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Have Gulf Leaders Recognized The Need For Change?

The conservative, oil-rich kingdoms of the Gulf have watched the toppling of regimes in Egypt and Tunisia and the civil war in Libya, and have seen the rising concerns in their own countries over lack of political representation and economic opportunity.

When Tunisian street vendor Mohamed Bouazizi set himself on fire last December, few imagined that his anger and frustration would spread across the Arab world, and certainly not to the conservative, oil-rich kingdoms of the Gulf. But the uprisings that toppled regimes in Egypt and Tunisia and unleashed a civil war in Libya have resonated with people throughout the region, awakening the same concerns about lack of political representation and economic opportunity that have ignited protests elsewhere. The turmoil has also provoked sectarian tensions between the Gulf’s ruling Sunni elites and the less-privileged Shiite communities, most notably in Bahrain, where the majority Shiite population has rebelled against the al-Khalifa royal family. Stability in the Gulf, a preoccupation of regional monarchs as well as Western governments and financial markets, suddenly seems in doubt.

The ruling powers have responded to the pressures with iron fists and open checkbooks. At Riyadh’s prompting, the Gulf Cooperation Council, a regional alliance of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, sent troops to Bahrain to suppress protests against the regime of King Hamad bin-Isa al-Khalifa. The move recalled the approach of the former Soviet Union, says Bruce Riedel, a senior fellow at the Brookings Institution’s Saban Center for Middle East Policy, who chaired President Barack Obama’s strategic review of U.S. policy toward Afghanistan and Pakistan in 2009. By intervening, Riedel contends, Saudi Arabia “invoked a 21st-century version of the old Soviet Brezhnev doctrine, ruling out revolution in the kingdom’s sphere of influence just like the Russians tried to outlaw freedom in Eastern Europe.”

The Gulf states have also sought to defuse discontent with a wealth of new spending, a luxury they can afford because of today’s high oil prices. Saudi Arabia, the world’s largest oil exporter, has led the way, drafting a massive $133 billion plan — equivalent to $10,000 for every Saudi — to boost welfare spending, build 500,000 new homes and create jobs. The GCC has separately pledged to provide billions of dollars in aid to Bahrain and Oman in a sort of regional Marshall Plan.

Such measures are unlikely to produce lasting stability, analysts and observers say. Only genuine political and economic reforms can meet the aspirations of the region’s population. On the political side, that means responding to calls for ruling autocracies to loosen their grip on society and allow for democratic reform. Activists in the UAE have called for free elections to a Parliament with genuine legislative powers. Voices in Saudi Arabia are urging King Abdullah to move toward a constitutional monarchy with an elected assembly. “Money can buy them love for a while, but none of what they are doing is addressing long-term structural issues,” says Isobel Coleman, a senior fellow at the Council on Foreign Relations in New York. On the economic side, governments — especially that of Saudi Arabia — need to open up to foreign investment if they hope to create jobs for their young and rapidly growing populations. “Liberalization is urgently needed,” says Mark Mobius, executive chairman at Templeton Emerging Markets Group. “They need to act quickly.”

Mishaal Al Gergawi, a current affairs commentator in the UAE, says the Gulf states need a broader social and political awakening. “The GCC faces a question of existentialism and defining its place in the world,” he says. “We are failing globally and need to position ourselves more favorably as a bloc that says more than ‘We sell oil.’ ”

With their vast wealth and relatively small populations, the Gulf states stand apart from Egypt and the North African countries, where the Arab Spring first broke out. Tiny Qatar is the most dramatic example: Oil and gas resources generate a gross domestic product that averages $145,000 for every one of the country’s 848,000 people, making it the wealthiest nation on earth on a per capita basis. Even Saudi Arabia, with its fast-growing population of 26 million, enjoys a per capita income of more than $24,000, compared with a modest $6,200 for Egypt. But Saudi Arabia is feeling the same demographic pressures as poorer and more-populous Arab countries. Fully half of the population is under the age of 25, and according to some estimates, as many as 30 percent of people between the ages of 20 and 29 are unemployed. The lack of opportunity for young people is a major source of potential discontent and explains why the government has been so quick to increase spending.

