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| ECONOMICS 2.0 |
| Can Arabia
be the next frontier? |
| Thanks to the rise
in oil price, the Arabs have billions of dollars
to spend. India Inc. could soon be coveting opportunities
in West Asia |
| Niranjan Rajadhyaksha |
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| You
can email Niranjan Rajadhyaksha
at niranjan_r@hotmail.com |
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Sometimes, threats magically
dissolve to become opportunities. Indian industry
was worried silly about cheap Chinese imports, some
five years ago. Today, there is hardly a large company
in India that does not have a plan to get a piece
of the Chinese pie - through exports, direct investment
or sourcing deals. A friend of mine sardonically
says that if Stanley Kubrick were still around to
film the transformation, he would call it How
I Learned To Stop Worrying And Love The Chinese.
I suspect we will see a similar change in our view
of the Arabs very soon. Currently, everyone is spooked
by the high price of oil. The headlines constantly
remind us that crude oil is now selling in excess
of $55 a barrel. This has stoked fears of higher
inflation and lower growth. But is there an opportunity
hidden here as well, behind the dark clouds of doubt?
The oil exporting countries will soon be sitting
on a mountain of cash. The US Energy Information
Administration has recently come up with some estimates.
It says that the net oil exports by the Organisation
of Petroleum Exporting Countries (Opec) have climbed
steeply, from $195 billion in 2002 to $240 billion
in 2003, to an estimated $286 billion in 2004. That's
an extra $136 billion of revenues in two years.
If oil prices continue to march north, the booty
will grow bigger. Some say that extra revenues will
eventually top $500 billion by the end of 2005.
What will the Arabs do with this money? Spend it,
in all probability. (What else do governments do
when they get windfalls?) Most countries in West
Asia have had huge budget deficits in recent years,
as the price of oil fell after the first Gulf War.
Now, they are likely to report fiscal surpluses.
Saudi Arabia, for instance, is expected to end this
year with a surplus of $15 billion.
The International Institute of Finance (IIF) has
said, in a recent report, that West Asia will spend
an extra $200 billion on physical infrastructure
over the next three years. This still pales in comparison
with what China is currently spending on stuff like
roads and new cities, but its economy is slowing
down. West Asia could pick up some of the slack.
Remember, it was the construction boom in the Gulf
during the 1970s which helped the Indian economy
recover from recession. And, the money wired home
by expatriate workers there helped give us our first
current account surplus after Independence.
An equity strategist tells me that some companies
are already eyeing the Arab opportunity. He says
a bag of cement costs Rs 150 in Mumbai and Rs 250
in Dubai, an indication that building activity is
picking up. Many turnkey project companies, too,
are looking across the Arabian Sea. And far more
companies may be able to join the party this time,
since the Opec countries are also thinking about
using their recent windfall to invest in building
a post-oil economy. That may mean investments in
areas like education, telecom and finance.
Meanwhile, another question: what will happen to
the money that is not spent? In the 1970s, the Arabs
parked their surplus funds with US banks, who blew
it up by giving loans for crazy projects in Latin
America. The banks were bailed out, while the Latin
American countries had to suffer years of stagnation.
Now, thanks to the war on terror, it is said that
the Arabs are wary about pumping their billions
into the American financial system. Europe is one
alternative. And, perhaps, Asia as well.
India may have a chance here. Its economy has traditionally
received very little of the money that the Arabs
have invested abroad. This may perhaps change. It
did with Singapore, which traditionally poured its
billions into China but is now looking at India
as well. Similarly, the new boom in West Asia could
mean a few billions flowing into the Indian economy
- either as direct investments or into the stockmarket.
Let's see where the petrodollars go in the coming
months. |
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