The Inflation Cycle of 2002 to 2015 - Uhlmann Price Securities

More documents

Recommendations

Info

Industrial Portfolio Strategy The Inflation Cycle of 2002 to 2015 ⎯ April 19, 2002 -72- Legg Mason Wood Walker, Inc. Saudi National Guard since 1963. Prince Abdullah is generally regarded as having a more fundamentalist approach to Islam than Fahd, and is reputed to be a strong-willed reformer and a pragmatist. Royal succession could cause political turmoil in Saudi Arabia. Though Prince Abdullah is reportedly healthy, at age 78, royal succession is still an open question vis-à-vis other members of the Sudairi Seven, their descendants, or other members of the royal family. We note that there is a strong relationship between Abdullah and Saudi Minister of Foreign Affairs Saud al-Faisal, the latter being the son of former Saudi King Faisal, and it is possible that Saud al-Faisal could emerge as the next Saudi Crown prince upon King Fahd’s passing, in our view. The lack of clarity with regard to succession is not a major deviation from the political history of Saudi Arabia. Although Saudi Arabia has established a number of consultative or democratic institutions, to include the Majlis al Shuria (Consultative Council) that was revived by King Fahd after the Gulf War, our view is that for the success of the al-Saud monarchy, the next Saudi King must be a reformer and have more national prosperity via higher oil prices. In our view, the power structure that has evolved in Saudi Arabia is a triumvirate, and its continued stability is of global interest to avoid major war and commodity and consumer inflation. In one corner of the Saudi triumvirate, there is the secular political authority of the al-Saud monarchy. The Saud family derives inspiration and occasional force from the Islamic religious authorities, who occupy the opposite corner, some of whom are the descendants of Abdul Wahhab, and are known as the al-Sheiks. Both parties derive earthly sustenance from the region’s economic interests - mainly related to oil in the modern era – which occupies the third corner. We believe that oil price deflation since the early 1980s has destabilized the economic interests of the region, since the history of the Saudi monarchy has been to use financial largesse to “buy off” discontent. We believe that this economic pressure has created a situation in which some of the long-simmering religious authorities have used the economic malaise to blame the political authorities for economic failure and its consequences, potentially in a bid for power and increased religious governance. The rapid urbanization and collapse of per capita GNP in Saudi Arabia, shown in Exhibit 56, has left the country with a rising cadre of disaffected young men, in our view. The situation is aggravated by a birth rate that is among the highest in the world, and a surge from 2000 to 2015 of potentially disenfranchised young Saudis relative to older, more established, and presumably less fiery Saudis, depicted in Exhibit 57. Unless the oil-based economy of Saudi Arabia receives a boost, and parlays that wealth into a successful diversification effort, we believe this youth explosion will collide with a dearth of private industry job opportunities, pushing the existing unemployment rate of approximately 25% even higher. In fact, youth explosion is a pan-Gulf problem. Among the Gulf states, ex-Iran and Iraq, non-citizens make up 37% of the population of 32.4 million, and residents under age 15 make up 40% of the population. In Saudi Arabia in particular, where the economy has failed to diversify beyond oil, in our view, this raises the prospect that more people will fall under the spell of the radical elements. With approximately 5,000 Saudi princes, the odds of at least several hundred “black sheep” are quite high, in our view. Those “bad apples” fuel resentment and may give the approximately 100 ruling princes a bad name, so we believe that current discussions regarding a culling of the royal roster may gain momentum, especially since high birth rates make royal expansion an increasingly serious problem. As a result, Saudi capital flight and corruption are serious issues, the result of some members of the royal family and high-level technocrats protecting their self-interest in a period of economic pressure. There
Industrial Portfolio Strategy The Inflation Cycle of 2002 to 2015 ⎯ April 19, 2002 -73- Legg Mason Wood Walker, Inc. is approximately $700 billion of private Saudi wealth abroad, as well as $266 billion from the United Arab Emirates, $163 billion from Kuwait, and $65 billion from the other members of the Gulf Cooperation Council. This wealth is in the hands of an estimated 200,000 individuals, equal to about $6 million per capita among the holders. It is noteworthy that an estimated $400 billion of this capital has been invested in Western stock markets, and has thus benefited from the very same disinflationdriven equity bull market of the 1982 to 2001 period that was the antithesis of the poor economic opportunity afforded the oil-based economies. Domestic uses for the capital are few, as we believe Saudi Arabia suffers from inadequate diversification beyond oil, and an embryonic work ethic that relies too heavily on foreign workers and meaningless government jobs. Oil still represents approximately 70% of state revenues and 40% of GDP, according to the EIA. Government positions account for 40% of all jobs, versus 25% in industry (mostly petrochemicals) and oil. In time, free markets and high rate-of-return domestic oilrelated projects could repatriate much of this wealth, Exhibit 56 – Saudi Arabian GNP Per Capita and Urbanization Saudi Arabian GNP Per Capita, Constant 1995 U.S.$ $12,000 $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 Exhibit 57 – Saudi Arabia Youth Wave, 1974 to 2040E 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Saudi Arabia GNP per Capita (Constant 1995 U.S.$) Source: The International Monetary Fund, World Economic Outlook Database 2001 Saudi Arabia: A Measure of the Passions of a Population? 1980 1990 2000 Ratio of Less Stable (age 20-34) to More Established (age 35-49) Source: U.S. Census Bureau, International Data Base, 2000 2010 A volatile combination The rise in young Saudis with few job opportunities relative to older, and presumably more stable Saudis, provides fodder for religious extremists in the 2002 to 2015 period, in our view. 2020 2030 90% 85% 80% 75% 70% 65% 60% 55% 50% Saudi Arabian Urban Population % of Total Saudi Arabia Urban Population as a % of The Total 2040
Page 1 and 2:
For a printed copy of this report,
Page 3 and 4:
Industrial Portfolio Strategy The I
Page 5 and 6:
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22: Industrial Portfolio Strategy The I
Page 71: Industrial Portfolio Strategy The I
Page 87: Industrial Portfolio Strategy The I
show all

The Inflation Cycle of 2002 to 2015 - Uhlmann Price Securities

Create successful ePaper yourself

Delete template?

Save as template?