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Qatar economic miracle flies into turbulence

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Qatar Airways kept up a bullish front at the Hyderabad International Exhibition and Conference on Civil Aviation yesterday. But all is not well in the emirate which last month sacked 40 staff from its high profile Qatar Financial Centre, including its brilliant PR chief Steve Martin.

The euphemistic talk is of a reassessment of budget priorities. The talk in Doha is of over-expansion without due regard to commercial good sense. And the big whisper is that gas prices are down, and that the outlook for gas revenues may be far below expectations.

Gas dependent

Who knows how much gas the now depressed economies in the UK and USA will actually require from Qatar. Certainly the previous plans linked to far faster rates of global economic growth will have to be reassessed.

In the meantime, the huge investments in liquefied natural gas infrastructure still have to be paid for and their massive loans serviced. There has been no indication that debt is a problem just yet in Qatar. But the credit crunch has already been manifest in a slowdown in finance for local property projects, many of which are now on a go slow or have stopped.

The new airport is said to be around two years behind schedule and over budget, so planes queue up on the tarmac at the overwhelmed original Doha airport, and a new luxury hotel is bang in the flight path.

Is the order backlog from Qatar Airways therefore as secure as its executives proclaim? The airline has 220 aircraft on order worth some $40 billion. By 2013 its fleet will grow from 80 aircraft today to 120 and its network jump from 86 to 120 destinations.

Over the past five years Qatar Airways has doubled its fleet and invested in five-star service standards that are the envy of the industry. Passengers also enjoy discounted fares courtesy of gas-subsidies. The airline has never made a profit. Is this not over-expansion?

Thin commercial logic

Without a domestic tourism industry like nearby Dubai the logic for creating a massive airline based in Doha has always been thin on commercial grounds. Bringing tourists into a city creates local spending that boosts the overall value of an airline to a local economy. Transit passengers do not have the same value.

Advertising expenditure can only go so far in any business model. Ask the now sharply cutback Qatar Financial Centre that has spent many millions on some superb adverts.

No at the end of the day any business has to stand on its own two feet and make a profit. State subsidies can fund a start-up and maintain a loss-making business. Ask Gulf Air. But there is no substitute for sound business economics and that is a fact many Gulf States are now starting to appreciate.

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Written by Peter Cooper

March 8, 2010 at 8:54 am

Looking back 30 years to see into the future

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At the Davos World Economic Forum participants are often encouraged to peer 30 years into the future. But what about looking back 30 years and recalling the dreams of that time for the future and using that as a guide as to what might or might not be achieved in the future.

This correspondent will return to Oxford University for a meeting of alumni in June after an absence of 30 years. What did the world look like then and what did we dream about?

Actually there were not so many dreamers among the spires then. Students were an apathetic lot and seldom went to meet our famous visitors. I liked to meet as many as possible and frequently ended up in one-to-one conversations.

Cold War days

At that time the world was split into the two camps of the Cold War, and Eastern Europe remained behind the Iron Curtain. Even the thought of this ever changing looked impossible.

The Middle East was a major source of tension, then as now. There was the Iranian Hostage Crisis after the revolution, the invasion of Afghanistan by Russia and the second oil price shock of 1980 – which very few analysts would have expected to be the start of 20 years of low oil prices.

In England the two party system seemed about to end with the rise of a new centre party. The leader of the conservative students in Oxford, a chap called William Hague remembers the leader of the liberal faction as a major rival. His political career blossomed, mine was already over.

But then as now the world faced a serious recession. The 1980-2 recession was probably the worst until the current day. Yet we survived, although it made getting jobs difficult for graduates at the time. Indeed, the Thatcher Revolution succeeded in reviving the British economy, albeit after a very painful start for many of us.

But over 30 years the extent of change depends very much on where you are sitting. In places like Oxford or my home town Salisbury time has stood still. Russia and Eastern Europe are transformed beyond belief, and this peaceful transition is the greatest achievement of the European Union perhaps.

