Wednesday, September 1, 2010
Congratulations gentlemen on surpassing Bahrain. Beneath your chairs are some boxing gloves in case any pregnant women try to sit down at your table.
So I’m back from the break now and ready to go for September. A lot has happened in the interim so I have a lot of writing to do. But before I get into the bigger issues I want to write about some of the smaller, less noticed ones.
Speaking of small, Bahrain was downgraded by Moody’s last week. I found this out by reading an article in The National that was positively dripping in schadenfreude. My favourite part of the article was where they called the downgrade the first fora GCC government. Well, I suppose that’s true if you don’t count the total obliteration of the various Dubai government related entities and the restructuring of Dubai World. Personally I think those things do count but I’ll not quibble with the national. The GCC has now seen its first sovereign downgrade of the financial crisis.
Though this is not big news in the way that the downgrades on the Eurozone periphery have been, it was only one notch and is still investment grade, the report is still interesting. They point out that Bahrain has a 7% of GDP budget deficit and has relatively little in the way of foreign exchange reserves or sovereign wealth funds in contrast to Saudi Arabia or Abu Dhabi. This means that should the world economy slo significantly and drive down oil prices Bahrain will be in a bind without much room to manoeuvre. Interestingly they also make the point that political tensions between the Shia and Sunni on the island are a source of potential instability. Most interesting are the points they make about the financial sector.
Bahrain has long been a financial center for the Gulf and Moody’s seems to argue that the banking sector in Bahrain is a liability both because it is too large and because it is too small. It is too large because with bank balance sheets three times the size of GDP any serious deterioration of asset quality might require government intervention which would be beyond the capacity of the government to intervene given its already stretched fiscal position. At the same time Moody’s says that the banking sector is not large enough to diversify the economy away from its dependence on hydrocarbons. So the Bahrainis seem to have sought to diversify their sources of revenue but instead have simply added another liability, at least according to Moody’s.
Well I can tell you why the banking sector in Bahrain is not big enough, it’s because Dubai has totally stolen its mantle as the financial center of the GCC. Sure there are still a lot of bank assets in Bahrain but virtually all the growth in financial employment in the GCC has taken place in Dubai over the past five years. Some have even consolidated their operations in Dubai and closed their Bahraini operations, or rather left a skeleton crew in Bahrain to appease the government but functionally consolidated in Dubai.
Why is this? I’d say it’s for two reasons. One is that when Bisher and Dr. O were not too busy lighting Sheikh Mohammed’s money on fire with various investment schemes or paying themselves substantial bonuses for managing those fires, they were luring the wide world of finance to the DIFC. The DIFC legal system has turned out to be kind of a bait and switch but when choosing a location once you have taken the bait, it’s hard to switch. The other reason is that it is a lot easier to attract expat knowledge workers to Dubai than it is to attract them to Bahrain.
There are many reasons for this. Some people will point to the infrastructure, which is impressive. Personally I think Dubai is likely to be the red headed stepchild of the capital markets for some time to come so I doubt that they will be adding to this but the silver lining to the collapse of the real estate market is that there is still a lot of spare housing capacity in Dubai so they actually don’t need to add to it. Others might point to the relatively permissive moral environment of Dubai. This is a factor as well, bankers and traders like a martini now and again. Their girlfriends like to be able to weak little bathing suits on the beach and occasionally kiss their significant others in gratitude for rescuing them from the rain of London. To be sure the atmosphere is a bit chillier now than it was a few years back but it’s still not Saudi Arabia.
While the liberality and infrastructure of Dubai are impressive I don’t think they are the primary reason why it is easier to move people to Dubai than elsewhere in the Gulf. I think the reason for that is the human infrastructure. Over the past ten years Dubai has achieved a critical mass of expat human capital. People want to live there because everyone else does. It has become the regional headquarters for so many multinationals that the expat social milieu is not dominated by a particular industry. Finance is prominent to be sure but there are foreigners there in the media, pharmaceuticals, infrastructure, consulting, you name it. It’s a much more interesting place to live than any other city. Dubai has created this environment through massively leveraging itself to build the physical infrastructure and marketing the hell out of itself in the West. Those two things are not sustainable now that the good ship Dubai has struck the restructuring iceberg but the human architecture that it has build should be able to outlast either one of those two things.
If Dubai is ever to recover it ABSOLUTELY must retain its preeminent position as the place for international expats to live and work. Thus I was shocked to read a recent news article about an assault on expats in Dubai by three Emirati men. At the IKEA cafeteria a Canadian investor man and his marketing manager wife sat down at a table for twelve which was partially occupied by Emiratis. The Emiratis claimed the entire table and demanded the couple depart. The woman, who was seven months pregnant and has doubtless been walking endlessly around the IKEA which is designed to be walked around endlessly demurred the Emirati brothers proceeded to beat her and her husband senseless. A Syrian man came to the rescue when the Emiratis began beating the unconscious husband with a chair and they beat him senseless as well. They broke the jaw of the pregnant woman and there is some ambiguity as to whether or not her pregnancy was compromised. The last thing her husband saw before being knocked unconscious was one of the Emiratis beating his wife and blood rushing down her legs. My guess is that if her pregnancy had not been compromised the courts would have made a point of noting it as a mitigating factor.
Obviously an attack on a pregnant woman by three Emirati men in the middle of an IKEA cafeteria is horrific in its’ own right and pretty hard to understand. What’s more, Dubai is completely dependent on foreigners to do most of the work, to move there, buy apartments and set up businesses in order to dig Dubai out of its deep dark hole. You would think that the authorities would deal harshly with the culprits. Besmirching the reputation of Dubai as a tolerant multicultural hub poses an existential threat to Dubai itself. Alas, it is not so. The assault occurred in June of 2009, the first hearing was in August 2010. All three assailants are free men in a city where hundreds are in prison for bounced checks. Two of them failed to even show up for the hearing, the judge questioned this but was not given an explanation and no action was taken. It would seem that the Emiratis don't think this is a big deal or that they will suffer any consequences. They may well be right.
It’s their country, they can do what they want, but if you ask me this is no way to run a country completely dependent on its reputation among foreigners. As sad as the article itself is the comment at the bottom from an Emirati: “they should have moved.” They probably will, and not to the next table but rather to the next country and if enough foreigners decide to follow them the creditors will beat the hell out of Dubai.