Middle East Business

• “Rebalancing of the World”
  Investors were excited about the rise above 10,000 on the Dow Industrials, while many western citizens felt downright embittered by the surge in profits for money center banks, some of which recovered on the back of handouts from the U.S. and UK governments.
  
  
  
  Somewhat lost in that mixed bag of emotions was a one year high for crude prices above $75 a barrel. That is certainly quite a leap from December of last year when the mid-$30 range was the order of business at the height of uncertainty.
  
  
  
  We know that this latest rally is a mixture of dollar weakness and anticipation of global demand recovering. What most pundits have missed in the rally is the real demand coming out of China, where there is discussion of eight percent growth being a base to build on in the next few years.
  
  
  
  That continued optimism out East is a nice counterbalance to the lacklustre performance -- despite euphoric market gains -- in Europe and the United States. It has those who get excited about the new drivers of the world economy talking about “rebalancing of the world.”
  
  
  
  One such kindred spirit is Ben Simpfendorfer. By day he is a China economist for Royal Bank of Scotland and he combined his years of experience in the Middle East and East Asia to pen the “New Silk Road”, the first comprehensive look at the re-emerging trade links between the two regions.
  
  
  
  At the heart of this bond is what the Middle East is famous for: oil and gas. Saudi Arabia produces 13 percent of the world’s daily crude output. China currently consumes nine percent of world demand and the line on the chart is moving upwards.
  
  
  
  Prior to the western led economic shock, Simpfendorfer talked of a “Holy Trinity” -- not a religious trinity -- but an economic bond between the Middle East, China and America. The Middle East supplies energy, China exports to the U.S. and America consumer demand supports both.
  
  
  
  The author says that trinity has been broken -- not permanently -- but perhaps for long enough to mark global rebalancing. This is very convenient for Saudi Arabia which Simpfendorfer says is looking for a way to hedge its relationship with the U.S.
  
  
  
  China, having looked at its track record in the Saudi and Iran, has taken a view, as it has in Africa, that it will limit its presence to business and not politics. How long Beijing can sustain that position, Simpfendorfer says, remains in question. Basically, with power comes attention.
  
  
  
  In that context, many are starting to rumble about Washington’s long term sustainability as the world’s dominant military force, which in turn may undermine the dollar over time.
  
  
  
  The U.S. currency came under intense pressure after rumors surfaced about back door talks between Chinese, Russian and Gulf central bankers on pricing oil in other currencies. If there is a retreat in either Iraq or Afghanistan, Simpfendorfer believes that will only accelerate the long-term trend.
  
  
  
  While the U.S. in a post-9/11 world has been faced with skepticism, China filled the gap and has become the largest supplier to the Middle East. This is not a one way relationship. On our program, we like to think of the region as a large potential single market of more than 300 million consumers. China does too.
  
  
  
  “We have to start thinking about the world in a different way and the commercial investment links between the Eastern economies themselves are growing and strengthening,” says Simpfendorfer.
  
  
  
  This particularly applies to what he likes to call the Islamic Corridor, stretching from East Africa through the Middle East and down into Southeast Asia. Time and again we are witness to investments between Kuwait and Malaysia, Dubai and Djibouti and there is a common comfort zone within the Muslim world that Simpfendorfer says will only grow deeper with time.
  
  
  
  The routes that supported trade centuries ago, the Silk Road and the Spice Route, may look different in the 21st century due to modern day transport, but the same spirit is alive and well.
  
• A View from the Top
  The gleaming tower is impressive from all angles with the searing autumn sun bouncing off the mirrored glass and stainless steel. We know that when it opens the Burj Dubai will be the highest building in the world at over 800 meters, although the final height is being kept secret.
  
  The targeted completion date was also a closely guarded secret, until I sat down with the Chairman of Emaar, Mohamed Alabar, who confidently told me he is, “shooting for (UAE) National Day” and that the December 2 goal is achievable. His team, including the CEO of his hospitality unit, seemed surprised by that statement, which sets the bar high after a half year of delays.
  
  Dubai is a destination that has built its reputation on iconic buildings and development projects -- The Palm, The World and the sail-like Burj Al Arab. Next to the Burj Dubai is yet another landmark – “The Fountain.” Alabar invited me on an early evening tour of the fountain, which is the largest of its kind in the world.
  
  It cost of more than $250 million to install and the jets can reach a height of 50 storeys. The entire downtown complex, which includes the giant Dubai Mall and The Address hotel, is impressive, and Alabar beams with youthful enthusiasm as he shows me around. While we walk, Alabar tells me he thought it was important to deliver the project after the global downturn, which rattled the desert foundations of Dubai.
  
  My interview with the Emaar Chairman came during the eighth year of Cityscape, the property exhibition where in years gone by developers has money to burn. They launched multi-billion dollar projects and would splurge millions on model displays and stands. This year, the atmosphere was far more subdued and sober. Developers talked of completion dates and deliveries, not size and new products.
  
  Alabar, arguably the largest developer in a region, was reflective about the events of last year and where we are today.
  
  “We’ve learned the art of managing business, which has changed forever in my opinion. I thought I was conservative. I think I could have been more conservative,” adding, “I am much harsher in the operation now.”
  
  Alabar could not address issues regarding the proposed merger between his group and the property development entities of Dubai Holdings, but he did not shy away from some of the more sensitive topics on the table these days – like Dubai’s debt.
  
  On where demand would come from for the second tranche of the $20 billion bond offering, he said the “majority from the [UAE] government with some private sector.” Asked whether a total estimated debt of $59 billion can be serviced between now and the end of 2012, he said, “Between repayment and restructuring over the next three, four, five years, I really don’t see an issue there.”
  
  When digging through the analyst reports, it seems a disproportionate amount of that debt sits within the empire of Dubai World and its property group Nakheel. It is weighing heavily on the Emirate overall. Dubai is eager to move on from a 40-50 percent property price-drop over the past year.
  
  Questions remain about how certain entities will contend with that debt burden. When asked whether a major cleaning up was required, he was diplomatic and frank at the same time, “I think restructuring in all businesses is a must. We cannot do business the way we used to do. I have restructured my business and I am sure DP World is restructuring their business the way Mercedes Benz is restructuring its business. So the answer is yes.”
  
  Alabar, like other executives, is confident that Dubai’s position as a financial services and trade hub with a more advanced infrastructure than its neighbours will allow for a faster recovery. He pointed out higher traffic numbers for Emirates Airlines recently and the return of expatriate white collar workers.
  
  Our discussion took place while the IMF World Bank meetings were underway in Istanbul. The two organizations put out similar growth projections of between two and 2.5 percent for the UAE next year. The master developer thought that number is too conservative. The days of double digit growth are not coming back soon, but a figure about double that is what he has in mind for 2010.
  
  During another series of conversations with executives from around the region, we talked about the “new normal” -- a new term to describe the post-downturn economy. The developed world is bracing for much slower growth for the next five years as a result of record debt levels. Many in the region are adapting to a different reality, even as they get ready to deliver on the next “biggest thing.”