector, the government of Saudi Arabia is expected to meet from its own sources. Moreover, Saudi Arabia has a large population. They have so much untapped demand for food, housing, electricity, transportation, utilities etc that with the right connections and strategy, it’s really hard to go wrong over there. If you are a banker lending to Saudi family owned conglomerate, better tighten your belt. But if you are looking to invest in Saudi, it is the safest economy to invest in at the moment from economic stand point (the legal and commercial aspects are not part of this article).