Gulf states told to invest oil wealth at home

Gulf states told to invest oil wealth at home

By Simeon Kerr in Sharm el Sheikh

Published: May 21 2008 01:16 | Last updated: May 21 2008 01:16

Arab Gulf states are reaping the benefit of record oil prices but they need to invest more in their own societies and the broader Middle East to sustain sharp growth, a senior banker in the region on Tuesday warned.

Khalid Abdulla-Janahi, chairman of Bahrain’s Ithmaar Bank, said the region’s middle classes had been routed by inflation and the retention of wealth among the most privileged – whether in the oil-rich Gulf states or the emerging economies of the broader Middle East.

His comments – echoed by other participants at the World Economic Forum in Egypt who also questioned the long-term vision of these super-wealthy states – come amid the oil-fuelled frenzy of development during the past few years that is set to continue as oil prices hover at slightly less than $130 a barrel.

“What’s happening is that the wealth is created at the top but [it] isn’t trickling down. Yes, there are enough people who aren’t getting their share and some can’t afford a house,” he told the Financial Times in an interview. “The oil boom of the past five years has killed the middle class.”

As oil revenues increased fivefold, the Gulf states have spent as much as $1,500bn (€958bn, £763bn) in international markets and on companies and property. Mr Abdulla-Janahi said the region should refocus to invest in education.

“The oil price could reach $500 a barrel, but if we don’t create the Middle East, then God help our grandchildren,” said Mr Abdulla-Janahi. “Why invest in Citigroup when there is a lot to do at home?” he said, referring to the investment by the Abu Dhabi Investment Authority, the world’s largest sovereign wealth fund, in the troubled US bank.

Robert Zoellick, World Bank president, has in recent months approached sovereign wealth funds, including some in Abu Dhabi, to enlist support for a bank initiative to encourage long-term investments in equities markets in Africa and other developing markets in the Middle East.

Gulf states have been diversifying their economies away from oil and gas, into sectors such as tourism and financial services. But change needs to accelerate, Mr Abdulla-Janahi said.

“The Arab world has to diversify beyond real estate. We have a window of opportunity to secure generations to come but we have to diversify along the chain like India and China do,” said Yasser El Mallawany, chief executive of EFG-Hermes, an Egyptian investment bank. “This is the real risk to sustainability: too much focus on the short-term while there are medium-term challenges.”

The wealth divide, rarely discussed in the Gulf, was even worse in the broader Middle East, in states such as Egypt, said Mr Abdulla-Janahi. The value of the Gulf’s investments in the poorer Middle Eastern states was one fifth of the value of investments in the US. True security comes with the stability of one’s neighbours,” he said.