Is Dubai set to be a new Global Financial Center, in the same league as New York, London and Hong Kong? This question seems timely, given the current chain of events.
With the recent run up in oil prices, Middle Eastern countries that produce oil have been minting money like crazy. Not just Middle Eastern (read: OPEC) countries, but any country that is able to produce and export oil has suddenly found itself once again the darling of the global economy.
The world just can’t have enough of what they are producing. And given that these countries are all finding that demand is much, much stronger than what they can all supply, the price of their oil has been shooting through the roof.
This is not exactly how it was in the 1970’s, the last time the world saw a significant price hike in oil. Back then, only the developed world had an insatiable appetite for oil. Whatever price hikes there were came largely from the collective decision by the OPEC countries to restrict and control supply.
This time, nobody’s restricting supply. In fact, too little supply isn’t the world’s pressing problem as much as there is too much demand.
Too much demand. More countries now demand oil. Developed countries are demanding oil more than ever. Newly-developed and developing countries are demanding more of it. There’s even significant demand coming from pure speculators – hedge fund managers who are betting that supply will not be able to meet demand. In the process, their bets are adding more artificial demand for oil.
So Middle East countries supplying oil are now awash with cash. Dubai is the financial hub of the Middle East, much like New York is the financial hub of North America, London of Europe, and Hong Kong of Asia. So far, Dubai has been merely a regional center. But now, much money is currently flowing to the Middle East, and much of it is flowing through Dubai. Dubai therefore now needs to learn quickly how to funnel these new streams of cash flows into high-earning assets and investments.
During the 1970’s oil price hikes, much of the Middle East’s newfound wealth was reinvested in US Treasuries, thereby indirectly funding the US trade deficit much like how China is funding the current US trade deficit. Simple enough. Just funnel excess cash back into your biggest customers, and you get to prop up their economies and currencies, thereby keeping them coming back for more of your goods.
But there is big difference between what is happening now and how it was in the 1970’s.
Back then, the US dollar was considered the most stable currency in the world. Therefore, it was the world’s default currency for global trade. Now, the USD is still the world’s global default currency, but the USD is fast falling from its prominence as the most stable currency.
The US budget and trade deficit s are now higher than they ever were at any time in its history. It has arguably reached levels where they are no longer sustainable, even with trading partners willing to prop it up by re-investing surplus earnings into USD-denominated Bonds and Treasuries.
Right now, putting government surpluses into USD-denominated securities is turning out to be a sure-fire wealth-destroying strategy. With the US trade deficit getting higher, the US dollar has been declining in value vis-à-vis many other world currencies. And with the decline in value of the USD, Americans are now shelling out more currency to buy imported goods that the need, among them oil. So the more Americans continue to buy ever-appreciating oil, the more money will flow out of the US economy, the more likely there will be trade deficits for the US economy, and the more likely the USD will depreciate again.
Unless the US economy finds a way out of this bind, funnelling government budget surpluses into US securities is no longer going to be the same no-brainer sovereign portfolio management strategy that it used to be. OPEC countries now would have to look for other alternatives to just putting their money into the US market.
Where should they put their money then? A good start would be in places where the currency is stable, or better yet, increasing in value. Right now, that could mean the same oil-generating countries that have been incurring significant trade surpluses.
There could just be more growth opportunities in the Middle Eastern region now than there is in the USA. There's more work to be done for Middle Eastern infrastructure standards to catch up with that of the US. Hence, there are potentially more value-generating investments to be made in their own region than in the US.
It is also the more patriotic thing for them to do. The Middle East also needs to learn from its past omissions. Because they did not invest their 1970’s petrodollars into their own domestic development, they were soon left behind once the price of oil was no longer the super-charged revenue-generator that it was. So this time, the Middle East needs to be more aware of these things. Oil is not going to last forever.
What is a regional financial center to do? Well, it could start by learning to employ the same strategies successfully utilized by the global financial centers - New York, London, Hong Kong.
And you know what? This projected extended downturn in the US financial markets is putting a lot of American financial professionals out of work. Right now, it’s not looking like they are going to get their old jobs back anytime soon. In New York, at least.
So what is newly-laid off New York finance guy to do?
Well, just look around and it's clear that there's a perfect match of need to available skills. Dubai needs to learn to become a global financial center. So Dubai investment houses and banks can literally take their pick of much low-hanging fruit. Many of these professionals can transfer much technology and know-how to the Middle East. All these countries need do is to open up and welcome this golden opportunity.
The Middle East is poised to benefit from the golden combination of available capital, talent, and ample opportunities, to catch up with the standards of the West. Dubai is strategically positioned to be the new center or much of this activity, if and when it does happen.
Is Dubai set to be a new Global Financial Center?