Unrest in the region has already taken an economic toll. The protests by the Shiite opposition in Bahrain and the government’s stiff crackdown briefly closed Manama’s financial district in March, dented the country’s tourism industry and led Standard & Poor’s to downgrade the country’s debt rating by two notches (see story, this page). The events will knock 4 percentage points off the country’s GDP this year, economists at HSBC Holdings estimate.

Political instability has also unsettled financial markets in the Gulf. The volume of bond issuance and syndicated loans in the GCC plunged to $9.79 billion in the first quarter from $30.3 billion in the fourth quarter of 2010, according to data provider Dealogic. Credit default swaps on Saudi Arabian debt rose by 43.5 basis points in the first three months of this year, to 119 basis points, despite the country’s massive oil revenues. 

The turmoil has led some regional companies to postpone financings. In March, Dubai-based oil field services company Topaz Energy and Marine withdrew a planned $500 million initial public offering on the London Stock Exchange — a deal that would have valued the company at about $1.7 billion. Some analysts, however, play down the impact of political unrest on local markets. “The GCC region, and the UAE in particular, are seen as more stable than other parts of the MENA [Middle East and North Africa] region,” says Christopher Laing, Deutsche Bank’s head of equity capital markets for Central and Eastern Europe, the Middle East and Africa. “The DFM [Dubai financial market] index returned 15 percent while Topaz was book-building, so failure to price successfully was not a result of regional risk.” Other markets have been more subdued. Saudi Arabia’s Tadawul all-share index has risen just more than 1 percent so far this year, while the Egyptian Exchange’s benchmark EGX 30 index has declined nearly 30 percent.

The possibility of wider unrest in the Gulf also threatens to roil world markets. Oil prices have climbed to their highest levels in two and a half years, with Brent crude touching $126 a barrel late last month, up from less than $100 at the start of the year. Prices could surge to $200 to $300 a barrel in the event of major civil turmoil in Saudi Arabia, former Saudi Oil minister Sheikh Ahmed Zaki Yamani predicted last month.

Some market participants are optimistic that the recent unrest will ultimately produce a sounder political and economic environment in the region, but that scenario will require that governments embrace reform rather than reject it. “Recent events will have a short-term impact, but volatility aside, a long-term movement toward stronger democracies in the MENA region will result in more transparency, more stability and a reduction in political risk,” says Hisham el-Khazindar, co-founder of Citadel Capital, a Cairo-based firm that manages $8.6 billion in private equity investments.

The death of Osama bin-Laden could add momentum to the reform drive in the Gulf and across the Arab world. The former al-Qaeda leader’s call for jihad against the West has lost much of its appeal and relevance at a time when people across the Middle East and North Africa are rising up and demanding human rights, political power and economic opportunity. “The Arab world has moved on since al-Qaeda was founded in the 1980s,” writes Maajid Nawaz, co-founder of Quilliam, a London-based think tank set up to counter Islamic extremism. “A clear majority of Muslims around the world have decisively rejected al-Qaeda’s vision. People’s real concerns are now about poverty, unemployment and a lack of government accountability.”

Christopher Davidson, a reader in Middle East politics at the U.K.’s Durham University, echoes that view. Osama’s demise “places a greater strain than before on [Middle Eastern] autocrats, as one of their most symbolic bogeymen is now off the radar for good.”

GULF LEADERS RECOGNIZE THE NEED FOR CHANGE but fear that concessions could spark instability and sectarian strife, analysts say. The fate of longtime Egyptian president Hosni Mubarak, who less than two months after being deposed finds himself under arrest on charges of abuse of power and corruption, only reinforces their caution.

The resistance to change has been most evident in the reaction of ruling regimes to events in Bahrain, where the Shiite majority — which makes up about two thirds of the population — protested against the political control of King Hamad and his Sunni elite, demanding equal rights and free elections. The government and its Gulf allies have accused Iran of instigating the revolt, with GCC foreign ministers accusing the Shiite country of “flagrant interference.” If the ruling Khalifa family were to fall, it would most likely be replaced by a Shiite-dominated government — something the Saudis and their GCC allies are determined to avoid. They didn’t hesitate to support the government’s crackdown, which left some two dozen people dead. Under the umbrella of the GCC Peninsula Shield Force, which the bloc created in the 1980s to deter threats and deployed in the two Gulf wars, Saudi Arabia sent 1,000 troops to Bahrain, and the UAE contributed about 500. It was the first time the group had used the force to quell an internal uprising. The GCC also pledged to spend $20 billion over ten years in Bahrain and Oman, which also has been shaken by protests, to develop those countries’ infrastructures.

