A journey to the Red Sea commercial hub of Jeddah and the Saudi capital Riyadh this week offered a unique vantage point for what were some politically charged economic decisions for Middle East leaders.
Despite the weight of 95 percent of the region’s “expert opinion”, the Gulf Cooperation Council decided to do nothing, which in turn means something – loyalty to the White House and, for the time being, loyalty to the beleaguered U.S. dollar.
Washington can thank Riyadh for this one. King Abdullah’s high profile visit to Doha for the GCC Summit dominated headlines while in Saudi Arabia, having declared his support for the dollar peg before boarding his private jet. There would be no revaluation of the riyal or a shift to a basket of currencies (euro, pound, yen and dollar) to better reflect the imports coming into the region.
Times they are a changing
According to Dr. Nahed Taher, CEO of Gulf One Investment Bank, Saudi Arabia imports only 20 percent of their products from the U.S. During an interview in Jeddah this week, the young, first female CEO of an investment bank in the Gulf says that with a weaker dollar and the riyal linked to the greenback, Saudi Arabia is importing record inflation, along with the goods from Europe, Britain, China and India. This is putting the squeeze on the Saudi public, the 90 percent not enjoying the fruits of record oil prices. Even the domestic workers complain these days how the weak dollar is eroding their repatriations back home.
Saudi Arabia stood down recent calls from officials in Qatar and the U.A.E for change, which gives the dollar a chance to recover as tensions with Iran subside and the U.S. Treasury offers an array of tools to fix the credit crisis.
One who called the Saudi action (or inaction) correctly was Dr. John Sfakianakis, chief economist of SABB (HSBC’s partner bank in the region). Over dinner in Riyadh, and a toast with Saudi martinis (the famous non-alcoholic fruit concoction) he didn’t say “I told you so” but he did tell me so more than a month ago. This was no time for Saudi Arabia to throw its weight against Washington, but behind it. With oil priced in dollars, the world’s largest producer also did not want to re-price its riyal and undercut revenues.
So instead of a historic, collective GCC move to re-price their currencies when they captured at least part of the global spotlight, discretion ruled. However, I would not bet this will be the last on this subject. Once the attention shifts away from the Gulf, a re-evaluation against the dollar or going to “the basket” might be in the offing.
The New Frontier
This trip to Saudi Arabia was also a fascinating look through the window of what might be. King Abdullah is putting forth change at what is a rapid pace for his citizens. You can see this for yourself when both driving the streets and looking at the blueprints for the future. On the drawing board today is a plan to build six cities from scratch, 20 regional airports and a $6 billion dollar cross country railway. Infrastructure is needed and this leader knows the country has been run down. After all it is the biggest economy in region, possesses the largest oil reserves in the world – collecting $165 billion this year alone -- and right now is the largest investor outside its country. And that is the rub. Saudi business leaders have focussed on other markets for real estate and manufacturing. This economy needs to spruce up what it has today, offer a world class infrastructure for tomorrow and capture a unique selling proposition. The private sector – the famously discreet Saudi trading families – will be part of the process, but one gets the sense that the path to partnership still needs to be defined so that this corner of the Arabian Desert can fully leverage what lies below.
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