‘People are leaving’: Gulf investors wary after Khashoggi murder and British 'spy' detention

Both UAE and Saudi Arabia, engines of economic growth in Arabian peninsula, have scaled back expansion plans and are tightening their belts

Borzou Daragahi
Tuesday 08 January 2019 16:40
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Months of often self-inflicted political gyrations culminating in the global uproar over the murder of journalist Jamal Khashoggi have waylaid the glittery Persian Gulf monarchies’ economic ambitions, turning one of the most promising regions in the world for investment into a veritable no-go zone for some international firms and businesspeople.

Both the United Arab Emirates and Saudi Arabia, the engines of economic growth in the oil-rich Arabian peninsula, have scaled back expansion plans and are tightening their belts. The region eked out 0.5 per cent growth in 2017, according to The World Bank, and was not expected to do much better once 2018 numbers are in.

Salaries are dropping, real estate prices have dived, retail, corporate profits are down, and tourism numbers have flattened, or worse, say Gulf economy experts. One analyst described how every year a colleague in the UAE manages to pressure his landlord to lower instead of increase his rent.

“People are leaving,” said one former consultant in the UAE. “It’s become too costly for families to live.”

Meanwhile government debts have risen, from 15 per cent of GDP to about 20 per cent in the UAE and from 1.5 per cent to 17 per cent in Saudi Arabia over the past five years, forcing governments to lower taxes.

“The taxes and VAT are adding up,” said an analyst. “People are asking why it’s not as good as used it be.”

Adding to the troubles, the Gulf’s rich have begun moving their own assets overseas. Signature projects like Saudi crown prince Mohammed bin Salman’s Neom city, a $500bn proposed city on the Red Sea, appear to have been shelved, the Financial Times reported last month.

One Western diplomat joked that the prince’s ambitious Vision 2030 programme to wean the kingdom’s economy off hydrocarbon sales and modernise the economy in a dozen years would have to be renamed “Vision 3020”.

Some of the troubles are beyond the power of the Gulf monarchies. Oil prices have dropped, hurting the mainstay of the economies of the Arabian peninsula. Tightened US sanctions on Iran have complicated once-flourishing business ties between the UAE and the colossus to the north.

The Gulf weathered the 2008 economic crisis, and boasts some of the most modern infrastructure in the world. Dubai, with its advanced air and seaports, remains a crucial hub for both Africa and Asia. Saudi Arabia remains one of the biggest and most important economies of the world.

“Progress was always going to be much slower than many investors and businesses had hoped for,” Axel Dalman, Middle East and North Africa risk analyst at London-based Fitch Solutions, told The Independent.

Over the past 18 months or so you’ve seen the reputation of the Gulf as a safe and secure place has taken a battering 

Kristian Ulrichsen, expert on Gulf economy 

“Saudi Arabia’s currently weak private non-oil investment environment doesn’t represent a drastic change from the recent past – more just a failure to match extremely high expectations for very rapid gains.”

But experts say the Gulf states’ own missteps over the past couple years have added gratuitously to the problems, shattering the region’s once gleaming image.

“Over the past 18 months or so you’ve seen the reputation of the Gulf as a safe and secure place has taken a battering,” said Kristian Ulrichsen, an expert on the Gulf economy at Rice University in Texas and a fellow at Chatham House.

Dubai Marina, United Arab Emirates (Reuters/Ahmed Jadallah)

“For a long time it was seen as a haven for doing business. That’s taken a blow.”

In addition to the kingdom’s handling of the Khashoggi affair, the Saudi and Emirati decision to impose a siege on the tiny Gulf monarchy of Qatar in June 2017 roiled confidence in the region. Later that year, Prince Mohammed stunned the world by locking up scores of Saudi royals in the Ritz-Carlton Hotel in Riyadh and then forcing them to cough up billions to win their release.

“The way the shakedown happened shook a lot of people,” said Mr Ulrichsen. “There was no rule of law.”

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Businesspeople have been stunned to see wealthy Saudi families move their cash into overseas investments over which they have little controlling interests in a desperate scramble to keep their money out of the hands of greedy monarchs.

“[The crown prince’s] recent actions of stripping families of their wealth has forced all Arab families across the region to worry that any state is now legitimately empowered to seize their assets,” said one Gulf businessperson.

“Now they will surrender control over their assets as long as it can be hidden in a legitimate business. They are focused on Arab countries like Morocco, Tunisia, Algeria because it is still more safe than Saudi, and Europe comes with a lot of questions.”

Investors now worry that Riyadh’s policy assertiveness or miscalculations could result in regional instability or reputational damage 

Axel Dalman, Middle East risk analyst 

The 2 October abduction, detention and dismemberment of Khashoggi, along with the arrest and detention in the UAE of UK scholar Matthew Hedges on dubious espionage charges, as well as the Saudi temper tantrum against Canada over a human rights-related tweet, have also rattled international investors. The incidents underscored a shift in Saudi and its UAE junior partner that has spooked businesspeople.

“Saudi policy-making has moved from a consensus-based and largely predictable model of governance to a much more vertical structure that’s prone to seemingly sudden shifts,” said Mr Dalman.

“That’s generating uncertainty, as investors now worry that Riyadh’s policy assertiveness or miscalculations could result in regional instability or reputational damage.”

The troubles, including a corresponding shift in attitude towards foreigners amid a hardening of propaganda across state-backed media, are discouraging talented international professionals who were once flocking to the Gulf for opportunities.

One senior consultant and adviser to the UAE’s defence industry realised one day recently his advice to focus on training personnel and building systems of accountability instead of buying expensive military hardware wasn’t being heeded, and was actually raising suspicions about his motives.

“They want ‘yes-men.’ They don’t want any challenge to the authorities,” he told The Independent, speaking on condition he not be named. “If you were adopting a neutral stance, a moderate point of view, or a contrary point – other elements who were more devoted to the state would attack you.”

Eventually, he said during a phone interview from the US, he joined others in abandoning the Gulf, quitting his post because he found he couldn’t do his job. Hundreds of other expats – especially those from South Asia living in the UAE – have also quietly made their way back home over the last year or so, as wages have fallen. While the oil business that has been the mainstay of the region’s economy for decades continues to generate interest, few other opportunities are surfacing, despite last-ditch efforts to make the Gulf more business friendly.

“The expat community have observed that salaries are falling, positions are no longer secure, and the investment to maintain businesses is not in place,” said the consultant. “There’s little fresh money. They’re making a lot of public announcements about investing but nothing is happening.”

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