ArabianMoney.Net

Prince Alwaleed’s holding company has made an offer to buy out the shares in Kingdom Hotel Investments that it does not own, and investors would be wise to seize this generosity.

Most hotel groups all around the world presently have assets up for sale. In Dubai Union Properties has publicly stated that it is in negotiations to sell its Ritz-Carlton in the Dubai International Financial Centre even before it is finished. Prince Alwaleed himself has been trying to sell The Savoy in London.

Hotel doldrums

So why would Prince Alwaleed want to buy shares in KHI when hotels are a hard sell all over the world? Basically the owners just cannot get the prices that they want because their business models do not justify such prices in a recession.

It is true that the KHI listing on the Nasdaq Dubai has been a disaster and dogged by poor liquidity from Day One, but then there is a cross listing in London.

But yesterday’s $5 a share offer for the outstanding 44 per cent of KHI offers a 25 per cent premium to the current share price. That values the group at $843 million against yesterday’s full-year earnings reported at $22 million, up 27 per cent on 2008.

KHI has its assets spread across emerging markets including Africa, and the prince clearly believes that the stock market is undervaluing the future potential gain in these countries.

But then again you can hardly argue that emerging markets are undervalued from an equity perspective at the moment. Most have almost doubled since the lows of last March and have strongly outperformed the industrialized world. The downside risk from here is obvious.

Cashing out

So the choice for investors is simple: do you cash out of a disappointing stock at a high point in the cycle with a 25 per cent buy-out premium, or wait for the next market downswing to wipe you out?

Admittedly Prince Alwaleed is thinking longer term but his optimism about emerging markets may well prove unfounded. China in particular is an economic powder keg about to explode, and downturns in emerging markets dependent on China, like Africa, will be particularly vicious.

Foreign investors in Africa have not had much success since the end of the British Empire and turning a quick profit is the only sensible thing to do in such unstable countries.

The rates of interest that business actually has to pay for loans are soaring in the Gulf of Arabia as the Greek financial crisis further undermines confidence in financial markets.

Credit default swaps linked to Dubai debt jumped 43 basis points to close at 627 points last week, while the kingdom’s biggest property developer Dar Al Arkan saw its Islamic bond sale fall short at $450 million despite a 10.75 per cent annual profit, which in practice is the same thing as yield on a conventional bond.

Loan sharks

Bank loans are harder to obtain and carry high interest rates. ArabianMoney learned last week of a Cyprus based bank that is planning to offer loans in the Gulf at 10 per cent but only with absolute surety over the same amount of money.

This makes it very difficult for some businesses that are short of cash to continue in business as the cost of interest is squeezing already tight profits. For property developers it often makes it impossible to borrow to finish their buildings.

However, interest rates are a function of a market economy and work to direct the allocation of capital to where it will get the best return. So high interest rates are also a sign of over-capacity and the fact that there is more property than occupants in places like Dubai right now.

In theory high interest rates will help to keep the property supply down and support rents and prices to allow the market to recover rather earlier than if everybody got a loan and carried on constructing buildings that have no immediate economic purpose.

Pressure on profits

That said high interest rates are a pressure on the local economy that it can ill afford in the aftermath of the global financial crisis, a slump in trade and the real estate crash. Specific action to create low-cost home loans would be useful, for example.

For savers on the other hand these are better times. Inflation is not currently a problem. Prices are actually deflating, particularly for housing and office rents. Therefore higher rates of interest are actually worth something to savers.

UAE local and foreign banks also carry an explicit guarantee from the federal government, and that has to count for a great deal in this uncertain world. For the credit worthiness of the UAE government is beyond doubt with its huge oil reserves and sovereign wealth funds.

Those global economists who think the Gulf Oil States will help to pull the world out of recession should look again at the latest data. Falling container volumes at the ports in Saudi Arabia signal a downturn, not a recovery, as does a big contraction in credit growth in the UAE.

Container volumes at the kingdom’s ports fell by 9.1 per cent to 11.9 million tonnes in November in comparison with the same month a year earlier, according to the Saudi Ports Authority. Imports were down 14.9 per cent to 4.9 million tonnes, while exports fell 4.9 per cent to 6.9 million tonnes.

8.4% fall in trade

For the January to November period total container volume in the Arab World’s largest economy slumped by 8.4 per cent to 129.3 million tonnes.

