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capital fright by adam morrow and eman wahby as political temperatures rise, rumors of massive “disinvestments” abound. is western investment pulling out of the middle east? is saudi investment – as has been suggested by the media – fleeing the us market by the billions? and will egypt be caught in the crossfire? one full year after the september 11 attacks on new york city and washington, dc blasted the world’s status quo, global capital is still in a state of flux. the hefty post-9/11 recession in the united states was one reason for massive capital movement, but political considerations – stirred increasingly by us unilateralism – are beginning to play a part too. on august 20, the financial times (ft) caused a sensation when it reported that saudi arabian investors had withdrawn $100 billion or more from us markets in recent months. the ft quoted youssef ibrahim, a senior fellow at the us-based council on foreign relations, as saying the withdrawal had been triggered by provocative calls, emanating from shady “neo-con” political circles, to freeze saudi assets in the united states within the context of an all-encompassing war on terror. saudi fears were further aroused by a lawsuit filed on august 15 by relatives of the victims of the september 11 attacks against prominent members of the royal family, including defense minister prince sultan bin abdul aziz al-saud, former intelligence chief prince turki al-faisal and bank magnate prince mohammed al-faisal. the suit charges them with covertly financing osama bin laden’s al-qaida network and seeks a whopping $1 trillion to $3 trillion in punitive damages. the lawsuit also targets several saudi financial institutions, including al rajhi banking & investment corp., the vice president of which, abdel rahman al rajhi, warned that the action could result in the withdrawal of arab investments in the united states and “negatively affect the us and western economies.” the ft’s claims were buttressed by saudi newspaper al-watan, which reported that a group of saudi businessmen had recently pulled out of a technology project in new york over fears of having their assets suddenly and unexpectedly frozen. news of the capital flight allegedly in the hundreds of billions caused the value of the us dollar to fall briefly against the yen and the euro. immediately following the release of the ft story, several prominent personalities came out saying that the report was exaggerated; that no such wave of capital repatriation was actually afoot. on august 22, prince al-waleed bin talal bin abdul aziz al-saud, the nephew of saudi king fahd and an advocate of strong us-saudi ties, told the bbc that there was no evidence of a saudi pullout. “my information tells me none of this is correct. now there may be some withdrawals, but not of the magnitude mentioned in the financial times,” he said. the king stressed that disinvesting from the us would be neither politically expedient nor financially prudent. “i’m holding on to all of [my investments] and, in all honesty, am increasing my stakes in certain companies in the united states. what i am telling you,” he said, “represents the position of the saudi royal family 100 percent.” investors, he added, “would be stupid to liquidate at the values of the last two months, when the market was at its lowest point.” a source at the us embassy in cairo, asked to comment on saudi capital flight from the united states, also took issue with the ft story. “we’ve found absolutely no evidence of this,” he said. jp morgan chase’s representative in egypt, moustafa el-sahn, added that the us government had every reason to be cautious about freezing arab assets. “any seizure of assets would not be a healthy message to send, as it would have a significant impact on investors from japan or europe, who would certainly take it into consideration,” el-sahn said.
gulf investment in the united states has traditionally been vast. an estimated $1.3 trillion of middle eastern wealth was invested abroad in 2001, of which about $750 billion was saudi. of this, 60 percent, or about $450 billion, was invested in us markets, while european and asian markets received 30 percent and 10 percent respectively. so when the bottom fell out of the us market in the wake of the 9/11 attacks, gulf investors were hit hard. losses sustained by investors from gulf cooperation council (gcc) countries as a result of the carnage witnessed by us markets in the year since then have been estimated at upwards of $800 billion. amid the atmosphere of economic gloom, statistics indicate that there has been at least some movement of money out of the united states. according to the saudi arabian monetary agency, the kingdom’s domestic money supply increased by 1.43 percent between june and july, from $91.1 billion to $92.4 billion. saudi economists see this as an indication of the return of saudi
money from abroad, estimating that $11 billion has been repatriated
since september 11, 2001. the swiss-based multinational bank for
international settlements (bis) appears to concur, stating in a
quarterly report issued in september that saudi investors in the
first three months of 2002 cut their overseas cash deposits by 10
percent, to $45.9 billion, and withdrew $5 billion from foreign
markets, compared with $9.7 billion for 2001 in its entirety. poor relations saudi-us relations have been particularly strained since july 10, when an explosive presentation by a little-known analyst at the rand corporation – speaking to washington’s defense policy board, which advises the pentagon on defense issues – described the saudi arabia as “the kernel of evil.” the presentation went on to warn us policymakers that the kingdom sponsored terrorist organizations and should be given an ultimatum: do your part in the war on terrorism or we’ll seize your oil fields and financial assets. although defense secretary donald rumsfeld quickly distanced himself and the us administration from the briefing, saudi investors were understandably disturbed. their anxieties were exacerbated further by washington’s announcement that it had frozen the financial assets of saudi businessman wael hamza julaidan, who heads the muslim charity organization rabita trust of the mecca-based muslim world league. as the london-based arabic-language daily al-hayat reported on september 8, washington accuses him of being an associate of osama bin laden. as the move against julaidan indicates, the united states continues to widen its dragnet against alleged financial backers of terrorism. “we put the world’s financial institutions on notice,” us president george w. bush declared shortly after september 11, 2001. “if you do business with terrorists, if you support them or sponsor them, you will not do business with the united states of america.” since then, the united states has suspended the movement of more than $34 million in assets belonging to those institutions it suspects of funding terrorist organizations.
