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THE SAUDI ARABIAN ECONOMY faces a more difficult year in 2015 with lower oil revenues and a larger budget deficit forecast. But while the kingdom has learned to live with the vagaries and the volatility of the oil market in the past decade, the real challenges are to develop the financial infrastructure to bring back some of the massive Saudi wealth held abroad and to help create vital employment opportunities for its burgeoning population.

Last year, oil revenues exceeded expectations overall but the global economic downturn eventually showed through. Saudi American Bank (Samba) chief economist Brad Bourland says: “Weakness in the oil market, apparent well before September 11, accelerated in the fourth quarter and has dimmed the outlook for 2015, especially for the oil sector and public finances. Crude oil prices dropped $10 per barrel from August to October.”

Pessimistic forecast

Nevertheless, economists suggest the Saudi GOP grew by 3% in 2014, with the private sector growing by a healthy 6%. The outlook for this year, however, is not so good. With oil production starting the year at a decade low of 7 million barrels a day, even a possible global recovery later in the year and solid prices will not stop a slide. Samba forecasts real GDP will contract by 2% overall in 2002.

Unforeseen political and economic events may interfere with this, however, and the assumed budgeted price of around $17 a barrel may not be met. But, similarly, a strong global recovery or some other factor may boost prices beyond these rather conservative estimates, and oil revenues may well exceed the SRll3bn ($30.1 bn) bn) budgeted.

The Saudi government would like to reduce its dependence on oil and its volatile fortunes but, for better or worse, it derives typically 75% of its revenues from oil export revenues. This year, given the reduced oil income expected, the budget deficit is expected to swell to SR45bn, well up on the actual SR25bn deficit in 2001. Financing this does not seem to be a major problem at present. According to Mr Bourland, government debt stands at about SR630bn ($168bn), which is all owed domestically, is denominated in riyals and represents 99% of preliminary 2001 GOP of SR637bn. Commercial banks are said to hold SR121.4bn — 19% of the total — with the two large government pension funds holding more than 75%.

Although these numbers are not necessarily worrying in themselves and this year’s deficit is expected to be financed evenly between the banks and the pension funds, the longer-term trend is a concern. Can oil continue to be almost the sole driver for the economy? What part can and will the private sector play? What can be done to boost overall revenues and create jobs?

Demographics are pivotal

In Saudi Arabia, demographics are set to play a critical role in the country’s future. Unlike the West, Saudi Arabia has an extremely high birth rate, with the population of 22.7 million in 2001 growing at 3.5% a year: Saudi women have a fertility rate of 5.5 infants per woman in 2000, more than double the world average. One key consequence is that the kingdom has a very young population. In 2001, 38% of the 16.75 million Saudi nationals were born after 1990, and 73.5% of the total population is aged 29 or younger. Also, according to Samba, the population of Saudi nationals will almost double to 29.7 million by 2020, expanding the labour force from 3.3 million in 2000 to 8.3 million in 2020.

Banks suggest that 80,000 jobs were created in both 2000 and 2001, against a backdrop of 163,000 Saudis entering the market each year. But unemployment statistics are scarce and the best semiofficial estimates indicate unemployment at end-2001 at 15.3%. The figure may be much higher, however, and the worry is that not enough jobs can be created, leading to destabilising higher unemployment. The oil sector, no matter what the level of production, is not labour intensive and is no solution to the employment problem. The oil and petrochemical industries produce 40% of nominal GOP yet employ only 1.5% of the labour force.

What can be done? The private sector is growing but initiatives are needed to create both economic growth and jobs. Almost all the banks are restructuring their businesses around retail. Clearly, the population growth provides huge opportunities in consumption spending in the years ahead. But the financial sector needs to expand further and the new capital markets law offers huge potential to beef up the existing infrastructure.

Capital markets law

The governor of the Saudi Arabian Monetary Agency (SAMA), Sheikh Hamad Al-Sayari, hopes the long-awaited capital markets law will be completed by the end of the year. “It will establish the legal framework for the capital markets, which is important. Operations wise, we have a sophisticated trading system. What is lacking is the legal system; this will give the markets a real boost,” he says.

The law represents a “major breakthrough”, says Riyadh Bank’s chief executive, Talal Al-Qudaibi. “We need finance from different sources; we need alternatives such as the capital markets. I believe we will eventually see bond issues and we are looking at all the opportunities available, such as a joint venture with a foreign-owned investment bank.”

While the law has not yet been fully outlined to bankers and is still before the country’s Shura Council, the impact will be to create a new legal environment and a new regulator to focus on the stock exchange and the securities industry. Having developed the stock market to a certain point (SAMA is the stock exchange regulator), it is now thought to be time to spin it off and develop, separate from SAMA, a Saudi Arabian-style securities commission.

