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Tuesday, March 06, 2012

No shelter from the storm

Assessing the far-ranging economic effects of a conflict in the Gulf

Executive Special Report

An attack on Iran that blocks the Strait of Hormuz would clearly have an impact on the Gulf economies. But when it comes to the possibility of a Gulf conflict, companies are extremely reluctant to talk about whether they have contingencies in place.

American technology firm Emerson, which works with the energy industry, replied to interview requests with the following: “Unfortunately since there’s insinuation about Iran in the feature we will not be able to take part whatsoever in this. We have very strict laws regarding this topic.” Royal Dutch Shell gave the incredulous reply: “We are not involved in politics so will not comment.”

Even without comment from companies, it is hard to imagine that they or governments in the Gulf Cooperation Council have not given some thought to contingencies if conflict does erupt. “GCC governments have been thinking about this for quite some time; it is not as if a conflict occurring would come as a surprise,” said a high-ranking economist at a leading Gulf bank, who wanted to remain anonymous. “That said, GCC governments are not known for advance forward planning.”

While the temporary loss of oil revenues would be a major blow to GCC states (see story page 42), certainly in the immediate term, non-oil sectors would also be negatively affected, such as the service sectors, aviation and tourism, all of which have grown over the past years.

“The Gulf economies are dependent on stability… so an attack on Iran would be a disaster, not just in terms of all the oil that would be locked in,” said the head of a European oil company off-the-record due to company policy. If a conflict happens, Gulf countries would be within missile range of Iran, and a possible target, particularly countries hosting United States forces: Qatar, Kuwait, Bahrain, the UAE and Oman.

Soft spots

The ports are a clear weakness given the region’s import dependence, while desalinization plants are a further weak point. According to Shahin Shamsabadi, a senior associate at consultants The Risk Advisory Group in Dubai, if the Fujairah desalinization plant was targeted, the UAE would only have enough water to last out the week.

Indeed, the Gulf’s 30 ports handle 30 million TEU (20 foot equivalent units) containers per year, and just under 250 million tons of general and bulk cargo. The shutting in of the UAE’s ports would be particularly damaging, accounting for 61 percent of the Gulf’s trade volumes, and Dubai Port with 13 million TEU per year a major re-export hub for the region as well as the wider Middle East and Africa, according to DP World. The UAE’s re-export trade was worth $205 billion in 2010-2011 fiscal year ending in April, according to the Abu Dhabi-based Arab Monetary Fund (AMF).

“It is a doomsday scenario for the Gulf,” said Shamsabadi. “A war right now… would prompt new discussions about [Qatar hosting] the World Cup [in 2022], and affect expansion plans of foreign companies and international oil companies. Only Saudi Arabia would be all right because it is so big.”

A massive personnel outflow from the Gulf may ensue, although it is likely that not all nationalities would react in the same way. “If you take the example of the Gulf War (in 1990), a lot of expatriate Arabs and expats from the Indian sub-continent are more likely to stay and Western expats to leave,” said Shamsabadi. There are an estimated 10 million expatriates in the GCC; from the West, British citizens are the dominant group, estimated at 100,000 in the Emirates alone.

The Gulf bank economist disagreed, at least in the short-term. “I think people would stick around initially. If the conflict lasted more than two or three weeks, and was looking like a long running affair, people could start to re-assess their options. But for a lot of expats it is not easy to leave as most are here for economic reasons. As long as economies remain strong, I don’t think the impulse to leave would be there,” he said.

Furthermore, a conflict now would likely not economically hurt the Gulf to the same degree as if a war had occurred prior to the financial crisis.

“Certainly the stock markets would take a hit, but the markets have been going nowhere for the last few years. There is not a lot of trading go on and not a lot of liquidity,” said the economist. “It is not like 2008. If a conflict happened then, it would have hit the region like a steam train as everyone was very bullish. Now the situation is not the same, the private sector has been weak since the financial crisis and confidence is fairly weak, so the scope for a sharp response in reaction to some geopolitical event like this is limited. Most growth is (currently) due to government spending, and following a conflict, they would increase or maintain spending."

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