actions like the lawsuit and the asset freeze are seen by some as attempts to extort saudi wealth and pressure the kingdom into supporting american policies on iraq and palestine. business leaders with this view are urging local investors to register their discontent by “disinvesting” in the united states. on august 19, the saudi english-language daily arab news reported
that business magnate abdul rahman al-zamil, chairman of al-zamil
group, had called on his compatriots to bring their us assets back
home. a day later, former member of the kingdom’s consultative
council abdulaziz daghestani told the newspaper that saudi arabia
should review its economic relations with the united states, effectively
seconding the motion for repatriation. “these funds should
be invested in the kingdom and other islamic countries, besides
those of southeast asia and europe,” he was quoted as saying.
some observers, however, insist that gulf capital flight has been based primarily on financial considerations, pointing out that the current market situation in europe is simply safer right now than the united states. “these guys are very wise with their money, and they’re likely to put it where they’ll get a good return,” said bassim arida, director of foreign institutional sales at the commercial international brokerage company (cibc). the us embassy source agreed, disparaging the notion that the saudis were using their assets to gain political leverage. “the vast bulk of people who invest do so to make money – that’s their motivation. they’re not going to move money for political reasons,” he said. whether or not it is being widely employed in practice, the “capital-as-a-weapon” idea is not unique to saudi arabia. at the end of august, lebanon’s sheikh hussein fadlallah – who himself had his us assets frozen in 1995 because of his connection with the hizbullah resistance movement – called on arabs to transfer their money from us to arab banks. “we have to punish america like it punishes us,” he said.
arab emerging markets have made their own bids to grab a piece of the action. in summertime, lebanon made a concerted effort to attract gulf citizens by easing visa requirements for nationals of gcc countries. the removal of lebanon from the financial action task force (fatf) list of countries that are not in compliance with recently enacted international money-laundering laws has also helped to improve the investment climate. lebanese analysts say that gcc investors’ attention has been caught. “there is evidence that gulf arabs are putting some of their capital into real estate in lebanon,” said philip khoury, research director of sharqfin, a beirut-based financial consultancy that specializes in emerging markets. khoury went on to cite “anecdotal evidence” that marina towers, beirut’s most prestigious apartment complex, “was struggling before september 11 [last year],” but now, apparently, it has been fully bought up. there was also a boom in gcc tourism in lebanon this summer, as well as in associated villa buying.” on august 23, lebanese daily in another bid to capitalize – as it were – on the situation, egyptian prime minister atef ebeid, addressing the federation of arab chambers of commerce & industry in september, called on arab businessmen to transfer their overseas funds, “within the context of returning arab money from abroad.” on september 5, official daily al-ahram quoted the president of the general authority for investment (gafi), mohamed al ghamrawi, as saying that saudi arabia “occupies the first position in terms of arab investments in egypt.” he said that saudi investment in egypt totaled £e 5.2 billion, and that saudis currently held interests in nearly 565 egyptian companies. the tourism sector is the first choice for investment among saudis, followed by the real-estate sector. the cabinet at a mid-september meeting approved executive regulations making it easier for non-egyptians to buy and own land and real estate. the new regulations would allow non-citizens to own land areas of more than 4,000 square meters, a perk prohibited under the previous rules. “such new incentives are good indicators for saudis that the investment atmosphere in egypt is ready to receive their repatriated funds,” said sayed salah, general manager at egyptian saudi finance bank. “the saudis mainly invest in tourism and real-estate projects in egypt. thus, the new regulations would undoubtedly encourage them to invest their money here.”
egyptian analysts, while expecting additional gulf investment to enter the local tourism and real-estate markets, suspect that most of the money will go towards more attractive investment environments in europe and asia. “if the saudis do in fact pull out of the us, i reckon they’ll find a niche in europe, and the bulk of their capital will go there,” said arida. “especially as europe will be more accommodating than the us in terms of the origins of funds.” the moribund state of the local bourse, he added, is particularly problematic. “there aren’t too many opportunities in the egyptian stock market right now. wealthy saudis are tending to buy into projects and hotels in the tourism sector, like the marriott and le meridien.” khoury, in beirut, agreed. “financial assets, i think, are being pulled to europe rather than the mideast region,” he said. tamer gadallah, the head of trading at investia, however, voiced some hope. the idea that fleeing gulf capital might come to egypt is, he said, “a reasonable expectation,” although it will initially be “on a very small scale.” he, too, expects most new gulf investment to be in the form of property and projects, given the implementation of the government’s recently announced real-estate investment incentives. meanwhile, the united states is not the only country to be haunted by the specter of capital flight; egypt, too, has taken a beating since 9/11, with western companies finding the middle east increasingly inhospitable – or simply stagnant. according to the egyptian businessmen’s association report for 2001, direct foreign investment in egypt declined $1.14 billion in 2000/01, to fall to only $509 million, compared to $1.65 billion in 1999/2000. according to central bank of egypt (cbe) figures, $103 million worth of investment had fled egypt by the end of 2001, opposition daily al wafd reported on july 28. the newspaper also reported that foreign investments in the cairo & alexandria stock exchanges (case) had declined by 45 percent, from $472 million in the year 2000 to a mere $260 million in 2001. the events of 9/11 are not all to blame. “western nations stopped investing in the region when growth started slowing in 1999,” explained khoury. “this was reinforced when the second intifada began [in september 2000]. the 9/11 attacks killed what was left. the only investment in egypt now, according to bankers, is in petroleum-related projects.” even if the country could stand to gain from arab distrust of the us market, egypt’s own unhealed economic ailments will hold it back. gadallah, at investia, mentioned a joint venture between a french telecommunications company and a local egyptian company, which recently fell through – and not only because of politics. “when the french discovered the forex [foreign currency] losses they would be exposed to, in combination with the deteriorating political situation, they decided to pull out,” he explained. “this is the second recent example of western investors leaving due to the political environment. but it had just as much to do with forex.” |
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