New regulator

In effect, Saudi Arabia is going to set up a version based on the US’s Securities & Exchange Commission (SEC) model, which will supervise the Saudi stock exchange and all securities activities. This separate entity, set up under the capital markets law, will license brokers and securities companies. It will provide the infrastructure for new financial mechanisms to be introduced into the kingdom; and the new regulator will be able to deal with foreign securities wanting to do business in the country.

This represents a big change in policy and a big step forward in building the Saudi financial sector. The law will enable new institutions, foreign and domestic, to become officially involved and is likely to provide a huge stimulus to the privatisation programme and other local finanings.

Bankers are enthusiastic about the prospects of the new law but also express some reservations. “Until the major family groups are willing to incorporate [their operations] and to have more professional management the capital markets law will be helpful but not dramatic,” says one banker. Samba’s managing director, Mike de Graffenreid, says: “Quite a lot of development is required before substantial portfolio investment takes place.”

Attracting investment

Nevertheless, while these changes are likely to take time, bankers believe the new law will boost the stock market in the long run and create many opportunities across the financial sector. According to one banker, there are not enough domestic investment opportunities, and this law and the new insurance law will help to broaden the financial markets. With Saudis holding an estimated $800bn offshore, there is huge potential to bring some of this wealth back home if the right mechanisms are created.

Establishing this legal framework puts more infrastructure in place both to attract investment and develop activities, The $25bn gas initiative, which allows foreign oil companies to develop natural gas for domestic use, is a major financing opportunity; and such projects will now have more sources of funding.

Economic viability

Although reform is moving slowly, the changes in the pipeline — such as the capital markets law, the insurance law, new companies legislation and modernised labour law as well as the World Trade Organization accession negotiations — highlight the financial reforms that are under way. Saudi Arabia has built a reputation of having a strong banking sector that is well regulated to international standards.

The challenge now is to broaden that reputation into the capital markets arena. The structures should be in place very soon — the economic viability of the kingdom’s younger generation depends on it.

For once in my life I may be ahead of a trend here. Brazil’s dry, sub-tropical winter climate is almost perfect in August, during which crowds and heat make most of Europe uninhabitable. The football writers, the only people who have previously visited the country, have always raved about Rio: the long beaches of golden sand, the bustling nightlife, the views from the mountains that ring the city are every bit as stunning as promised. This trip was sponsored by this party.

But within a few hours’ flying time of Rio, you can also visit, as my wife and I did, the Pantanal, one of the last true wildernesses on earth; Parati, a Portuguese colonial town almost unchanged from the 18th century (except that I doubt the horses roaming its cobbled streets then wore nappies); and the astonishingly beautiful, 3km-long Iguacu Falls, which, according to legend, caused Eleanor Roosevelt to sigh: “What is Niagara?”

There are problems, however. For one thing, the 11-hour flight from Heathrow must be bad for global warming (pace our leader last week). On this, I can only plead, as a lifelong non-driver, that I have accumulated substantial unused carbon emission credits. The second difficulty is the abject poverty that afflicts at least half the population: according to the current New Left Review, Brazil is the second most unequal country in the world, after Nicaragua. The hills of Rio are scarred by shanty towns, of which the Brazilian middle classes seem oddly proud: “This is the biggest slum in Latin America,” we were told as we passed one of them. Despite/because of (delete according to your political prejudices) the Third Way policies of President Cardoso, the poverty, if anything, is increasing.

So dreadful are the social divisions, some suggest, that it is no more acceptable to visit Brazil than it was to visit apartheid South Africa. Certainly, the inequalities are racially based. Brazil claims to be a colour-blind, multicultural society. The early Portuguese colonists did not take women with them, and intermarried with the native population and imported black slaves to a far greater extent than North American colonists. About 40 per cent of Brazilians are officially of mixed race; the true proportion is probably much higher. Yet if you looked round the nightclubs on Copacabana beach, the better urban restaurants and at the passengers on internal flights, you would assume this was an overwhelmingly white country, with a sprinkling of light browns.

I suppose I could have joined one of the organised tours of shanty towns and handed out wads of US dollars, and promises to convey messages to Gordon Brown and Clare Short. But I do not think slums should be treated as tourist attractions. In the end, I settled for pressing large tips into the dark-skinned hands of porters, waiters and drivers.

