09 March 2011
Find out why Goldman Sachs chairman Jim O'Neill is bullish about the turmoil in the Middle East.
Jim O'Neill, the man who coined the acronym BRIC, knows a thing or two about emerging markets and opportunities. And he likes what he sees in the Middle East. He is obviously looking beyond the tragedy of death and destruction and of the displacement of people across MENA.
"If I look at the whole region together, then just at Africa in general, MENA has the combined potential to be a BRIC-like economic group. In this spirit, and despite all the horrible things happening in some of these places, this revolution strikes me as being essentially rather bullish," O'Neill wrote in a note on February 27.
Here is what O'Neill says about...
...Egypt...
"On Egypt per se, I stick with the same broad judgments outlined in that piece. As an N11 economy, Egypt has the potential to grow dramatically in coming decades if their 80 million - and rising - population is allowed and encouraged to enjoy the same opportunities many of the rest of us face."
... Iran...
"...Iran is another N11 country, which likewise has significant potential. A different leadership there would be especially interesting as, below the surface, Iran has some attributes that would allow the country to advance much more easily than others. Its Growth Environment Score (GES) is notably higher than a number of N11 countries."
... Saudi Arabia...
"...Saudi Arabia is particularly important, not least as its key role as a major oil producer. It is also important as regional power within the GCC. Although Saudi Arabia doesn't have enough people to warrant inclusion in the N11 economies (as population is the sole criteria), it is currently the largest economy in the region and, has some potential to be regarded as a "Growth Market", i.e., being 1 pct of global GDP at some stage in the future. The policy response of the Saudi leadership last week to spread the benefits of the country's vast wealth is an important development in my view."
... On oil...
"...This brings me to the second issue: oil. Of course, this aspect of the MENA issues has the potential to be rather negative. There are some credible analysts that argue all major global recessions can be generally associated with periods of rapidly rising oil prices. Professor James Hamilton of the University of California is amongst the most well known, and also one of those that argue the 2008-2009 recession may have been, at least in part, due to sharp oil price increases.
"In my old life in the GS Economics Department, many years ago we used to have a very rough rule of thumb that a 10% increase in oil prices would, if sustained over a year, lead to a 0.5% slower rate of global GDP growth. We stopped believing this, however, many years ago, for the simple reason that the evidence started to change. Oil prices continued to rise a lot and GDP didn't slow. In fact, it had actually accelerated.
"I was often very suspicious about these models anyhow, having had the dubious pleasure of spending 1979-1982 researching OPEC and oil prices, for which I was surprisingly awarded a PhD. I learnt two things. First, I learnt that OPEC wasn't an effective cartel. In reality, Saudi Arabia was the only producer of the group that mattered. Second, it was my first encounter with "never be with a lazy consensus". I had a stack of articles from the late 1970's confidently predicting crude would race above $100 per barrel then. It took 38 years for that to happen. Instead, oil prices spent most of the period from 1983 to 2000 declining.
Confident oil price forecasting makes FX forecasting seem straight forward...
"In my view, the reasons why oil prices rise, and an understanding of the corresponding impact on the broader financial market is key to forecasting the potential damage."For much of the last decade's rise in oil prices, the reason why it didn't cause the trouble that simple econometric models might have suggested is probably because there was a shift in the global demand curve, as China especially but also India, and other new "Growth Markets" started to see their economies become much bigger. In many cases, their own demand was also less sensitive to rising global oil prices as they were subsidized.
"As far as the circumstances are concerned, it is probably the case that rising oil prices "appeared" to cause the damage they did in the 1970's - and possibly also in 2008 - is because they occurred at the same time as tightening financial conditions. This is why the GS Economics Department started analyzing the potential consequences in terms of oil price-adjusted financial conditions. It seems to me that this is still valid. If oil prices contribute to/coincide with rising inflation expectations and central banks are forced to tighten monetary policy, then indeed it may appear that they have contributed to a big economic slowdown. On the other hand, if central banks are more concerned about the depressing consequences to real incomes and postpone monetary tightening, then it is quite possible that any increase in oil prices will not have the negative consequences that many fear. This is also obviously dependent on the time period of any increases.
...On Libya...
"Events in Libya have gotten people worried about the loss of oil supplies certainly in that country, but also elsewhere. That's why prices spiked so much. As a result of this, and presumably as part of its desire to show its leadership role, Saudi Arabia announced a boost in oil production. So in effect, as there has been no disruption apparently yet in Libya, global oil supply was increased. I shall leave it to others to predict what may or may not happen next to oil prices, but as with many other periods of Middle Eastern turmoil I have studied and lived through, they may go up, but they may go down. Clearly, the stability of Saudi Arabia and its willingness to act as a swing supplier is likely to remain key."
... On ME impact on China...
"...Doesn't the MENA protest suggest that similar uprisings are likely in any country that is not a true democracy? Of course, China is the country that many are asking about in particular. The past 4 weeks have demonstrated that anything is possible (yet again), but I am not convinced by these simple arguments. The protests don't seem to be necessarily about the system of governance, although that is clearly a big element in some countries. It is about wanting a better life. As it relates to China, it is interesting to see that local markets seem to have taken all of these events in stride, which I suspect is partly because they and their leadership know, spreading China's immensely rising wealth to all is a policy priority anyhow."
