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AL HABTOOR INFORMATION AND RESEARCH DEPARTMENT

     As recession takes a hold in America in the wake of the events of September 11^th, the ripples of the slowdown of the American economy will impact on the global economy, as they reach the shores of other economies, making a full blown global recession highly likely.

     Economic fundamentals will change around the world, as banks, financial institutions, and related businesses, which appeared to be the centers of professional excellence and profitability, find themselves caught up in an event so unique and unprecedented, as to make it almost impossible to imagine what the final consequences will be.

What about the Arab economies?

     Although every country in the region has closed ranks with the international community in condemning terrorism, the length of the campaign, the confusion over its objectives, and the vagueness of it geographic reach are beginning to affect business confidence around the world, both in the developed economies, and the fledgling ones.

     A slide into global recession will hit the hardest those Arab economies, that lack natural resources and are already suffering from large budget deficits, low exports, lack of investment, state intervention, and a slowly disintegrating infrastructure, thus forcing up prices and depressing wages; this in turn will curb consumer spending. Many of these States, such as Egypt, depend on tourism to support their economies and earn foreign currency. This has been one of the sectors most affected by events of September 11^th.

     The repercussions here in the Gulf region are less visible; they have shown up mainly in the aviation, shipping and tourism industries, where high insurance rates, hotel cancellations, and fewer air passengers have put pressure on the revenues of the hospitality business and transport industry. Most of the Gulf States will be able to ride out the current crises, as in a short term they are all able to cover any shortfall in revenue by drawing on their vast overseas investments.

     But other effects will show themselves over time, as recession in America, Europe, and Asia drives down the demand for oil, causing a shortfall in oil revenues, against those forecast. As demand slackens, nearly all the counties in the Gulf region, who still primarily depend on oil revenues to maintain their economies, will suffer due to the fluctuating and weakening oil price; this means, that major infrastructure projects or prestige developments funded by Gulf governments will be put on hold or cancelled. In turn, this will have a knock-on effect throughout their economies, as consumer confidence wanes and curbs consumer spending, hampering growth throughout all sectors of their economies. Inward investment will be hard hit.

     However, considering that the GCC financial markets are largely insulated from world markets, the financial sector is largely going to remain unaffected. Alongside this, analysts believe that the businessmen in the region will absorb extra costs, such as increased risk premium and slight rises in the cost of consumer products.

     Although we cannot foresee what the ultimate duration of this downturn will be, many analysts are predicting that the world economy will be in recession for the next 36 months. But from the fourth quarter of 2002 the global economy will slowly begin to recover the advantages lost since September.

     To ride out the current downturn, some economies will be in a better position than others, by capitalising on the upturn, to further develop their economies. 

     Nevertheless, two economies are likely to come out stronger from the current situation - the United Arab Emirates and Lebanon.

     Both countries have strengths that will see them well positioned to take advantage of a future upturn in the global economy, and are likely to set the pace for future growth in the region. Both of them have embraced and sustained moves to promote a more balanced development that takes into account the vicissitudes of international markets. Both countries have a highly educated, well-trained work force, and both are working hard to develop the private sector and encourage free trade. To this end both States are moving towards more participation by the private sector, into what was previously thought of as government enterprise, such as communications, utilities and public services.

     In Lebanon for instance, there are no regulations against foreign investment, with the exception of ownership limits imposed on buying real estate by foreign investors, curbs on certain media and financial services, and internal control of defence and national security. Lebanon’s banking sector is the most developed in the region, and dates back to the 19th Century. It was in the 1948 legislation, that it really established itself, by liberalising all capital movements and exchange transactions, and in 1956 a banking secrecy law was introduced, which remains one of the most important features of the present Lebanese banking system. Since the return of stability after the civil war, the 1990’s saw the banking activity grow by over 25% per annum, and the financial sector has become one of the most vibrant and dynamic areas of the Lebanese economy. It has well-developed local commercial laws, and guaranteed property rights. Its laws and other financial systems are transparent, and it has an arbitration centre allowing the regulating of local and international disputes. These, allied with liberal capital movement policies, pose no restriction on the import or export of foreign currency, and no market entry restrictions on foreign firms, allowing them complete ownership of their companies. All of this along with developing tourism and the Governments determination to curb the budget deficit and continue with its reconstruction plan for the country will ensure that it will continue to attract inward investments and produce a thriving private sector.

     Like Lebanon, the United Arab Emirates has a highly educated and well-trained work force; but, unlike its GCC partners, it has a relatively diversified economy with only 37% of its GDP coming from the oil sector. It has developed a stock exchange with trading floors in the capital Abu Dhabi, and the Emirates’ main trading city, Dubai. One of the major strengths of the UAE, is, that the country is a very safe and stable environment, in which to conduct business throughout the region. This, along with moves by the government to develop a substantial non-oil sector, centered on Dubai’s role as a regional trade and services hub, has seen the successful development of the duty and tax free zones throughout the Emirates; particularly the Jebel Ali Free Zone which is the largest in the region.

     The Dubai government has undertaken several important initiatives that will transform it into the regional centre of development for information technology, media, and tourism. The establishing and completion of Dubai Internet City, Media City and Ideas City, along with the vast and innovative Palm Island project, the development of the Dubai Marina Project and Dubai Festival City, has made the Emirates particularly attractive to international companies. Some have already established regional headquarters in these free zones, conducting their business interests throughout the region.

     The Emirates has made great strides in bringing its banking and financial systems up to international standards, by passing banking and commercial laws that emphasise good practice and transparency, such as the recently passed money laundering legislation.

     Alongside this, there are moves to get the government to allow long-term rent contacts to foreigners, which would make investment in the UAE more attractive to outside investors, who, at the moment, are unable to own land or property in the Emirates. It is proposed that 99 years leases could be granted, along with long-term visas, valid for ten years and renewable as long as an individual, or company has investments in the country.

     All this, along with no taxes on corporate or individual enterprise, makes it an extremely attractive business environment.

     As demonstrated, both the United Arab Emirates and Lebanon, have well-developed strengths that the other economies in the region lack. This will, in the medium, to long term, ensure that both will be able to respond to, and capitalise quickly on a future revival of the global economy. Both have the potential to become powerful regional economic players over the next decade, ensuring that they will be able to hold their own place in the global free market.