Post

Awkward Moments for Mohammed Bin Salman in Buenos Aires

By Karen E. Young

November 28, 2018

The arrival of Saudi Arabia’s Crown Prince Mohammed bin Salman at the G-20 summit in Argentina will be an awkward moment. Leaders of the world’s strongest economies with tight smiles will accept him as a peer among equals. The political theater aside, there also will be awkward, and ideally substantive, conversations about the G-20 agenda which aims to create global growth that is “fair and sustainable.” The US tariffs on China are the most obvious difference of opinion on “fairness,” but the trajectory of growth in Saudi Arabia and the wider Middle East is also less than “sustainable.”

The G-20 summit should have been a key opportunity for Saudi Arabia to celebrate the possibilities of economic growth in the Middle East and North Africa as its largest economy and major source of intra-regional FDI and central bank support. Given Saudi Arabia’s recent cash injections to Bahrain, Jordan, Egypt, and Yemen, it is a major source of development finance for the region, and should be an architect of the region’s growth plan.

Saudi Arabia’s Crown Prince Mohammed bin Salman arrives at Ministro Pistarini in Buenos Aires, Argentina, November 28, 2018. Argentine G20/Handout via REUTERS

Saudi Arabia began its own efforts to tackle the beast of the rentier state that crowds out private investment and discourages private sector job growth with its Vision 2030 unveiling in 2015. But the optimism of 2015, when the economic reform agenda began to unfold across the rentier economies of the Gulf, has hit a wall. The reforms of labor markets, openness to foreign ownership, massive privatization plans, and a real government focus on job creation for young people all now take a back seat to the politics of repression.

Saudi Arabia’s politics are infecting growth prospects for its fellow Gulf Cooperation Council members, for different reasons. There is a great deal of speculation about the impact of Saudi foreign policy on the business climate in Dubai, but the real loser to Gulf tensions has been Qatar. Following the embargo of Qatar in June 2017 by Egypt, Saudi Arabia, Bahrain, and the United Arab Emirates, net foreign capital outflows from Qatar amounted to $24 billion last year. And Qatar saw negative net foreign direct investment in the first half of 2018.

Dubai always finds a way to wrangle success from regional upheaval, whether it will be selling overbuilt apartments to Chinese investors, or capitalizing on its expertise in logistics, real estate, and contracting to consolidate its efforts as a post-conflict reconstruction “master developer” for the region. Dubai is accustomed to shifts in its expatriate demographics, as well. Remember the calls of a white-collar expatriate exodus of 2009? A current outflow of talent in its financial sector is likely connected to the failure of its only major private equity operation in Abraaj, which employed over a hundred financial professionals. What replaces the current demographic will be a different kind of financial community: less-London, more Nairobi, focused on regional growth and technology. There is one very open opportunity, however, for Dubai in creating companies that can list on local stock exchanges ready for emerging market index inclusion, but this seems to be left untouched for the moment.

In Saudi Arabia, the kingdom’s own efforts to attract foreign direct investment are foundering. Foreign direct investment in Saudi Arabia is at its lowest level as a proportion of GDP since 2002 (0.3 percent of GDP). The government has been slow to move forward with a number of planned privatizations, and the opportunities for shared projects seem often crowded out by new state-owned companies picked up by the ever-expanding Public Investment Fund.

It is really saying something when Egypt was the largest beneficiary of foreign direct investment in the Middle East and North Africa in the first half of 2018. Four billion USD of direct investment from foreigners has found a home in Egypt in the first half of 2018, more than double the amount to Saudi Arabia. This is up 9 percent from last year and equivalent to 1.6 percent of Egypt’s GDP, according to research by JP Morgan. There is capital literally waiting to find investment opportunity in the region, and it seems to prefer the relative stable chaos of Egypt to that of wealthy Gulf states.

Fund manager Mark Mobius recently concurred, saying Egypt might be a better place for equity investment. (Though his logic is questionable, as he suggested Egypt was not subject to Saudi Arabia’s political influence.) The expectation of emerging market index inclusion for Saudi equities and bonds is supposed to be a boon for local markets. But, local investors are sitting on the sidelines, wary of placing too much of their capital in the local stock market and also unwilling to invest in new businesses that might be able to go public in the near term. Bankers in Dubai talk of a stall in merger and acquisition activity. The current business climate is cold. The politics have been contagious, in a period in which opportunity should be plentiful.

The future of growth in the Middle East and North Africa depends on the same things it always has (and it is not higher oil prices). The future of growth is away from pro-cyclical oil-based growth. The future of the region’s economy rests in the ability of firms to compete with the state, of business people to feel comfortable in their capital exit strategy, and for employment opportunities to be matched with gains in productivity. This is sustainable growth.