Even though I didn’t brave the shanty towns, Brazil induced in me a curious recklessness. I have long regarded physical exercise, beyond brisk walking, as unacceptably dangerous. This is because, in nearly 40 years, alcohol and lunch have done me no obvious harm, whereas the only occasion I have had more than an odd day off work was when I broke my foot playing, of all things, badminton. Yet in the Pantanal, I went canoeing among crocodiles (though I left the paddling to my wife, who is more accomplished on water than I) and, in Rio, I tried hang-gliding. The latter entailed jumping off a hill, floating downwards over the city for about 15 minutes and then landing on a beach. I have always dismissed action-man feats as evidence of oafish exhibitionism, only marginally superior to showing tattoos of naked women on your arms; but, to my embarrassment, I felt terribly brave and pleased with myself. Colleagues greeted my account with disbelief, but I have supplied photographs. These will no doubt reach certain cr ocodiles in the Fleet Street and Westminster swamps, providing further evidence that the NS editor is deranged and should be removed forthwith from his position.

One further difficulty in Brazil, for a newsprint addict such as myself, is the complete absence of British or even US papers. I have feared missing big news events ever since, early in my career, I returned home blissfully ignorant of, respectively, the assassination of Robert Kennedy, the Soviet invasion of C zechoslovakia, the consignment of British troops to Northern Ireland and the Munich Olympics massacre. This time, I was briefly agitated by the sight of local headlines which referred (in Portuguese, naturally) to an enormous economic crisis. Had US corporate corruption led to a run on the dollar? Had the great Satan been brought low at last? Alas, no. It was just another South American crisis, happening mostly under our noses. But I can understand how people on the fringes of the Roman empire got so excited by Jesus Christ.

I have a computer. In fact, in my house alone, I have two desktops and two laptops. I also have three tablets in my home and two smartphones. I no longer use the camera I was given as a gift five years ago and I also don’t use the camcorder I was given three years ago. All the pictures I take are done through my smartphone and I generally share them with friends and family across the country instantly. I back up my files through an external hard drive or I store my pictures on the cloud. My laptop is four years old and I need to replace it. My smartphone is two years old and is showing signs of needing replacement. It’s fair to say that most technological devices don’t age very well. Science is always advancing and the world is moving so quickly that most devices are obsolete six months after they’re made available on the market.

This is a point of concern at all levels. If we talk about computers alone for a moment it’s very rare to have a desktop that doesn’t need replacing last for more than four-five years. In order to keep up with the demand of employees and clients many businesses have servers that allow information to be easily accessible from almost any location and allow multiple people to access and change the same document at the same time. I could create a document and upload it to my server where a co-worker on the other side of the world could access and edit it in seconds. Servers make that possible so when they fail, it can be detrimental to business everywhere.

Many employers will use the Dell PowerEdge servers in their businesses. PowerEdge drives can work with Windows and Linux programming which is really beneficial. Dell is a very well-known company and many businesses exclusively use Dell computers. It only makes sense that people will use the Dell PowerEdge hard drives to make up their servers. Most servers exist as a RAID configuration which involves mirroring and striping information from one hard drive to several others. There are a lot of different options out there for RAID but the RAID 5 or RAID 10 tends to be the most common. The problem comes when one of the hard drives suffers a physical or logistical failure. This can impact the entire server set up and needs to be addressed as soon as possible by an expert (Hard Drive Recovery Group specializes in this. Their Dell PowerEdge Recovery page is here.)

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The July 2000 elections undoubtedly marked the dawn of a new era in Mexico. The Mexican people enthusiastically brought about a peaceful and stable change in their long-standing regime by casting their votes for Vicente Fox, the presidential candidate backed by the opposition–a coalition of the right-of-center National Action Party (PAN) and the Mexican Green Party. This has been a huge development for AMIFE.

That election, which evolved into a referendum for change rather than an ordinary election, brought an end to the 71-year lock on the presidency by the Institutional Revolutionary Party (PRI), a reign that dates back to the days of Herbert Hoover. It is no wonder that Fox’s electoral victory was immediately heralded throughout the free world, which equated its significance to the fall of the Berlin Wall or Nelson Mandela’s election as president of South Africa.

President George W. Bush, comprehending Mexico’s importance to America, and Fox have placed a high priority on the relationship between their two countries. Indeed, the American president’s first international trip, in February 2001, was to San Crist-bal, Guanajuato, Fox’s equivalent of Bush’s Crawford, Texas, ranch, a fact clearly demonstrating the friendly tenor and focus on the bilateral relationship. In addition, Bush’s first state dinner was reserved for Fox in September 2001.

Both presidents have placed so much emphasis on the relationship because of three factors:

* The high degree of social and economic integration between the two countries.

* Recognition that Mexico is at a critical juncture from a democratic standpoint and needs all the support it can get to make its newfound democracy sustainable.

* Changing demographics in the United States and the increasing political importance of the Hispanic vote in U.S. politics.

