Dubai was the symbol of an investment boom in the Arabian peninsula. And the Al Gosaibi and Saad group crises have, for many investors, signalled this boom’s final chapters.
After the 2001 terrorist attacks in the US, petrodollars were invested closer to home because of a fear of asset freezes and hostility toward Arab investment. As Gulf markets were opened up to regional and global capital, asset values mushroomed along with the oil price.
Since the property crash in Dubai – as well as the crises in the Kuwaiti and Bahraini financial sectors – there has been reconsideration, as elsewhere, of development that is focused on the financial sector. Investment at home and abroad by Arabian state money is now more focused on high-end manufacturing and engineering. However, while such states as Qatar and Abu Dhabi do need to focus more on educating their populations, they do not yet have sufficient competitive advantages to compete on a global scale in such sectors as aerospace and information technology.
These countries will remain subject to economic and financial-sector volatility while permanent populations are so small and the inflow of petrodollars is so large. The states will still face challenges attracting and retaining skilled labour. A more sustainable answer is to take greater advantage of the immense human capital available elsewhere in the wider region.
There is some petrodollar investment in sectors such as agriculture in neighbouring states less blessed with oil. Abraaj, one of the biggest Gulf private-equity funds, focuses on a region it refers to as Menasa (Middle East, including Turkey, North Africa and south Asia). Amwal, based in Qatar and with the support of Dubai’s Shuaa Capital and the Qatari royal family, also views this region as its field of investment. Amwal’s chief executive likes to think of his region as west Asia.
Abu Dhabi state funds Mubadala and Aabar have invested in car manufacturing and petrochemicals projects in Algeria. But Gulf investors’ North African real estate projects are looking less viable, partly because the European recession has meant less tourist traffic. Gulf property developers have had to refocus on the home market because of their domestic property-market troubles. Yet the biggest barrier remains the bureaucratic hurdles to investment. Egypt’s Orascom Telecom has furthermore been confronted with troubles in repatriating profits from Algeria, its most profitable market, perhaps for political reasons.
Bureaucratic and political barriers to investment create a vicious circle of under-investment, radicalization and isolation, even as oil-induced Dutch Disease spreads across the region. Arab investors and politicians alike must make more effort to work around or eliminate these barriers. Turkey also has an interest in this. Bankers in Istanbul talk wishfully of weaning Turkey away from economic dependence on Europe. Turkish banks are opening more branches in the Middle East. But Turkey’s neighbours, such as Iraq and the Caucasus states, do not yet have the dynamism or stability of east Asia.
State petrodollar funds have the benefit of being able to sustain losses in the short term. But unrealistic efforts towards local ultra-modernity might mean that the petrodollars are wasted, especially if neighbouring states remain underdeveloped. The wider region is therefore an under-appreciated arena for investment – even if there might be initial loss and difficulty in parking Gulf petrodollars elsewhere in the Muslim and Arab world.