Middle East progress

In the Middle East the tensions remain. But some cities have made amazing progress. Dubai was a small town in 1980, now it is a global hub city with the world’s tallest building. Other countries have gone backwards.

So where would that leave us 30 years in the future when I hope to be among the survivors going back to my old university again? The lesson seems to be that some things do change and others change very little.

Geopolitically you would have to think a split between the USA and China might be the new axis of political power. It would be wrong to write-off America. We used to do that in 1980. China I am less sure about.

One of my young colleagues from Oxford went to Japan in the 1980s and came back after the market crash of 1990. Japan became very important but never surpassed the USA. China could yet just be a significant power rather than a bipolar giant by 2040. Its crash is yet to come, and all that glitters is not necessarily gold.

European Union

Europe ought to be far more important by 2040. The expansion and consolidation of the European Union is an understated achievement of the past three decades. If it continues and embraces Russia, to a greater or lesser extent, then this is a formidable economic and cultural power bloc, substantially larger than the US and second only to China in population.

Just as we used to write off the USA in 1980, today people overlook Europe. It is a very large, rich and well-educated continent. China has a very long way to go to catch up.

The Middle East should also enjoy dynamic change, if only because a fast growing, young population will demand it, and the oil and gas wealth should pay for it. The hope must be for a more peaceful outlook with the oil and gas reserves developed to the point that an economic transformation of the region occurs.

Cities like Dubai, Abu Dhabi and Doha are already feeling this phenomenon. It ought to become more widespread. Will it actually happen? Given that the world needs the energy resources of the region this has to be inevitable, one way or another.

Written by Peter Cooper

February 4, 2010 at 9:03 am

Qatar downsizes its financial centre, Dubai victorious

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The Qatar Financial Centre is being downsized in the wake of the resignation late last year of its director-general Stuart Pearce and a move to a unitary regulatory authority covering all financial institutions operating in the emirate.

This appears to be an end to the QFC’s rivalry with Dubai as a regional financial centre, if that was ever a serious proposition. Its high profile and award-winning television advertising campaigns won a good deal of attention and spread the message that Qatar is a place to watch to global financial institutions.

Fastest growing economy

Indeed, Qatar is expected to be the fastest growing economy in the world this year with key gas installations coming on stream. But that is also a part of the problem.

The ‘resource curse’ is a phenomenon identified by economists that afflicts economies with one dominant source of income. For Qatar read gas. The problem is essentially that one sector bids up the cost of labour, resources and credit and dominates the economy to the exclusion of all else.

From the perspective of global financial institutions that has made Qatar a highly expensive country in which to operate, and certainly not suitable for the large numbers of staff required for a regional base. Hence the raison d’etre of the QFC is strangled at birth.

Debt-ridden Dubai with its empty towers and plunging office and housing rentals looks far more attractive to banks and financial institutions looking to save on costs. Staff can also save on rising personal taxes, so everybody is happy.

QFC role

There has been no official announcement yet about changes at the QFC. But it looks as if it will continue to provide visa and ancillary support for foreign financial institutions in Doha – which remains valuable in this dynamic economy.

For such a small place to have two regulators always seemed a trifle excessive, and this simplification will actually help existing foreign financial institutions in Qatar. The QFC will still be open for business but Dubai wins the undisputed crown as regional financial centre for global financial institutions.

Bahrain with its Sharia law in Arabic is not a contender for global financial institutions whose business language is English. So Dubai, as the regional business centre, is where they belong.

Written by Peter Cooper

February 2, 2010 at 8:35 am

$6bn new Qatar petrochems plant targets China

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For proponents of the New Silk Road and the eastwards shift in the global economy news that Exxon and Qatar Petroleum have just signed a deal to build a $6 billion petrochemicals complex for exports to the Asia Pacific region is a further confirmation of their thesis.

