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 / Summer 2009 / Issue 55(originally published by Booz & Company)


The Challenges of Balance

In the Gulf states, leaders have begun to master five types of balance between opposing forces. They manage their finances for volatile stability, using short-term uncertainty as a means of bringing about long-term development. They practice restrained laissez-faire, balancing heavy and light regulation. They promote public privatization, combining autonomous entrepreneurship and government ownership. They pursue fast and slow talent strategies simultaneously to strengthen their workforces. And they seek to achieve open nationalism, balancing greater exposure to the world with a traditionally focused political system and culture. Each of these capabilities involves political and economic skill, and also a fair degree of subtlety and insight. Observations of how the GCC countries are faring can reveal much about what it takes to succeed in the domain of rapid growth.

Volatile Stability
The capital base of the Gulf nations is founded on the region’s most famously volatile natural resource, oil. In the early 2000s, these countries began investing that capital more broadly in the global markets. This step made long-term stability possible, but, as the financial crisis demonstrated, it also created new kinds of short-term uncertainty.

Indeed, the financial risks of playing on the world stage have never been greater. The investment climate fluctuated as dramatically in the Gulf states in 2008 as it did in the rest of the world, closing the year with 57 percent losses in overall stock prices. Although turbulent highs and lows are unsettling, it is a sign of a healthier economy that they are triggered by the world’s financial markets, instead of by surging or crashing oil prices. The leaders of the Gulf region have begun to take that volatility in stride; they are learning that, by broadening their exposure to global markets, they increase the resilience and effectiveness of their financial assets.

Consider the region’s sovereign wealth funds. From the 1980s through the early 2000s, they were seen purely as ways to use investments: to buffer against the highs and lows of oil prices and to provide for intergenerational savings. But between May 2003, when oil prices began to rise, and June 2008, when they approached a peak, the accumulated foreign exchange reserves of the Gulf states increased nearly fourfold. The region became rich — far richer than most observers, including its own leaders, ever dreamed it would be. At the end of 2008, the assets of major SWFs in the region were estimated at more than US$600 billion — and with the assets of central banks included, the figure was more than $1 trillion. Given a rebound of the world economy and (as is widely expected) another increase in oil prices, the Gulf countries’ assets could grow to between $2 trillion and $3 trillion by 2015.

Already, the size and liquidity of the Gulf’s SWFs have forced them to move massive amounts of capital outside the region, and to take on new types of risk. This makes the Gulf states’ destinies interdependent with the outside world’s financial markets. Since mid-2008, the GCC nations have poured billions of dollars into big U.S. investment banks reeling from the credit crisis. Abu Dhabi and Kuwaiti funds own major stakes in Citibank; the Qatar Investment Authority, a sovereign wealth fund, is a major shareholder in Barclays PLC. The Gulf states are also investing in emerging economies, both in Asia and across the Middle East and North Africa. Jordan Dubai Capital, an investment bank affiliated with Dubai Holding Group LLC, invests in rivatization, infrastructure projects, private equity funds, and publicly listed companies in Jordan. SWFs are also beginning to behave like venture-capital and private equity funds, investing in startup companies and incubators and influencing the policies of management. In August 2008, for the first time, a number of Gulf SWFs raised debt for transactions.

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