Persian Gulf monarchies, flush with record oil revenue, are betting that a $7.5 billion theme park with an indoor ski slope, a $1.2 billion power grid and a $1.2 billion cargo shipper will shield them from the next energy bust.
Gulf investors have announced $8 billion of overseas acquisitions in the past 18 months, including the purchase of wax museum owner Tussauds Group. A Kuwaiti company agreed to pay $3.4 billion for African phone company Celtel International BV, resorts are springing up in the United Arab Emirates, and Qatar is investing $7 billion to host the 2006 Asian Games.
“It’s been a tremendous time, not just because of oil money, but because markets are being opened up,” says David Hodgkinson, chief executive officer of HSBC Holding Plc’s Middle East unit in Dubai, United Arab Emirates. “There’s a realization countries must diversify.”
Failure to develop their economies will leave Middle East oil producers vulnerable to swings in energy prices. In 1998, Saudi Arabia’s economy shrank 10.8 percent and the government posted an $11.7 billion deficit when oil prices dropped to $10.35 a barrel in New York.
Last year, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain generated $180 billion of oil sales, three times as much as in 1998, according to Standard Chartered Plc, which makes two-thirds of its profit in Asia.
The six governments had a record $60 billion combined budget surplus last year, the bank said in a March report. Crude oil reached a five-week high of $54.60 yesterday on the New York Mercantile Exchange, down from record $58.29 set April 1.
Dubailand
Saudi Arabia has failed to invest its windfall. Instead, the world’s biggest oil producer has paid debts and increased spending to reduce unemployment, which is helping breed Islamic militants.
Dubai, by contrast, is financing a $30 billion plan to double tourism revenue in the next decade. The emirate is already the biggest vacation destination in the region, with 4.7 million visitors annually, according to government statistics. With a population of 1.03 million, Dubai is the second-biggest member of the United Arab Emirates, behind Abu Dhabi at 1.36 million.
The centerpiece of the plan is Dubailand, a theme park that will be twice the size of Walt Disney World in Florida. The complex will include an indoor ski slope, horse- and car-racing tracks, water rides, a dinosaur theme park and a rain forest under a glass dome. The state-owned company sponsoring the development has approved $6.8 billion in private financing and will put up $740 million for roads, water and the like.
Wax Museum
Dubai International Capital LLC, owned by Crown Prince Sheikh Mohammed bin Rashid al-Maktoum, in March agreed to pay 800 million pounds ($1.45 billion) for Chessington, England-based Tussauds in a transaction that may provide expertise for the Dubailand project. Tussauds owns Madame Tussauds Wax Museum in London and attractions in Europe, Asia and the U.S.
“Dubai International Capital’s role is to seek investments that are long-term and give good returns,” says CEO Sameer al- Ansari. “The Tussauds investment is strategic to Dubai.”
The cash flowing into the Gulf is also fueling a boom in regional stock markets, with Saudi Arabia’s Tadawul All Share Index more than doubling in the past 12 months. Local companies plan $12 billion of initial share sales this year, according to Dubai-based Zawya.com, which provides business information.
Sushi and SUVs
The region’s oil wealth spills out onto streets clogged with Porsche Cayenne sport-utility vehicles and Mercedes-Benz coupes. In Dubai, restaurants and hotels are packed. The city’s Sho-Cho bar is filled with young women who sip $12 vodka Red Bulls and tuck into $100 meals of sushi and sashimi.
“It’s a really lively place with lots of beautiful people right by the sea,” says Omar Ghobash, 34, a Dubai resident who runs a consulting firm that encourages international universities to set up campuses in the emirate. “What more could you want?”
Christie’s International Plc, the world’s second-biggest auction house by sales, opened its first Middle East office in April, after prices for Islamic art soared. London-based Christie’s last year sold a Mogul fly swatter once owned by Robert Clive, who ruled India for King George III, for 800,000 pounds, 10 times the auction house’s estimate.
“There’s obviously quite a lot of money out there looking for a home in art,” says Lydia Limerick, Christie’s Middle East representative in Dubai.
Emirates Palace
Governments in the region are using their money to lure tourists to beaches situated between Europe, Africa and Asia.
Abu Dhabi in March welcomed the first guests to the $1.1 billion Emirates Palace hotel, which features a three-bedroom suite trimmed with silk, gold leaf and Swarovski crystal chandeliers that rents for $12,500 a night.
The hotel, owned by the government and operated by Munich- based Kempinksi AG, has seven apartments set aside for the royal families of the emirates. About 60 percent of the 394 rooms were booked in April, according to the hotel.