At a press conference in Doha yesterday the two energy companies announced that the giant complex will be online in 2015. Exxon is taking a 49 per cent stake in the project which comprises at 1.6 million-tonne-a-year cracker, two 650,000-tonne polyethylene plants and a 700,000 ethylene glycol plant.

Biggest energy deal

This is the biggest energy project investment in the Gulf region in three years. Exxon president Stephen Pryor told Bloomberg: ‘The biggest growth markets for petrochemicals in the world are in Asia Pacific with China being the biggest piece of that’.

He said Exxon intends to raise chemical production capacity in the Middle East by as much as 50 per cent over the next six years. Exxon is also making huge investments in Saudi Arabia.

There is a certain irony in the quintessential US energy giant Exxon profiting from the shift in the global economy towards the Asia Pacific. It just shows that business is business wherever it is done, provided that profits flow back to shareholders.

For the US remains a leader in many aspects of energy technology, and it is generally for technological expertise that oil majors are welcome these days, not for their money. Could a Chinese energy company build, operate and finance such a sophisticated plant at such keen margins?

US technology

Clearly the US has not entirely lost its commercial advantage, even in the expansion of the Asia Pacific region. It is a reminder that the growth and development of poorer countries does not necessarily come at a loss to richer nations.

Indeed, over the past 25 years richer nations have made considerable advances in per capita wealth, ahead of the Third World whose constantly rising population dampens any per capita advance. Will the poor always get poorer and the rich richer?

Not necessarily, China is the exception that might provide a new rule. But many other developing nations lag far behind.

Written by Peter Cooper

January 7, 2010 at 10:56 am

Patience will pay dividends for Arabian investors

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How boring to have to convey the message that patience is likely to pay dividends for investors in 2010. But being dynamic and opportunistic can be a hell of a bad idea if you are jumping in the wrong direction. Better to wait and see where the markets are going first.

Take the FTSE for example: year-end pundits predicted an upside of a few hundred points for 2010 but conceded market volatility would be considerable. So you would see your fortune fluctuate substantially, and lose some nights’ sleep, all for a few lousy percentage points in gain, assuming that the consensus is right.

Market timing

A patient investor would wait for one of these market pull-backs and then either ride a mini-cycle and sell rather quickly, or hold and still have a bigger gain at the end of the year, assuming the consensus is right.

But what if the consensus is wrong? After such a long rally from the lows of last March a big correction is still possible. And if global economies go into a double-dip recession later this year stocks could very well end up at a much lower level than today. Again hardly a reason to risk your capital in stock markets now.

You could argue that certain stock market sectors – energy or precious metals, for instance, will outperform others, or stock pick if you have some special insight. That is almost certainly true but these stock prices will still be affected by the wider market moves.

Trading sideways

Perhaps 2010 will be a year of a sideways trading range in stocks but with high volatility. That is a historic pattern observed previously after periods of violent movements like we have seen over the past two years.

To me this feels like the mid-to-late 1970s. That was the era of high inflation, high energy prices and the precious metals’ price spike. Nominal property prices consolidated but lost ground in real terms due to inflation. People then predicted the end of the US dollar but it refused to die.

Sat in Dubai that makes for an interesting outlook despite the need for patience right now. Arabia has already had its big investment correction, although it might not yet be quite at the bottom if global markets tumble again.

Local not global

So if you think of higher oil prices, low property prices and bombed-out stock markets, the local opportunities for Arabian investors that are coming up could be worth the wait. And perhaps local investments will be far more successful than global investments over the coming few years as in the late 70s.

Arabian stock markets crashed in late 2005 and are thus further ahead in the recovery cycle than the advanced economies, and local property crashes have been far deeper and faster than anything seen in the West. Yet the oil price is around $80 a barrel which is great for local cash flow, and much higher than the price that fueled the last asset price bubble.

Written by Peter Cooper

January 4, 2010 at 9:08 am

Why did Koreans win the $20bn UAE nuclear power order?