Durham University’s Davidson says the GCC intervention raised the stakes in Bahrain and underscored the ruling regimes’ resistance to change. “Saudi intervention has destabilized the region. Saudi and the UAE have both revealed themselves as status quo powers, and their populations will remember that,” he says. “Saudi, Bahrain and Oman’s regimes are all vulnerable to being toppled. The Gulf regimes, as dictatorships, ultimately only have two strategies for containment: bribe or threat.”

Although protests have died down since the GCC deployment and Bahrain has shortened its martial law curfew, the situation in the country continues to fester. Opposition groups have called on the government to resign as a precondition for talks, while the government has arrested opposition leaders. The standoff threatens to exacerbate sectarian tensions in the country and the region, analysts say. “My concern is that the situation for Bahrain’s Shiite becomes more frustrating and dire and they turn to Iran for support,” says the Council on Foreign Relations’ Coleman. “A Hezbollah-ization of Bahrain could lead to regional escalation,” she adds, referring to the Iran-backed Lebanese Shiite militia. Other analysts discount the risks of contagion, if only because the dangers for the region and the global economy are so great. “We maintain our view that the likelihood of events in Bahrain spilling over into other Gulf states, including Saudi Arabia, remains very low,” says Farouk Soussa, chief Middle East economist at Citigroup Global Markets in Dubai.

Protests in Saudi Arabia have been muted. Facebook-promoted calls for a day of rage in Riyadh in mid-March prompted authorities to deploy an overwhelming number of police and security forces, effectively frightening off any would-be protesters. But there have been signs of restiveness in the Eastern Province, site of the country’s major oil installations and home to most of its Shiites, who make up an estimated 10 to 15 percent of the population. In the past two months, several hundred people have demonstrated to protest the Saudi intervention in Bahrain and to call for the release of domestic Shiite prisoners. Saudi authorities have arrested 160 dissidents, according to Human Rights Watch. The organization has demanded the release of one of the detainees: Nadhir al-Majid, a writer and teacher who criticized the government for not allowing demonstrations.

The most prominent reform advocate, at least publicly, is Prince Alwaleed bin-Talal bin-Abdulaziz Alsaud, the billionaire chairman of Kingdom Holding Co. and a nephew of King Abdullah. In a New York Times opinion piece,   Alwaleed said Arab governments needed to adopt “radically different policies” to provide economic opportunity and a political voice to their populations. “We can succeed only if we open our systems to greater political participation, accountability, increased transparency and the empowerment of women as well as youth,” he wrote. The former director general of   Saudi Arabia’s powerful intelligence service and an ex-ambassador to the U.S., Prince Turki al-Faisal, has also spoken out in favor of political reform. In a recent speech to the Jeddah Economic Forum, he called for the election of members of the Shura Council, an advisory body to the king.

The government has responded only grudgingly to calls for political reform. In March the election commission announced that municipal elections, which have been delayed for the past two years, would finally be held in September but that women would not be allowed to vote. “They are mocking the whole process,” says Coleman. “Allowing half the country to go to the polls for a few seats in a marginal majlis [council] is hardly reform.”

Rejecting significant political liberalization, the government is relying instead on budgetary largesse to counter discontent. With oil prices in excess of $100 a barrel, the authorities have plenty of money to spend. The state will bring in $243 billion in oil revenues this year, the second-highest level on record, and the current-account surplus will swell to $93 billion, or 20 percent of GDP, according to Paul Gamble, head of research at Jadwa Investment in Riyadh. The budget will be in healthy surplus this year even as the government ramps up spending under its $133 billion program designed to defuse social discontent, he adds. “We can expect to see more announcements of spending, but always coupled with thinly veiled threats regarding permission to protest,” says Durham University’s Davidson.

