Middle East feels the pain

Oil sales will fall if consumer confidence wanes, says OPEC
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By Mona Megalli

LONDON - Global economic uncertainties and threatened United States reprisals for last week's attacks on U.S. cities could blunt the global appetite for what the Middle East has to offer, from barrels of oil to holiday retreats.

Both U.S. allies and foes in the region will suffer the economic fallout of the September 11 attacks that left more than 6,500 people dead or missing, analysts say.

"The majority of these countries will suffer, it is a question of who suffers less," said Mohamed El-Erian, managing director at Pacific Investment Management Co (PIMCO) in Newport Beach, California.

Damage to Middle Eastern economies will not be even-handed or borne with the same resilience in a region where annual per capita income in 1999 ranged from $360 in Yemen to $16,310 in Israel, according to the most recent World Bank figures.

Oil exporters have rebuilt reserves and tightened lax fiscal policies during the recovery in oil prices, from under $10 per barrel in the winter of 1998 to around $26 at present, and are better positioned to endure depressed incomes for up to a year, according to one study.

For others, already burdened by high debt, like Lebanon, or by the effects of almost a year of violence, like Israel, the risks have heightened.

International ratings agency Standard & Poor's said this week Lebanon was "vulnerable to external financial pressure". S&P cited the country's high budget deficit, limited domestic capital markets, a highly-indebted banking sector and a slow privatisation program.

And in Israel, Gil Bufman, Chief Economist at Bank Leumi, said the bank had halved its growth forecast for Israel for this year to 0.5% from 1%.

Immediate repercussions

In several countries, the repercussions of the U.S. events on income were immediate, even though in many cases its measure was anecdotal.

Sheer fear cut back on tourism income as travelers cancelled bookings and airlines grounded flights in the wake of the deliberate crashing of three hijacked planes into the World Trade Center and the Pentagon.

In Egypt, reservations manager for Cairo's Ramses Hilton Hotel, Rasha Farouk, said 8,000 to 9,000 room nights had been cancelled in the week following the attacks.

"At least 80% have been cancelled. Some have been cancelled for months ahead," she said.

Angus Blair, managing director Safron Private Equity partners investing in the Middle East, said Israel, Jordan, Tunisia and Dubai would also suffer sharp declines in tourism income.

Slumping global stock markets and emergency interest rate cuts have slashed into investment income for those with overseas investments, economists said.

Kuwaiti analyst Jasem al-Saadoun said he expects absolute losses in the value of Kuwait's overseas assets to fall as much as 20% from their level in the Spring of 2000 to the end of 2002 in case of a further economic slowdown.

Kuwait does not publish figures for its overseas investment assets held by the government but they are widely estimated at over $80 billion.

Analysts use figures for Saudi foreign investment overseas, both private and official, of anywhere between $100 billion and $400 billion and the unofficial figure for the United Arab Emirates ranges around $300 billion.

Oil producers well positioned

But PIMCO's El-Erian and others said a fall in investment income or even a slump in demand for oil would find Arab exporters in a good position to endure losses.

"Relative to other countries in the world, most of the Arab oil exporters are relatively well equipped because 1998 was so fresh in their minds, their behavior after that has been very responsible in terms of policies and saving their windfall," said Fareed Modhamedi, of the Petroleum Finance Co, an oil industry consultancy in Washington.

"They have a much much bigger cushion to deal with this uncertain environment than they ever have had in the past," he said.

Mohamedi has drawn up estimates for how key OPEC members would fare if the benchmark West Texas Intermediate light sweet crude to fell to $23 or even $18 for a year from current levels.

U.S. light crude futures for November delivery were trading at $26.42 a barrel, off 31 cents, on Friday afternoon.

Under Mohamedi's calculations, an $18 per barrel WTI price would whittle Saudi Arabia's external assets to around $87 billion.

Traders expect world oil demand to suffer if the world tips into recession, so the hit on oil revenues could come from lower imported volumes rather than lower oil prices.

OPEC officials have said there is no need to raise supplies when they meet in Vienna next week but no one is predicting where oil prices will go from here.

OPEC Secretary-General Ali Rodriguez said on Friday that any large-scale U.S. military action could increase oil demand in the short-term, but said faltering consumer confidence would hit consumption in the end.