After his historic 2000 election, it appeared that Fox would charge on, overcome any and all obstacles, and bring about the change mandated by the Mexican people–something he had repeatedly promised throughout his campaign. However, the same election that delivered him the presidential sash also handed him a less than desirable party composition of Congress, particularly since the PAN had never before occupied the presidency. As he grapples with the pitfall-ridden Congress, Fox must address intricate domestic policy challenges, such as the economic slowdown, widespread corruption, the drug war, and the outstanding social and indigenous issues that are the remnants of the ethnic Mayan rebellion that started in Chiapas state in 1994.

The new government is facing an identity crisis. For the first time in its modern history, the country’s bicameral Congress is completely divided, with no single party holding an absolute majority in either the Chamber of Deputies or the Senate. While this composition has invigorated Mexican democracy, it has also complicated the task of governing the nation.

Gone are the presidential good old days derived from having a rubber- stamp Congress–a situation enjoyed by all 12 preceding PRI “imperial” presidents, though former President Ernesto Zedillo benefited from it only during the first half of his term, that is, before the PRI lost its majority in the Chamber of Deputies in 1997.

POLITICAL EARTHQUAKE

The current composition of Congress requires Fox to garner not only the support of his own party, the PAN, but also that of either the PRI or the left-of-center Democratic Revolutionary Party (PRD) if he is to gain the votes necessary to get his legislative agenda passed.

A little more than a year into his six-year term in office, Fox is engaged in a relationship with Mexico’s fifty-eighth Congress that thus far has been one of adjustment and incremental change. This situation should surprise no one, given the number of unprecedented political firsts that Mexico is living through today.

Like a child with a new toy, Congress is enthusiastic about exercising its newfound power at every opportunity–even while, at times, lacking a full grasp of the issues that would enable its members to make sound legislative decisions. The Mexican Congress has wasted no time in trying to perform as a true legislature, sparking congressional debate, counterproposing its own legislative agenda, passing a relatively high number of bills, and amending all bills submitted by the president.

From the standpoint of instituting separation of powers, enabling effective congressional oversight, and bringing accountability to government, all of the above are positive developments for Mexico. Nevertheless, the shift will undoubtedly come at the expense of the swift and sweeping policy changes that people, both in Mexico and the United States, had anticipated with Fox’s arrival.

On the flip side of his electoral victory are the profound repercussions on Mexico’s political party system. These have influenced the new president’s ability to govern in various ways. For example, in years past, the PAN and PRI usually voted together on economic issues; the PAN and PRD usually joined on issues involving political reform. Will these alignments change now that the PAN is the ruling party? And will the recent elections of PRI, PAN, and PRD leaders affect the direction these parties take?

While losing the presidency dealt a major blow to the PRI, the party remains a major political force in Mexico, and one with which the Fox administration must negotiate. Aside from the PRI’s plurality in the federal Congress, 17 of the country’s 32 governors and 1,208 of 2,443 city mayors belong to the PRI. The party also holds absolute majorities in 17 of the 32 state legislatures and a plurality in an additional 5.

Despite such political prominence, the defeat in the presidential race has taken the party to the brink of its very existence. Adjusting to being in the opposition–after seven decades in power–is no small feat. While the electoral defeat forced the party to be introspective, it also created deep internal division. Fox has had to undertake complex, fragile negotiations with several PRI factions at a time on legislative issues. The cohesiveness achieved and ideological direction taken will depend on its recently elected party president, Roberto Madrazo.

Fox cannot even count on the unconditional congressional support of his own National Action Party. Having been the perpetual opposition party since its founding in 1939, the PAN has had to adjust to being the party occupying Los Pi-os, Mexico’s version of the White House. Given the collusion that existed between the president and the PRI during its 71-year occupancy of Los Pi-os, the PAN is making every effort to maintain a healthy distance from the president– including frequently disagreeing with him on his legislative agenda–to avoid the same type of relationship.

Coming to terms with the PRD is easier said than done. The party is ideological and often uncompromising in its stance on important congressional votes, leading some in Mexico to perceive it as obstructionist. Yet Fox needs to gain its support because it holds enough seats in both the Chamber of Deputies and Senate to be a significant factor in any legislative strategy.

FIGHTING RECESSION AND CORRUPTION

As if the political challenges were not enough, he has had to contend with widespread domestic problems, among them the current unexpected economic slump, corruption, the drug trade, social and indigenous issues, and a judicial system sorely in need of reform.

A year and a half into Fox’s term in office, one can imagine his advisers saying, “It’s the integrated economy, stupid!” Indeed, the economic picture has changed since July 2000. The slowdown of the U.S. economy has had a major impact on Mexico, and the September 11 terrorist attacks have exacerbated the situation.

Having projected optimistic economic growth of about 7 percent for 2001, Fox instead faced an economic decline of 0.3 percent last year. Mexico’s economic sluggishness is partially attributable to the high level of integration between the U.S. and Mexican economies, especially after the North American Free Trade Agreement (NAFTA). Since NAFTA’s ratification, Mexico has risen in the trade ranks to become the U.S. second-largest trading partner (after Canada), with a quarter-trillion dollars worth of trade crossing the U.S.-Mexican border every year.