Such spending isn’t a panacea, though. The government has already run into difficulties with an existing development program that calls for spending $60 billion to construct four major cities in underdeveloped areas of the country. Amr bid-Abdullah al-Dabbagh, governor general of the Saudi Arabian General Investment Authority, said recently that officials had made some mistakes in the choice of locations. Shares in Emaar, the Economic City, which is building the flagship project, King Abdullah Economic City, dropped by 29 percent in the 12 months ended March 31. And the government’s resources aren’t infinite. Given the current high rate of spending, the government needs a price of $77 a barrel for Saudi crude this year, equivalent to about $81 for Brent, to balance its budget, up from a break-even price of just $23 a barrel in 2003.

Many foreign investors believe the government should open the door to outside capital rather than relying so heavily on public spending. Templeton’s Mobius says his bête noire is a provision of the Saudi capital markets law that precludes direct investment in the country’s assets by foreign funds and requires inflows to be channeled through a local company. The $1.5 billion Templeton Frontier Market Fund has only a modest exposure to Saudi Arabia and the UAE, he adds.

Only two Gulf countries — the UAE and Qatar — have not experienced any public protests, but that doesn’t mean there is no discontent. In March a group of 133 academics, lawyers, journalists and intellectuals petitioned the UAE’s president, Sheikh Khalifa bin Zayed Al Nahyan, to demand wide-ranging democratic reforms. The group called on the government to allow universal suffrage for the election of the Federal National Council. In 2006, in a tentative first experiment in democracy, the government allowed some 6,500 people to select half of the 40-member council; the remaining members were appointed. The petition also demanded that the council be transformed from an advisory body into a true Parliament with legislative powers. UAE authorities have detained four activists, including Nasser bin-Ghaith, an economics professor at the Abu Dhabi branch of the Sorbonne University, and Ahmad Mansoor, a high-profile blogger who has called for an elected Parliament. The official UAE news agency reported that the two men were being investigated for “acts that threaten state security and public order.”

The tiny oil-and-gas-rich state of Qatar is the least restive country in the Gulf, and it’s not hard to understand why. The country will add roughly a quarter of a million dollars to its sovereign wealth fund for every Qatari national and will achieve a current-account surplus of almost 30 percent of GDP this year, according to economists at HSBC. With hydrocarbons flowing freely and government spending ramping up to prepare facilities for soccer’s World Cup in 2022, the economy — and the government — appear almost unshakable.

Qatar and the UAE will be the main beneficiaries of unrest in other parts of the Gulf, says Citigroup’s Soussa. “Their image as safe havens for investors and commerce has been bolstered in recent weeks,” he asserts.

Kuwait, which has a sizable Shiite minority of about 25 percent of the population, has experienced political turbulence but shows no real signs of instability. The country has the most vibrant political system in the Gulf, with an elected National Assembly. The government resigned at the end of March to prevent opposition members of the legislature from questioning ministers about the government’s handling of the crisis in Bahrain. The move had no significant consequences, however, and the ruling emir, Sheikh Sabah al-Ahmad al-Sabah, is expected to reappoint Prime Minister Sheikh Nasser al-Mohammad al-Sabah to form a new government. The country’s economy, meanwhile, is projected to grow by 4.3 percent this year, with oil exports generating $83 billion in revenues.

The Sultanate of Oman has taken the biggest steps toward political reform after protests demanding democratic changes and jobs resulted in several deaths. Sultan Qaboos reshuffled his cabinet three times in the space of a month to root out corrupt and ineffective ministers and agreed to grant legislative powers to the Majlis al-Shura, previously a consultative body. The sultan also set a minimum wage and promised to create 50,000 public sector jobs. Labor unrest has continued at major Omani companies, however, and state security forces have clamped down, with reports of as many as 100 arrests.

Persistent protests in Yemen since January have prompted the GCC to intervene and propose a deal whereby President Ali Abdullah Saleh would step down in return for immunity from prosecution. The underdeveloped country’s importance is political rather than economic. Yemen is a stronghold of Al-Qaeda in the Arabian Peninsula, a group that remains a potent threat in the region, and Saudi Arabia has been involved in several skirmishes with the Shiite insurgent group al-Houthis along the two countries’ borders.

It’s far too soon to say whether the unrest in the Gulf will lead to dramatic reforms, but there seems little chance that regimes can resist change and turn the clock back to the days before the Arab Spring. Observes Ghanem Nuseibeh, a senior analyst at Political Capital Policy Research and Consulting Institute, a Budapest-based think tank, “For the first time in decades, the internal political status quo of the GCC is challenged and will need to change.”  •  •

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