The oil exporters of the Persian Gulf are flush with cash...In fact, unlike during the last oil boom of the late 1970s, relatively little of the current Arab oil surplus has been directly invested in U.S. assets or even deposited in the international banking system. This time much of the oil money has remained at home, where a classic speculative mania is now being played out.
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...OPEC members have earned around $1.3 trillion in petrodollars since 1998, according to the Bank for International Settlements. The extra liquidity injected into the gulf economies by the oil price hike since 2002 is estimated at around $300 billion by HSBC...a great deal [of which] has stayed in the gulf region.
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...The gulf economies are growing rapidly, along with corporate profits. Returns on equity in the region are approaching 20%, calculates Credit Suisse...A new era of permanently high oil prices and perpetual prosperity has been hailed.
...Dubai is attempting to transform itself into a leading financial center and tourist resort. Saudi Arabia intends to become a world leader in fertilizer production. A bridge costing $3 billion is proposed to span the Red Sea. A new economy is coming into being. The current oil boom, unlike former ones, won't be followed by a bust, say the believers. This time it's different.
...Since January 2002, the Egyptian, Dubai and Saudi stock markets are up respectively by over 1,100%, 630% and 600%. Only four years ago, gulf companies were priced at around twice book value. Today they trade on an average of 44 times historic earnings and at over eight times book value. gulf banks are valued at over nine times book value, according to Credit Suisse.
Sabic, a Saudi conglomerate, is currently ranked among the world's 10 largest companies by market capitalization. The Saudi stock exchange has a market cap of around $750 billion. That's roughly three times the country's GDP. By comparison, the U.S. stock market reached a peak of 183% of GDP in March 2000. In fact, the relative overvaluation of the Saudi stock market is even greater than these figures suggest. Nomura analyst Tarek Fadlallah points out that as the oil industry remains in state hands, a far smaller fraction of Saudi economic activity is captured by the stock market than in the U.S.
...Reports suggest that the majority of new Dubai properties are being acquired for speculative purposes, with only small deposits put down. They are being flipped in the contemporary Miami manner.
[Market] inefficiency: Financial information in the gulf is totally inadequate. The Saudi megacap conglomerate Sabic attracts no domestic financial analysis...Companies report their results in a rudimentary fashion. It is against the law to sell short overpriced stocks in the Saudi market. And foreigners' financial sophistication is absent since only gulf nationals can purchase Saudi stocks. Instead, speculators operate in an information vacuum in markets reportedly dominated by insider trading and practiced manipulation.
...the madness of crowds: Up to two million of the 16 million Saudi population are said to be playing the market. Interest-free loans are commonly available. Saudi...The education minister has warned teachers to stop day-trading at schools. People are quitting their jobs to trade.
This is, pardon the term, a partial-birth abortion in the making. So, why do we care?
The political consequences could be more serious. Arab rulers have deliberately encouraged the boom in the hope that rising asset prices and a strong economy would distract their youthful populations from religious fundamentalism. This strategy could backfire. History teaches that when speculative bubbles burst and the public loses large sums, there is normally a political backlash. This was true of the U.S. in the 1930s, and to a lesser extent in the early 2000s, and of Japan in the 1990s. It's not hard to imagine Islamists capitalizing on a future bust with denunciations of stock-market gambling. Some of today's young Arab day-traders could well turn into tomorrow's al Qaeda recruits.
What will happen is that the bubbles will start to deflate and the deep-pocketed Gulf rulers who desire stability above all will prop them up, probably with adding massive amounts of liquidity and taking over non-performing loans. That, in turn, will come to roost when, for one reason or another, the oil pipeline experiences a protracted interruption.
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