In emerging markets, bankers and investors from developed centres face a choice. Go to countries that need you but whose payment capacity might be flawed or join the throng to the nouveau riche markets, where the payment capacity is apparently greater but the competition is more intense and there is less need for foreign money.
Market-friendly oil-and-gas-exporting nations are affiliated to the second camp. In today’s era of intense resource scarcity, the west salivates over the places that are taking its cash. It is partly an effort to get the cash back. But it can be relatively hard to find good lending opportunities in oil-and gas-rich nations. In other developing countries and regions, the overall wealth is perhaps smaller but the non-oil sector might be bigger. Oil wealth can mitigate the pressure to privatize and open up the economy. The oil industry itself is concentrated within inaccessible state-linked entities, and for good strategic reasons. Western investment desperately seeks access. However, it often ends up merely funding an adjacent property bubble, or something equally speculative and detached from the real sources of wealth (for example, private banks or the stock market).
Dubai has seen a classic oil-linked bubble. The emirate became a commercial capital while the oil price was high because it is surrounded by economies that are more closed and more oil-rich. It shows that bankers and investors who follow the hydrocarbon gold rush might be doomed to a disastrous end.
As we are learning now, the presence of oil wealth can be a disadvantage for foreign bankers, even after the hydrocarbon bubble has burst, and when banks and private companies (especially in construction) need to restructure their debt.
Investors focus too much on oil-rich governments’ greater capacity for bailouts. But oil wealth reaches a critical mass after which it is a disincentive to providing overly generous bailouts. Governments that possess sufficient oil wealth can rest assured. There is no point in spending it all on a bailout.
For oil-rich countries it is less problematic than for other emerging economies if international investment never returns. There is a need to avoid completely alienating international investment and expertise. But what is the point in being penitent towards western capitalists when western capitalists’ greed for petrodollars will bring them back anyway?
This kind of reasoning has been seen in Kazakhstan, in that country’s aggressive bank debt restructuring, and in Saudi Arabia, where international creditors are feeling decidedly marginalized in the debt restructurings of two family groups. It has also been seen in the UAE, where Abu Dhabi, the political capital, has enough cash and oil not to be much damaged if Dubai messes up its debt payments. The UAE will still be a beacon.
A final example of the dangers caused by oil-induced arrogance is the plight of expatriate bankers in the Middle East who have lost favour with their host countries’ establishments, and have had their right to leave taken away. Their salaries were high. But western governments have less courage to demand that oil-rich countries follow western-style legal procedures when things go wrong for western citizens – or indeed for western banks and corporations.
Until the perils of petrodollars are appreciated, emerging markets that are poorer in oil but richer in people will still be tragically ignored, and the future of Dubai and its pointless imitators might be assured. Bankers and investors who want to save their skins should stop being blinded by their love of oil.