Rainy Day Saving

The dramatic increase in world oil prices has resulted in a boom in Middle East and Central Asian oil-exporting countries’ receipts for oil and gas exports.
After topping an estimated $650 billion this year, the region’s oil exports look set to rise to near $750 billion in 2008. This represents an almost fourfold increase from the annual levels at the start of the decade. Between 2004 and 2008, the cumulative additional export revenue (relative to the 2001-02 level) from oil and gas for the region will amount to a staggering $1.9 trillion.

Oil Export Boom

As reported by Imf.org, with the public sector accounting for the bulk of oil production in most countries, the export boom has translated into a major boost for the public finances. Government revenue from oil and gas is now estimated at over $510 billion for 2007 and is expected to pick up to about $580 billion in 2008. The cumulative additional fiscal revenue from oil and gas during 2004-08 is projected to amount to $1.5 trillion for all the countries together.
High oil prices have also led to stronger economic growth in the region. During 2001-02, real GDP growth in the region’s fourteen oil exporters averaged 4 percent a year. Since then, real output expansion has exceeded 6 percent every year. The growth is raising living standards and creating jobs, both for citizens as well as migrant workers.

Prudent Response
The oil exporting countries have saved a substantial portion of the oil revenue. Initially, most of them reacted conservatively to the surge in oil prices, treating it as a temporary increase and saving most of the additional income. Some countries also paid down a substantial part of their public debt.
Only after prices climbed further and seemed likely to remain high did countries move ahead with major investment projects. Reflecting this general pattern, the average saving rate of oil export income--measured as the ratio of the region’s current account surplus to its oil and gas exports--rose to about 45 percent in 2005-06 compared with an average of about 25 percent during 2001-03.
Similarly, the average saving of fiscal oil revenue--the ratio of the overall fiscal balance to fiscal receipts from oil and gas--climbed from less than 15 percent to more than 45 percent.
Envisaged spending plans imply continued prudent management of oil revenue in the region as a whole. Most countries have begun implementing major investment projects. The Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) alone have investment spending plans that amount to more than $800 billion over the next five years.
The projects--in roughly equal proportions--are in the oil and gas sectors (funded largely by the national oil companies), infrastructure (mainly under public-private partnership arrangements), and real estate (financed primarily by the private sector).

Income Saving Rates
Thus, oil income saving rates will remain substantial, although they will ease significantly from rates seen in past years. For Middle Eastern and Central Asian oil exporters as a whole, the average saving rate is projected to decline to about 40 percent in 2007-08 for oil export income and above 40 percent for fiscal oil receipts.
The increased spending can be financed easily, even if oil prices were to decline significantly. Although oil earning projections would clearly be affected by movements in oil prices--a decline of $10 a barrel would reduce the region’s export receipts by an estimated $90 billion and its fiscal receipts by about $70 billion--the region’s external and fiscal positions would remain very comfortable, especially in comparison with the period before the surge in oil prices.
In other words, Middle Eastern and Central Asian oil-exporting countries, in aggregate terms, will be able to undertake their envisaged spending plans and still set aside substantial savings for the future.

Benefits All Around
Higher spending will be good for the countries themselves and for the rest of the world. Upgrading infrastructure and social services should boost growth potential, create jobs, and allow the non-oil sectors of the Middle Eastern and Central Asian economies to develop. In many of the countries, needs in these areas are pressing, and the oil boom provides resources to meet them.
Neighboring non-oil exporting countries are already benefiting from increased exports of goods and labor to the oil-exporting countries. With increased spending by the region’s oil exporters, the impact will spread further as their imports from the rest of the world expand.
This will be reflected in a sizable narrowing of the region’s oil exporters external current account surplus, which is projected to decline from over 20 percent of GDP in 2005-06 to over 17 percent in 2007-08.
Moreover, as the massive investments in oil and gas production and refining reach completion, the world’s supply of hydrocarbons will expand to meet growing demand and help alleviate the tightness in energy markets.