Find out why Goldman Sachs chairman Jim O'Neill is bullish about the turmoil in the Middle East.
Jim O'Neill, the man who coined the acronym BRIC, knows a thing or two about emerging markets and opportunities. And he likes what he sees in the Middle East. He is obviously looking beyond the tragedy of death and destruction and of the displacement of people across MENA.
"If I look at the whole region together, then just at Africa in general, MENA has the combined potential to be a BRIC-like economic group. In this spirit, and despite all the horrible things happening in some of these places, this revolution strikes me as being essentially rather bullish," O'Neill wrote in a note on February 27.
Here is what O'Neill says about...
...Egypt...
"On Egypt per se, I stick with the same broad judgments outlined in that piece. As an N11 economy, Egypt has the potential to grow dramatically in coming decades if their 80 million - and rising - population is allowed and encouraged to enjoy the same opportunities many of the rest of us face."
... Iran...
"...Iran is another N11 country, which likewise has significant potential. A different leadership there would be especially interesting as, below the surface, Iran has some attributes that would allow the country to advance much more easily than others. Its Growth Environment Score (GES) is notably higher than a number of N11 countries."
... Saudi Arabia...
"...Saudi Arabia is particularly important, not least as its key role as a major oil producer. It is also important as regional power within the GCC. Although Saudi Arabia doesn't have enough people to warrant inclusion in the N11 economies (as population is the sole criteria), it is currently the largest economy in the region and, has some potential to be regarded as a "Growth Market", i.e., being 1 pct of global GDP at some stage in the future. The policy response of the Saudi leadership last week to spread the benefits of the country's vast wealth is an important development in my view."
... On oil...
"...This brings me to the second issue: oil. Of course, this aspect of the MENA issues has the potential to be rather negative. There are some credible analysts that argue all major global recessions can be generally associated with periods of rapidly rising oil prices. Professor James Hamilton of the University of California is amongst the most well known, and also one of those that argue the 2008-2009 recession may have been, at least in part, due to sharp oil price increases.
"In my old life in the GS Economics Department, many years ago we used to have a very rough rule of thumb that a 10% increase in oil prices would, if sustained over a year, lead to a 0.5% slower rate of global GDP growth. We stopped believing this, however, many years ago, for the simple reason that the evidence started to change. Oil prices continued to rise a lot and GDP didn't slow. In fact, it had actually accelerated.
"I was often very suspicious about these models anyhow, having had the dubious pleasure of spending 1979-1982 researching OPEC and oil prices, for which I was surprisingly awarded a PhD. I learnt two things. First, I learnt that OPEC wasn't an effective cartel. In reality, Saudi Arabia was the only producer of the group that mattered. Second, it was my first encounter with "never be with a lazy consensus". I had a stack of articles from the late 1970's confidently predicting crude would race above $100 per barrel then. It took 38 years for that to happen. Instead, oil prices spent most of the period from 1983 to 2000 declining.
Confident oil price forecasting makes FX forecasting seem straight forward...
"In my view, the reasons why oil prices rise, and an understanding of the corresponding impact on the broader financial market is key to forecasting the potential damage."For much of the last decade's rise in oil prices, the reason why it didn't cause the trouble that simple econometric models might have suggested is probably because there was a shift in the global demand curve, as China especially but also India, and other new "Growth Markets" started to see their economies become much bigger. In many cases, their own demand was also less sensitive to rising global oil prices as they were subsidized.
"As far as the circumstances are concerned, it is probably the case that rising oil prices "appeared" to cause the damage they did in the 1970's - and possibly also in 2008 - is because they occurred at the same time as tightening financial conditions. This is why the GS Economics Department started analyzing the potential consequences in terms of oil price-adjusted financial conditions. It seems to me that this is still valid. If oil prices contribute to/coincide with rising inflation expectations and central banks are forced to tighten monetary policy, then indeed it may appear that they have contributed to a big economic slowdown. On the other hand, if central banks are more concerned about the depressing consequences to real incomes and postpone monetary tightening, then it is quite possible that any increase in oil prices will not have the negative consequences that many fear. This is also obviously dependent on the time period of any increases.
...On Libya...
"Events in Libya have gotten people worried about the loss of oil supplies certainly in that country, but also elsewhere. That's why prices spiked so much. As a result of this, and presumably as part of its desire to show its leadership role, Saudi Arabia announced a boost in oil production. So in effect, as there has been no disruption apparently yet in Libya, global oil supply was increased. I shall leave it to others to predict what may or may not happen next to oil prices, but as with many other periods of Middle Eastern turmoil I have studied and lived through, they may go up, but they may go down. Clearly, the stability of Saudi Arabia and its willingness to act as a swing supplier is likely to remain key."
... On ME impact on China...
"...Doesn't the MENA protest suggest that similar uprisings are likely in any country that is not a true democracy? Of course, China is the country that many are asking about in particular. The past 4 weeks have demonstrated that anything is possible (yet again), but I am not convinced by these simple arguments. The protests don't seem to be necessarily about the system of governance, although that is clearly a big element in some countries. It is about wanting a better life. As it relates to China, it is interesting to see that local markets seem to have taken all of these events in stride, which I suspect is partly because they and their leadership know, spreading China's immensely rising wealth to all is a policy priority anyhow."
AlifArabia 2011