Then again consider credit growth in the UAE, the region’s second largest economy. Between 2003 and 2008 the annual growth in total bank credit grew from 18.4 to 38.4 per cent. Last year it plummeted to 2.4 per cent, and the Central Bank predicts credit growth will stay low in 2010.

Both the new figures for Saudi trade and credit growth in the UAE are consistent with economic recession, and that is clearly the immediate outlook for the Gulf Oil States.

The rebound in oil prices from the lows of December 2008 has prevented the situation from being worse than this, but total oil revenues fell in 2009 with lower prices and output. The knock-on effect on the non-oil sectors is clear, although this has been compounded by a real estate crash in the UAE.

Recession hits

However, the kingdom is not avoiding the slowdown as some economists hopefully suggested it might. Trade data is amongst the most reliable from which to make economic projections, and not generally prone to later statistical revisions.

That said the Saudi Arabian trade figures are better than the 16 per cent slump in China for 2009, the country most often cited as likely to lead the world out of the worst economic slump since the 1930s.

It could still be that in relative terms the Gulf States are something of a safe haven for business activity, but untouched by global realities they are most certainly not.

At the Davos World Economic Forum participants are often encouraged to peer 30 years into the future. But what about looking back 30 years and recalling the dreams of that time for the future and using that as a guide as to what might or might not be achieved in the future.

This correspondent will return to Oxford University for a meeting of alumni in June after an absence of 30 years. What did the world look like then and what did we dream about?

Actually there were not so many dreamers among the spires then. Students were an apathetic lot and seldom went to meet our famous visitors. I liked to meet as many as possible and frequently ended up in one-to-one conversations.

Cold War days

At that time the world was split into the two camps of the Cold War, and Eastern Europe remained behind the Iron Curtain. Even the thought of this ever changing looked impossible.

The Middle East was a major source of tension, then as now. There was the Iranian Hostage Crisis after the revolution, the invasion of Afghanistan by Russia and the second oil price shock of 1980 – which very few analysts would have expected to be the start of 20 years of low oil prices.

In England the two party system seemed about to end with the rise of a new centre party. The leader of the conservative students in Oxford, a chap called William Hague remembers the leader of the liberal faction as a major rival. His political career blossomed, mine was already over.

But then as now the world faced a serious recession. The 1980-2 recession was probably the worst until the current day. Yet we survived, although it made getting jobs difficult for graduates at the time. Indeed, the Thatcher Revolution succeeded in reviving the British economy, albeit after a very painful start for many of us.

But over 30 years the extent of change depends very much on where you are sitting. In places like Oxford or my home town Salisbury time has stood still. Russia and Eastern Europe are transformed beyond belief, and this peaceful transition is the greatest achievement of the European Union perhaps.

Middle East progress

In the Middle East the tensions remain. But some cities have made amazing progress. Dubai was a small town in 1980, now it is a global hub city with the world’s tallest building. Other countries have gone backwards.

So where would that leave us 30 years in the future when I hope to be among the survivors going back to my old university again? The lesson seems to be that some things do change and others change very little.

Geopolitically you would have to think a split between the USA and China might be the new axis of political power. It would be wrong to write-off America. We used to do that in 1980. China I am less sure about.

One of my young colleagues from Oxford went to Japan in the 1980s and came back after the market crash of 1990. Japan became very important but never surpassed the USA. China could yet just be a significant power rather than a bipolar giant by 2040. Its crash is yet to come, and all that glitters is not necessarily gold.

European Union

Europe ought to be far more important by 2040. The expansion and consolidation of the European Union is an understated achievement of the past three decades. If it continues and embraces Russia, to a greater or lesser extent, then this is a formidable economic and cultural power bloc, substantially larger than the US and second only to China in population.

Just as we used to write off the USA in 1980, today people overlook Europe. It is a very large, rich and well-educated continent. China has a very long way to go to catch up.

The Middle East should also enjoy dynamic change, if only because a fast growing, young population will demand it, and the oil and gas wealth should pay for it. The hope must be for a more peaceful outlook with the oil and gas reserves developed to the point that an economic transformation of the region occurs.

Cities like Dubai, Abu Dhabi and Doha are already feeling this phenomenon. It ought to become more widespread. Will it actually happen? Given that the world needs the energy resources of the region this has to be inevitable, one way or another.