When the United Nations Population Fund published its “State of the World Population“ report earlier this year, it pointed out that the world would reach “an invisible but momentous milestone“ in 2008 when, for the first time in history, more than half the world’s population would be living in urban areas.
Now, in a recent study, the London-based International Institute for Environment and Development (IIED) has drawn attention to how good urban governance holds the key to successfully coping with the unprecedented pace of urban expansion in many developing countries.
According to Hindu.com, the world’s urban population had multiplied ten-fold during the 20th century and most of this growth had taken place in low- and middle-income nations, the study, which drew on the latest urban data from the UN’s Population Division as well as from several recent censuses, said. It would be the urban areas of these countries that would accommodate most of the world’s growth in population between now and 2020.
But, “most of these nations lack the institutional, legal, and financial systems needed to manage rapid urban change over the next 15 years in a way that addresses urban poverty and the risks associated with climate change,“ according to the study’s author David Satterthwaite, a senior fellow in the Institute’s human settlements group.
Propelled by economic growth in countries such as China and India, much of the rapid urban expansion is occurring in Asia which already has many of the world’s largest cities. Although three-fifths of all Asians still live in rural areas, the region is home to half the world’s urban population.
Asia has half of the world’s 100 fastest-growing large cities measured in terms of population growth rates between 1950 and 2000. China alone has 15 such cities and India eight. In addition, Africa has 25 cities in the same category and Latin America 21.
By contrast, Europe’s dominance had decreased dramatically. It had more than half of the world’s 100 largest cities in 1910 but had only ten such cities by 2000. It now has most of the world’s slowest-growing and declining cities, and its great centers of industry are no longer among the world’s largest cities, observed the IIED study.
The study held that economic growth was the most important factor underlying urbanization. Increasing urbanization was being driven by the growing concentration of new investment and employment opportunities in urban areas. “Within most nations, the main driver of urban change is best summarized as the geography of where private enterprises choose to concentrate or to avoid.“
“There is no automatic link between rapid urban growth and urban problems,“ according to the study. “Most of the costs associated with rapid urban growth are not caused by the growth itself but rather by the inability of national and local institutions to adapt to the new challenges that this growth presents.“
“Most cities may be centers of wealth and opportunity but they are also centers of extreme poverty and usually of very large and often growing inequality--in terms of income levels, housing conditions and access to services,“ the study found. “Around a billion urban dwellers--a sixth of the planet’s population--are homeless or live in crowded tenements, boarding houses or houses or shacks in informal/squatter settlements [often three or more to a room]. Many are denied the vote, even in democracies, because they lack the legal address required for voter registration. They are often exploited by landlords, politicians, police and criminals.“
Besides, there were often problems with corruption. Even where city governments are elected, it was common for local politicians to use patron-client relationships with their constituents, which undermined democracy and accountability, the study noted.
“Poor local governance is the key to understanding growing urban problems,“ said Satterthwaite in an email.
There was a long tradition in India and elsewhere of seeing ’the poor’ in negative terms, he went on to say. A rapidly-growing economy like that of Mumbai, Bangalore or Hyderabad attracted many migrants who are essential to these economies. But few city or State Governments had actually recognized this and changed their policies and investments on housing, land-use, infrastructure and services accordingly.
“What is critical is that city and state governments become far more effective at working with low-income groups, not against them. In many ways, the very poor conditions in which so many of the residents in Mumbai and Bangalore live is a scandal, given the economic success of these cities. This is not so much about money as about the attitudes of senior politicians and civil servants,“ Satterthwaite said.

China’s strengthening ties to Africa were ambitiously tightened on October 25. South Africa’s Standard Bank, the largest banking group in Africa by assets, announced that it was hooking up with the Industrial and Commercial Bank of China (ICBC) in a transaction worth a whopping 36.7 billion rand ($5.5 billion).
As reported by Economist.com, ICBC, the most valuable bank in the world, is worth some $319 billion. It will take a 20 percent stake in its Johannesburg-based counterpart. Half the shares will be bought from existing shareholders at a 30 percent premium over market price, and the rest will be new capital. But a takeover is not on the cards: ICBC’s investment is capped at 20 percent.
The deal is one of superlatives. This is the largest foreign investment by a Chinese bank anywhere in the world. And the deal trumps the 2005 takeover by Britain’s Barclay’s of Absa, another South African bank, to become the largest foreign-direct investment in South Africa.
Goldman Sachs was behind the matchmaking. The Chinese bank is keen to spread its wings abroad, especially in Africa; Standard Bank needs cash to feed its own expansion. The deal, which was negotiated in a speedy 45 days, still needs the nod from shareholders and regulators. But if all goes well, it should be done and dusted by February 2008.
The transaction is the latest example of China’s growing interest in the region. It also illustrates the expanding web of trade and investment that links together emerging markets and their growing weight in the world’s economy.
African countries had generally looked north to Europe for investment. But China’s links to Africa date back to the 1950s and 1960s. China’s communist rulers were keen to support Africa’s newly independent countries. Its insatiable appetite for commodities has revived China’s interest in the region. Now commercial considerations rather than ideological ones are the driving motivation for China, which wants the oil, metals, wood and cotton that Africa has in abundance, to feed its soaring economy.
Chinese government officials regularly waltz across Africa in an effort to encourage and support Chinese companies that want to do business in the region. Beijing hosted a summit with African heads of state last year, and the African Development Bank’s annual meeting took place in Shanghai this year.
Although Europe and America remain Africa’s largest trading partners, China’s share is growing fast. African exports to China have expanded by over 40 percent a year since 2001, and imports from China quadrupled over the same period. Total trade reached $50 billion last year and is expected to double by 2010.
China has become an attractive source of cash for Africa. It comes with fewer strings attached than money from the West. Multi-billion dollar lines of credit or investments have been arranged in places like Congo and Angola, now the largest single supplier of oil to China. Africa’s private sector may now join the party as well: more transactions like the on between Standard Bank and ICBC could be on the way.
Other South African companies, such as Anglo American, a mining conglomerate, and SABMiller, a giant brewer, moved their listings to the London Stock Exchange to finance foreign expansion. But this is not something that interests Standard Bank. “We want to do it from South Africa,“ says Jacko Maree, the bank’s chief executive.
The growing trade and financial links between China and Africa is what Standard Bank and ICBC want to tap into. No doubt many of ICBC’s 2.5 million corporate clients, which include some large state-owned companies, are keen to do more business in Africa. ICBC will get access to Standard Bank’s extensive banking network in 18 countries across the continent--not to mention its expertise in commodities.
The South African bank, which has a small presence in China, now expects to operate in the Chinese market more easily. Both banks are keen to join forces to expand their presence in other emerging markets as well. They are also planning to create a common $500 million fund to invest in oil and mining.
Chinese interest in Africa is unlikely to cool at any time soon. The latest deal is a landmark and could provide a template for many more to come.