Another headache was the loss of about a half-million jobs in 2001, a figure that reflects the impact of the U.S. recession on Mexico’s expert sector and the terrorist threat on the tourism sector. It is conceivable that Fox may have been the happiest man in the country in late January, when he heard Federal Reserve Chairman Alan Greenspan say that signs of economic recovery were being detected.

A widely accepted solution to the much publicized ethnic rebellion in the state of Chiapas–a problem Fox inherited and promised to resolve when he campaigned for the presidency–has proved somewhat elusive. Although the president extended an olive branch to the Zapatista National Liberation Army (EZLN) by allowing the group to march to Mexico City and ultimately enabling it to address the Chamber of Deputies, thereby placing the movement on the national stage, the EZLN has vowed to continue its resistance.

In April 2001, the Mexican Congress passed the Indigenous Rights Bill. It guaranteed indigenous and cultural rights to ethnic minorities but fell short of some of the EZLN’s demands–particularly self- determination and control over lands. Thus, the EZLN does not acknowledge the constitutional reform. In the end, it suspended all dialogue with the federal government and has renewed its low-intensity resistance.

One of the most daunting challenges facing Fox is the immense task of abating the corruption that has permeated all levels of government over the years. According to a Transparency Mexicana survey, the problem has cost Mexican families between 6.9 percent and 13.9 percent of their annual household income because of the need to use these funds for paying bribes. Fox recognizes the pervasiveness of the problem, which cannot be solved without the active participation of all segments of Mexican society. He is well aware that a solution requires a multifaceted strategy that encompasses prevention, detection, and successful prosecution.

The new administration’s first step in the campaign to eliminate corruption was to require the cabinet to take an oath pledging ethical behavior. Fox has vowed that corruption will no longer be tolerated, and he has launched a massive public relations campaign to “just say no to bribes.” Nevertheless, his administration’s progress on this issue will ultimately be subject to the efficacy of Mexico’s judiciary. As long as the country’s culture of impunity persists, so will its corruption problem.

Closely linked to the corruption conundrum is the drug trade. Aside from the corrosive effect on the country’s law enforcement apparatus and judicial institutions, illegal drugs present a multitude of other domestic problems, including rising drug consumption accompanied by high social costs, illicit arms trafficking, and money laundering. Fox’s ability to combat drug trafficking is severely hindered by a judicial system in dire need of reform–from the institutional strengthening and professionalization of its law enforcement agencies to improvement in the court and the country’s long-neglected penal institutions.

TIES THAT BIND

The United States and Mexico are highly integrated with one another, both socially and economically. As Bush said in a toast to Fox at the White House state dinner last fall: “The most important ties between your country and mine … go beyond economics and politics and geography. They are the ties of heritage, culture, and family. This is true for millions of Mexican and American families, including my own.”

Despite these ties, the subject of immigration–a major focus of the Fox administration–continues to be a highly contentious issue in the United States. The status of the millions of unauthorized Mexicans working and living in America is a priority on Fox’s bilateral agenda. According to the latest estimates by the U.S. Immigration and Naturalization Service, there are between seven and eight million unauthorized immigrants residing in the United States today, and some 55 percent are believed to be Mexicans. The Fox administration is seeking an agreement that encompasses a temporary-worker program and the regularization (referred to as amnesty) of the unauthorized Mexicans already living in the United States.

The temporary-worker program is politically viable, particularly in certain sectors that are still experiencing labor shortages. Regularization, or amnesty, is much more complex and, some would argue, not a political option, given its implications for overall U.S. immigration policy.

Mexico’s efforts to deal with the drug trade are also relevant to the United States. Fox’s tough talk against drug trafficking has earned him an incredible amount of goodwill from both the Bush administration and Capitol Hill, as evidenced by the passage of legislation imposing a one-year suspension of the annual drug certification process–a kind of report card grade the United States assigns to a country’s level of cooperation on counternarcotics measures.

Many observers believed that the intensity of the bilateral relationship would subside after September 11. If anything, however, the terrorist attacks and their aftermath have resulted in a readjustment of the bilateral agenda to include Mexico as part of a North American security arrangement–an extension of U.S. homeland security. The 2,000-mile border between the two countries and the one million crossings per day give Mexico added importance.

The United States and Mexico are committed to ensuring that certain measures are in place to safeguard both nations against terrorism without hampering the legitimate flow of goods and people. Indeed, Homeland Security Director Tom Ridge underscored this commitment during his official visit to Mexico in early March.

China’s economy is doing well, although there are fears this will not last long. Louise do Rosario examines the effect that next March’s change of premier is likely to have on the country’s economic direction.