“It doesn’t matter if anything makes money in Abu Dhabi,” says Anthony Harris, a former U.K. ambassador to the United Arab Emirates who now works as a consultant for Dubai. “The hotel’s opulence is about making a statement about Abu Dhabi. They’ll market the hotel as the most glamorous and luxurious in the world to try to attract visitors to the emirate.”
Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, last month chose the Emirates Palace ballroom as the site of a soiree to show off its newest 7 Series sedan to 1,400 guests. Sheikhs in white cotton robes and women in head-to-toe black abayas polished off smoked salmon and lobster soup as the $150,000 car sparkled under a battery of spotlights.
`Incredible Pace’
Munich-based BMW forecasts a second year of record sales in the Middle East in 2005.
“One can’t help but be impressed by the incredible pace of development here,” says CEO Helmut Panke, 58. “Probably no other part of the world is moving forward as fast as the Gulf.”
In addition to burnishing their reputation for luxury, the Gulf monarchies are trying to turn themselves into centers for manufacturing and transportation.
Abu Dhabi’s state-owned Mubadala Development Co. and Saudi Arabia’s Olayan Group last year helped Volkswagen AG buy Dutch car- leasing company LeasePlan Corp. for $2 billion. Wolfsburg, Germany- based Volkswagen then agreed to take a minority stake in a venture that will invest 1.13 billion euros ($1.38 billion) in truck- assembly and auto-parts plants in the United Arab Emirates.
Government-owned Dubai Ports International in December agreed to pay $1.15 billion for Jacksonville, Florida-based CSX Corp.’s container terminals business. The purchase gives Dubai a foothold in China. Dubai is already the largest re-export center in the Middle East, with $10.3 billion of goods shipped through its ports in 2003, according to the Dubai Chamber of Commerce and Industry.
Electric Power
Qatar and Mumbai-based Hinduja Group in April agreed to invest $1 billion in manufacturing and health projects in Asia. The venture may also set up plants in Qatar, where the government plans to create an industrial zone near the Doha airport.
Qatar expects to spend $60 billion during the next eight years on public works projects and overseas investment, says Economy Minister Mohamed Ahmed Althani. Doha, the capital, will be the first Gulf city to host the 45-nation athletic competition called the Asian Games in December 2006.
To help power their growing economies, the six monarchies in January invited companies to bid for the $1.2 billion first phase of a project linking their electricity grids.
“What we do not want to reach is the complacency of living on high oil prices,” says Althani, a member of Qatar’s ruling family.
Saudi Arabia
With a population of 23 million, Saudi Arabia has twice as many people as the five other Persian Gulf monarchies combined. The government spent more than 80 percent of its budget surplus on debt payments and social welfare programs, according to Samba Financial Group, based in Riyadh, Saudi Arabia.
Groups with ties to Osama bin Laden’s al-Qaeda network have killed more than 100 people in a two-year campaign to drive Westerners from Saudi Arabia and undermine the ruling family.
Saudi Arabia had an unemployment rate of 8.5 percent last year and public debt equaled 70 percent of gross domestic product, Samba said in a February report. Unemployment in the United Arab Emirates was 2.4 percent and debt stood at 18 percent of GDP, according to the U.S. Central Intelligence Agency World Fact Book.
“They can’t afford to buy foreign companies because they’ve got a much larger population and have to worry about providing water, electricity and jobs,” says Daniel Hanna, a Middle East economist at Standard Chartered in Dubai.
The Gulf economy is getting a boost from local stock markets that provide an investment alternative for Arabs put off by tighter U.S. rules on travel and financial disclosure since the Sept. 11 terrorist attacks. The markets restrict investment by non- Arabs.
Stock Markets
The absence of stock markets in the region during the 1970s meant wealthy Arabs and their governments had little choice but to invest overseas. Saudi individuals alone bought about $700 billion of U.S. assets from 1974 to 2001, says Youssef Ibrahim, managing director of Strategic Energy Investment Group in Dubai.
The market value of shares on the Saudi stock exchange, the largest in the Arab world, is now $452 billion, 40 percent more than those traded in Johannesburg.
“The Middle East used to be a classic offshore market where people put all their money in the U.S. and Europe,” says Charles Peter Greuter, the managing director responsible for the Middle East at Credit Suisse Group in Zurich. “Now the trend has reversed and the money stays more onshore.”
To contact the reporter on this story:
James Cordahi in Dubai on at cherifcord@bloomberg.net
Photo credit: curtis palmer via Visualhunt.com / CC BY
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