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Chair’s Comment (Middle East Advisory Committee)
To spend or not to spend? According to the International Monetary Fund (IMF), world growth is projected to fall to 0.5 percent in 2009, its lowest rate since World War II. In dealing with the global financial crisis and lost value in the $17 trillion range, governments around the world have been scrambling to decide on the right fiscal expenditure packages to boost their economies. Attempts to reach multilateral agreements to avoid a global recession have not materialized. From the onset of the crisis, the European Union (EU) has been divided between, on the one hand, an aggressive economic stimulus package proposed by Spain, France and the United Kingdom, and on the other, Germany’s push for more conservative plans. In the United States, Democrats and Republicans were bitterly divided on the stimulus package proposed by President Barack Obama. The 2009 World Economic Forum (WEF) in Davos, Switzerland, at the end of January, predictably illustrated strong opinions among participating countries. It also highlighted a potential split between the EU and the United States over the establishment of global rather than national regulations. This matter is bound to be at the top of the agenda at the G-20 summit in April this year.
The Middle East has similarly offered dramatic contrasts within the spectrum of possible reactions, from near-panic budget shrinking to bold and daring expansion of budgetary expenditures. The financial crises that so quickly engulfed the globe in the second half of 2008 caught oil-rich countries in the midst of ambitious and much-needed development projects. Financial markets plummeted throughout the region, with average losses of more than 50 percent of their 2007 value. On average, the region lost 50 percent in asset value, with Dubai being the most affected with a 75 percent loss and Qatar the least affected with less than 30 percent.
As expected, the prevailing reaction was to shrink 2009 budget expenditures to fence a global recession. The Gulf Cooperation Council (GCC) reacted by reviving talks for a monetary union, and it announced the formation of a GCC Central Bank by the end of 2009. Oil-exporting countries witnessed the widest spread of oil prices in history, and the exuberance of record-breaking oil revenues in 2008 gave way to ultraconservative budgetary measures that may negatively affect the energy industry in the future. Kuwait reconsidered its pledge to invest $55 billion in the energy sector over the next five years. It scrapped a $17.4 billion petrochemical venture with Dow Chemical, and it has postponed investment in new projects. The UAE, where the oil sector represents 36 percent of GDP, is forecasting a drop in GDP growth from 7.4 percent to less than 4 percent. Adding to the global gloom, the relationship between the Middle East and the EU has deteriorated on several fronts, including the GCC’s suspension of trade talks with the EU.

Confidence in Saudi Arabia

Today’s serious financial concerns make it difficult to imagine a country in a position to increase its spending budget to finance megaprojects at a negligible social cost. Yet it may be happening. In a move that sharply contrasts with the prevailing global economic contraction, Saudi Arabia started 2009 with a strong display of confidence. Reinforcing his commitment to the Kingdom’s economic development, King Abdullah bin Abdul Aziz al-Saud unveiled the country’s largest-ever budget, allocating no less than $60 billion to new projects. Reportedly, this amount is 36 percent larger than the new-projects allocations made in 2008.
Unfortunately, the Middle East’s biggest economy is not free from challenges. While projecting a record 2008 budget surplus of $157.38 billion and revenues estimated at $293.4 billion, Saudi Arabia is also facing a decline in oil revenue along with future budget deficits. At the same time, Saudi Arabia is being called upon to play a larger role in helping to solve the global financial crisis, perhaps utilizing some of its wealth in foreign assets, estimated at over $500 billion. At the WEF in Davos, the Saudi Arabia General Investment Authority was actively seeking to attract foreign investment, a difficult proposition given the tight control exerted over direct investments.
Perhaps the largest obstacle to the Kingdom’s achievement of world economy status is its internal organization and infrastructure. It is not enough to allocate massive amounts of money for development. The government must also urge ministers and officials to embrace and implement change. Otherwise, the younger Saudi generation, in need of education and job creation, may not receive the full benefit of the fiscal expenditure, a consequence potentially more serious than cycles in the financial and political arenas.
The good news is that, as this article went to press, King Abdullah reshuffled his cabinet, sending a strong message of modernization by appointing less conservative officials to leading posts in education, justice, religious police, information, the central bank and ground forces, and by appointing a woman, for the first time, as deputy-minister for female education.