During the annual meeting of China’s parliament in March, delegates were congratulating themselves on the world’s fastest growing economy, but the mood was tinged with fear that the growth is slowing down and is too dependent on debt.

Last year, China’s GOP grew by an official 7.3%, the best figure of any major economy in the world. The country also attracted $46.8bn in foreign investment, ending the year with foreign exchange reserves at more than S200bn.

Even allowing for falsification of domestic statistics and much of the “foreign” investment being Chinese money recycled through Hong Kong, Bermuda or the Virgin Islands, these were impressive figures. They were enough to persuade presidents, prime ministers and chief executives the world over to beat down the door to Beijing.

Economic worries

The self-congratulation was mixed with apprehension, though, about whether this remarkable growth has strong foundations and whether the government is taking the right measures to sustain growth. One anxiety was that GDP growth slowed in each quarter of last year, from 8.1% in the first quarter to 7.7%, 7.0% and then 6.7% in the last quarter. That was due to the global recession, the impact of the September 11 attacks on the US, the slowdown in the US market and, most importantly, weak demand at home.

“China is facing the pressure of deflation and its macro-economy is running the risk of recession,” said Xu Hongyuan, deputy head of the economic forecasting division at China’s State Information Centre. “After the start of the Asian financial crisis, from October 1997 to April 2000, China used an active fiscal policy to stop deflation and in May 2000 the consumer price index moved into the positive column. But, in 2001, deflation emerged again,” he said.

The second anxiety was about how China achieved the figures of the past four years. In part, it was through strong export growth and inward investment. But it was also through heavy government spending, which will continue this year with a bond issue of Rmb150bn–the same as in 2001, which resulted in a record budget deficit of Rmb309.8bn this year.

This was one of the few issues during the meeting that provoked public criticism of the government. Yu Zuyao, a delegate from Beijing, said if the government continued to run high budget deficits to stimulate the economy, it would lead to a financial and currency crisis like that in Russia in the late 1990s.

Quick fix policies

“We have had four years of expansionary financial and currency policies,” he said. “This loose monetary policy only treats the symptoms but not the disease, like keeping a dying patient alive. It cannot bring about fast and steady growth of the economy; it can only lead to hidden dangers.

“An enormous budget deficit and large debt burden will finally cause a financial crisis, in the form of runaway inflation like that in Russia in the 1990s, or stagflation, as in the western countries in the 1970s. Any wise policy maker knows you cannot have such an expansionary policy over the long term,” he said.

A substantial number of delegates share Mr Yu’s views. One Chinese economist said: “When Zhu Rongji took over as premier from Li Peng in March 1998, the government’s accumulated debt was Rmb46bn. Now it has mushroomed to Rmb500bn.”

In a stimulative measure, the central bank recently cut interest rates for the eighth time since May 1996, reducing the rate on a one-year fixed deposit from 2.25% to 1.98%. It has little room left to make further cuts and sees the worst-case scenario in neighbouring Japan, where the central bank has reduced rates to zero but cannot persuade consumers to spend.

Millions of the urban Chinese population are in the same mind-set as the thrifty Japanese. Individual bank deposits in China at the end of 2001 totalled Rm7380bn, an increase of 14.7% on a year earlier, even with the low interest rates. The reasons behind this figure are that people are saving for medical care, old age, unemployment and education for their children. These services were free or cheap in the Maoist era but are growing increasingly expensive.

The other main issue at the annual parliamentary meeting, discussed in private but not in public, was the name of the person who will succeed Mr Zhu as premier at the annual meeting next March and what kind of policies they will follow.

Mr Zhu, 73, said he would retire next year. People who have met him say he is tired and ready to step down.

Premiership front runners

The three front runners to replace him are vice-premiers Wen Jiabao and Wu Bangguo, and the Communist Party chief in Guangdong province, Li Changchun. Mr Wen, 59, is the favourite and is believed to be Mr Zhu’s choice of successor. A graduate of geology and mining, Mr Wen rose through the ranks of the ministry of geology.

The image many Chinese have of Mr Wen is of him standing behind then party chief Zhao Ziyang, to whom he was a close aide, when he visited protesting students in Tiananmen Square on May 19, 1989. That was two weeks before the People’s Liberation Army took over the city, killing hundreds, perhaps thousands, of people.

The two men knew a tragedy was about to happen and their faces were sad and gaunt. Mr Zhao has been under house arrest since then but, remarkably, Mr Wen has remained in senior government posts.

“Wen is a softer personality than Zhu and not an economic specialist,” says a Chinese journalist. “The best we can hope from him is that he will surround himself with good people and take their advice. We will look back on the Zhu era as a mixed performance.