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There is never a dull day in the United Arab Emirates. Just when journalists thought it safe to put up their feet for a holiday between Christmas and the New Year the government issues a brief statement placing a landmark $20.4 billion contract for four nuclear power stations with Korean companies.

What happened to the expected deal with a US consortium led by General Electric, or for that matter the widely trumpeted French group headed by Electricite de France? We will never know, of course, these things are decided behind closed doors.

Korean triumph

But hats off to Korea Power, a state-run utility which supplies almost all the power in South Korea, Doosan Heavy Industries & Construction, Hyundai Engineering & Construction, Samsung C&T Corporation, and Westinghouse Electric – whose inclusion will be some sop to the disappointed Americans.

The news will be jumped on by the New Silk Road enthusiasts who foresee a radical shift in Middle Eastern business towards Asia as the global powerhouse of the future. In this instance they are literally and metaphorically on solid ground.

From a political standpoint the UAE is keen to sign up to peaceful nuclear power to make a point to both the US and Iran. But a rapidly growing UAE economy is set to double its electricity demand to 40,000MW by 2020, and it hopes by then its oil will be worth a lot more in exports than as a power source.

So this growing nation needs nuclear power. It is also commercially sensitive and the most likely reason for the Koreans winning the bid is that they came in with the best offer.

Lowest cost

After all if you are going for low-cost electricity, you might as well get is as cheaply as possible. South Korea has aggressive expansion plans for its nuclear industry and a deal with the UAE is clearly a feather in their cap. But Samsung built the Burj Dubai, the world’s tallest building due to open January 4th, so they are hardly unknown in the UAE.

The Korean government says it is also pursuing contracts in Jordan, Turkey and China. Perhaps they should be looking to other emirates in the Gulf. It is hard to imagine that Qatar is not going to copy the UAE and go nuclear.

Written by Peter Cooper

December 27, 2009 at 4:42 pm

Reason to doubt oil price resilience in 2010

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Commodity speculation with cheap money, emerging market demand and a weaker dollar have helped to keep oil prices higher than they should have been in a recession during 2009. There is good reason to think these forces will not sustain oil prices next year.

First, we are seeing signs all over the world of a tightening in monetary policy. From Chinese real estate loan restrictions to actual rate rises in Norway and Australia, and even in the US now the talk is of reigning back the stimulus as the economy recovers.

Faking growth?

Secondly, there are increasing question marks over the real strength of emerging market economies. Have they just been faking it for 2009? Stagnant petrol sales in China, for example, hardly square with the reported rip-roaring growth rates.

And certainly much of the government money pumped into China, India and Brazil has gone into inflating stock market and property bubbles of dangerous proportions. Take away the new liquidity and this will implode taking the real economy with it, ask Dubai.

Third, the US dollar appears to have bottomed out and now be on an uptrend (see this article). All commodities are priced in dollars, so when the dollar strengthens then commodity prices fall.

And perhaps a fourth reason to think oil prices might be lower in 2010 is that global demand is still very weak as a result of the impact of the recession on GDP which will now take several years to recover to former levels, even assuming the recession does not turn out to be a double-dipper.

GCC impact

A falling oil price is of course particularly bad news for the Gulf economies. They have been fortunate in 2009 to enjoy an oil price averaging $61.54 to date compared with the $45 in their national budgets. Otherwise the impact of the global financial crisis would have been even worse.

So what if the oil price averaged $40-50 a barrel in 2010? That is not going to be catastrophic. The price band in the early 2000s was $22-28. But equally it is not very good news for the places like Dubai which have been hardest hit by the recession.

The present big spenders – Abu Dhabi, Doha and Saudi Arabia – are always liable to trim their plans back if the oil price takes a tumble, and that is a reasonable expectation for 2010, unless inflation emerges and renews interest in oil as an inflation hedge.

Written by Peter Cooper

December 21, 2009 at 9:00 am