In global crisis, oil insulates Gulf

Economists say that Arab states such as Saudi Arabia will feel the pinch, but a year of record oil prices provides a deep cushion.

Kamran Jebreili/AP
Credit worries? Arab developers appear confident the global economic crisis will not slow down building in the Gulf. Here, a man examines a project slated for Dubai.

Against the backdrop of an imploding global financial system, one of the world's richest men unveiled plans to build the world's tallest building in Saudi Arabia.

Prince Alwaleed bin Talal bin Abdul Aziz revealed a display model of Kingdom City, a $26.7 billion mini-city to be constructed near the Red Sea port of Jeddah. At its center will be a tower more than a kilometer high (the exact height is a secret) for offices, luxury residences, and a five-star hotel.

With a fortune estimated by Forbes at $21 billion, Prince Alwaleed, chairman of Kingdom Holding Company, doesn't have to worry about getting a line of credit, even in these financially shaky times.

Still, his apparent confidence about the future reflects the predominant view in oil-rich Saudi Arabia and its Gulf neighbors about how the fiscal tsunami sweeping the rest of the globe may affect them.

Despite repercussions here that have included a downward slide in oil prices and trouble in stock markets, government officials and outside experts forecast that their region will suffer, but not as much as most.

Saudi economist and consultant Ihsan Buhulaiga says that events emanating from Wall Street in recent weeks have created "a very serious crisis" already impacting Gulf nations.

But, he predicts, the effects will not be as severe as in the G-7 industrialized nations, where "we're talking about zero growth or contraction." Gulf nations' growth will slow down, but remain "positive," he adds.

"Gulf countries are going to feel the pinch," says Howard Handy, chief economist at Samba Financial Group in Riyadh. "But I think from everything I've seen so far, it is not going to be fatal." Given their "vast reserves and surpluses" generated by record high oil prices earlier this year, the Gulf states are facing the global crisis "from a position of great strength," he adds.

Even with less revenue from falling oil sales, Saudi Arabia and other states will be able to pay their bills and finance many of their large development projects.

Those projects "will be fulfilled," says Abdurraham al-Humaid, a retired accountancy professor and private consultant, though "the time span" for their completion may be longer.

With international credit possibly becoming inaccessible, local banks or the Saudi government will have to step up to provide credit to keep those big projects on track, Mr. Humaid adds.

Saudi Finance Minister Ibrahim al-Assaf assured Saudi television viewers that "oil revenues will definitely cover these projects in addition to what we have in reserve."

Mr. Assaf added that Saudi banks had shown "excellent third quarter results," proving "that they were not affected by the subprime mortgage crisis in the US."

Nevertheless, Saudi Arabia, along with Kuwait, Bahrain, and the United Arab Emirates all recently took steps to strengthen their banking systems by lowering interest rates and injecting additional cash. Saudi Arabia's most immediate trauma from the global crisis came in its stock market, the largest in the Arab world. In the first four days after it resumed trading Oct. 4, after the Islamic religious holiday of Eid, the market lost 22 percent of its value, according to Mr. Buhulaiga.

Finance Minister Assaf called the sell-offs "unjustifiable" and predicted the market would recover – which it did. Taking its cue from Asia and Europe, it bounced back strongly this week. But whether that bounce will be permanent is an open question.

Another concern of local economic observers is that many Saudi banks and the government – whose large foreign assets are managed by the Saudi Arabian Monetary Authority (SAMA) – have not yet disclosed how much those foreign investments have suffered.

According to Reuters, SAMA, the country's central bank, reported in August that it had $285 billion invested in foreign securities and $79 billion in foreign bank deposits. Other government bodies, it said, had $63 billion in foreign securities and $5 billion in deposits with foreign banks.

The relative equanimity displayed by most economic observers is also contingent, they say, on the scope of the global recession they see coming and how far oil prices drop. "We are facing a deepening recession in global terms and it's pretty broadly based," says Samba's Mr. Handy.

After its record price of $147 a barrel in July, oil has fallen steadily to about $80 a barrel. That still leaves a huge cushion for Saudi Arabia, whose current budget is based on a conservative price prediction of $50 a barrel.

But drops below that would mean a whole new ball game for the kingdom and its Gulf neighbors.

The US-generated global crisis has elicited some interesting responses from observers other than economists. A religious scholar suggested that the world should now shuck capitalism and adopt Islamic finance, which is based on sharia, Islamic law.

And a contributor to the Arab News daily said he saw "poetic justice" at work. "I am convinced that the world is paying for the neocon crimes against the people of Iraq and Afghanistan," wrote Aijaz Zaka Syed.

"Certain people are reading too much into this crisis," says Buhulaiga. "It's very serious, but it's not going to be the end of history ... the US economy will emerge smaller, but still will be the largest" in the world.

Meanwhile, Prince Alwaleed presented the designs for the world's tallest building to his uncle, Saudi King Abdullah, at a ceremony last Saturday.

Better known in the West as a major shareholder in Citigroup, and owner of the Four Seasons hotel chain, Alwaleed said in a press statement that his gigantic real estate development would be his company's "contribution in placing Saudi Arabia at the forefront of the first world."

Presumably, a first world without today's financial woes.

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