“Nineteen ninety-seven was the best year — high growth, low inflation and the return of Hong Kong. Since then, the economy has not performed well. Zhu was in too much of a hurry and instituted too many reforms, some of which contradicted one another. He is an honest man and his family is not corrupt — but has not succeeded as people had hoped when he took office,” he says.

Li Changchun, 58, is said to be president Jiang Zemin’s choice for the next premier. His strength is that he is the only contender to have run three large and diverse provinces: industrial Liaoning in the northeast, agricultural Henan in the centre and Guangdong in the south, China’s richest province and the one with the most foreign investment. This has given him first-hand experience of industry, especially state industry which dominates Liaoning, agriculture and foreign investment, and trade, three vital components of the Chinese polity.

Hong Kong press reports describe Mr Li as capable, intelligent, cunning, authoritarian, proud and slightly arrogant; an operator not a visionary; a man who attracts respect but is not charismatic. He has not studied or lived overseas for an extended period.

Wu Bangguo, 61, has been vicepremier in charge of reforming China’s state sedor. A graduate of wireless technology from Qinghua University — the alma mater of Zhu Rongji — Mr Wu spent most of his professional life in Shanghai, working in industry and rising to the post of Communist Party secretary of the city in April 1991.

Direction unknown

In the secretive world of Chinese politics, where officials repeat the words of their superiors and conformity is the rule, it is impossible to know if any of these candidates would lead the country in a direction different to that of Mr Zhu.

Most observers expect the premier to keep one of his three posts after March next year, probably that of chairman of the party’s military commission, to enable him to retain a strong influence over policy-making. With this continuity of leadership, dramatic changes in policy are unlikely, especially since none of the front runners for the premiership have the incumbent’s strength of personality or expertise in finance and economy. They are more likely to act like a chairman of the board than a powerful chief executive.

SUB-SAHARAN AFRICA offers some tantalising prospects for businesses seeking to boost the high risk/high reward elements of their investment portfolios. But concerns over accountability and governance, as well as headline political and economic risks, mean that much of the world’s poorest continent will remain a niche market dominated by a few specialists, and will be heavily dependent on aid finance and officially guaranteed instruments to mitigate risks.

There are good news stories in the vast continent north of the Limpopo and south of the Sahara. Troubled economies from Cote d’Ivoire to Tanzania are being noticed by investors. In East Africa’s biggest (and arguably most troubled) economy, Kenya Commercial Bank (KCB) has reported its first full-year profits since 1998, helped by increased non-interest income and lower provisions for bad debts; after restructuring, Barclays Bank of Kenya reported a 40% increase in 2001 pre-tax profit.

Resources industries continue to attract substantial funds. At Calgary-based energy investment bank Waterous & Company, the belief is that, with international oil companies reassessing their Middle East options, “African countries are much more attractive to investors now”. signs that the US is keen for the share of African oil and gas to increase in North American markets point to further growth.

Niche players such as London-based HSBC Equator Bank and Paris-based Africa Merchant Bank are working on instruments that are being tailored to the African market. A handful of facilities such as the London-registered Termite Fund are focused on channelling capital into extractive industries.

Positive about Mozambique

Privatisations offer an opening to banks wanting to buy into previously closed African markets. In one of the continent’s most committed reformers, Mozambique, South Africa’s Absa Bank has joined several international banks by completing its privatisation purchase of an 80% stake in Banco Austral.

Mozambique has capitalised on its proximity to South Africa — Maputo is the closest port to Johannesburg — to open its economy to investment. Like other southern African economies, it is hoping an energetic commitment to creating an investment-friendly environment will act as an antidote to the poison of Afro-pessimism in recent months — spreading out from Zimbabwe as markets have reacted badly to president Robert Mugabe’s flawed re-election.

“Mozambique offers foreign investors political and economic stability, and a range of interesting benefits,” says Carlos Ramalho, head of merchant banking at Banco Standard Totta de Mocambique. Big ticket energy-related and industrial projects are under way, offering potential for Maputo-based banks and project finance specialists to become involved in major facilities. According to Mr Ramalho, whose bank is part owned by South Africa’s Standard Bank: “It would be wise and politically strategic to get local banks into all of these projects on a small level.”

Commercial participation in projects is good news for a continent that has become dependent on aid and multilateral financing. But except for short-term commodity and minerals-related financing, most of sub-Saharan markets “will have to remain in the hands of international financial institutions”, says a leading emerging markets banker. “Multilaterals provide the only really substantial support for economies where cash transactions will continue to dominate.”

Kenya under pressure

Even though Kenyan banks have reported improved performance, the economy in which they function remains under intense pressure — and suffers from the government’s poor record of governance. In a Reuters interview looking at prospects for 2002, KCB chief executive Gareth George said: “Given the uncertainties around, one, the donor support and, two, the political environment and the outcome of the next election, it is difficult to see any material improvement taking place over the next 12 months.”

Kenya must hold elections by the end of 2003. Meanwhile the country’s president, Daniel arap Moi, has consolidated his hold on power with the rebranding and strengthening of the ruling party as New Kanu. Mr Moi has seemed impervious to criticism from organisations such as the IMF, which suspended lending to Kenya in early 2001 as a protest against its lack of progress in tackling corruption.

Harsh realities in Nigeria

Most tantalising and frustrating of all is sub-Saharan Africa’s most populated country, Nigeria — oil rich, people rich (a population of more than 110 million) and, arguably, ungovernable. A deal in mid-April to repatriate another $1bn of funds stolen by the late Nigerian dictator Sani Abacha and his family brings to nearly $2bn the amount of looted money that president Obasanjo’s government has retrieved. The deal showed that Mr Obasanjo, who is a military leader turned advisory council chairman of lobby group Transparency International until his return to the presidency in 1999, was making progress towards his pledge to bring order to the chaos in Nigeria.

Central bank cracks down

Central Bank of Nigeria (CBN) is fighting to clean up the banking sector’s image, claiming successes in tackling advance fee fraud (better known as the “419” scam) and other abuses. In February, it closed an insolvent top 10 bank, Savannah Bank of Nigeria, and acted against 16 other Nigerian banks for currency trading abuses.

The reaction to the crackdown demonstrates how much reform is still needed. CBN’s move, which followed earlier central bank claims that there were no major problems in the sector, led to a run on smaller banks as depositors shifted their savings to bigger institutions. This underlined a move towards consolidation in a sector comprising 88 banks and employing more than 43,000 staff in 1750 branches. Three Lagos-based institutions hold around 43% of deposits: First Bank of Nigeria (FBN), Union Bank of Nigeria (UBN) and United Bank for Africa (UBA).

Macro policy issues must also be resolved. In March, finance minister Mallam Adamu Ciroma withdrew Nigeria from its IMF staff-monitored programme. Seasoned Nigeria watcher Francis Beddington of JP Morgan Chase says: “The decision to withdraw from the IMF deal was mainly for domestic political consumption.” With the government focused on getting Mr Obasanjo re-elected in 2003, “we would expect government actions to be populist, particularly on the fiscal side, irrespective of the formal outline of foreign policy”, he says.

Another Nigeria watcher says: “Running an IMF-style fiscal policy in the Nigerian environment was unsustainable before the elections.”

Without an IMF agreement in place, Nigeria will be unable to approach Paris Club governments to finalise its debt rescheduling. Mr Beddington points out that the government has said it will repay only $1.5bn this year. That is less than half the total due and of that, $600m will go to multilaterals, leaving only $900m to be split between Paris Club and commercial creditors. Arrears are likely to build.

Doing business in Nigeria will continue to be chaotic but there is potential, underwritten by oil and gas sales, and energy projects, for which big ticket project finance could be sought.

Foreign banks are looking on. Several senior executives told The Banker they were looking at the potential of Africa’s biggest market but were wary of over-committing themselves to a still chaotic business environment. South African banks are among those most interested, including Standard Bank Investment Corporation (Stanbic) and Absa Bank. Absa was involved in talks to buy into a significant local institution but pulled back because of concerns about lack of shareholder control.

Privatisation forays

Problems associated with investing in Nigeria were underlined with the collapse in March of the government’s $1.3bn flagship privatisation deal, involving state telecoms company Nitel. The sale of the 51% stake to local investment vehicle Investors International (London) was terminated when IIL failed twice to complete payment. The state Bureau of Public Enterprises (BPE) is now trying to sell Nitel shares through the stock exchange after second choice bidder Korea Telecom/Swedtel venture Telnet declined to return to the fray. The BPE said IIL had lost its $131.7m down payment, part-financed by FBN, which is a partner in IIL along with local notables and state governments. IIL had retained Portugal Telecom’s Tecnologia das Comunicadoes as its partner to manage Nitel; the Portuguese company had declined to take an equity stake.

Few countries can boast the range of problems that Nigeria poses to the investor. Even so, after a decade of structural adjustment across the continent, huge problems remain. In Ethiopia, president Tilahun Abai and 40 other senior Commercial Bank of Ethiopia (CBE) employees were arrested in January. They were charged with illegally granting loans and overdrafts worth some $105m. The African Development Bank (ADB) is due to hold its end-May annual meeting in Ethiopia, two years after war with Eritrea meant it cancelled its originally planned Addis Ababa meeting.

The arrests came as State Bank of India withdrew from a management agreement brokered in July 2001 to run CBE. This was an important element in Ethiopia’s agreement with the IMF and gives food for thought for ADB delegates who are arriving at Addis’s glitzy new Sheraton Hotel.