Page 238 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

220 Dubai & Co.

Euromoney article, a former HSBC banker acknowledged that the
ADIA was one of the few institutions in the world that the bank’s
most senior executives would drop everything to visit, regardless of
13
what else they were doing. HSBC’s bankers are certainly not alone
in recognizing the ADIA’s clout.
The depth of the GCC states’ government investments was
apparent in the first Gulf War. When Iraq invaded Kuwait, the
Kuwaiti government fled to Saudi Arabia and Europe, and Kuwaiti
oil production stopped. Despite having no current source of
income, the government easily sustained itself based entirely on its
investments. The state was also, according to insiders, able to offer
generous support and incentive packages for business families to
reestablish their enterprises in Kuwait once the war was over. Such
payouts would not have been possible without significant govern-
ment reserves.
Besides drawing on savings, Gulf states can also issue sover-
eign debt in the form of conventional bonds and Sharia-compliant
Sukuk. Sukuk, often dubbed “Islamic bonds,” offer a return profile
similar to that of bonds while using a Sharia-compliant structure
involving leases or other asset-linked instruments. Credit ratings
for all Gulf governments are strong, as control of energy resources
provides a solid asset base and source of income. Sovereign debt is
therefore a real option for GCC countries as budgetary pressures
mount. Another rationale for sovereign debt—even in countries
with strong fiscal positions—is that it creates a local benchmark for
debt pricing and thereby boosts capital markets.
Another measure that is possible but would be difficult to
implement is increasing oil production. As the GCC states make up
the dominant bloc within OPEC, increasing Gulf production with-
out OPEC support could lead to large-scale noncompliance with
OPEC quotas worldwide. For the cartel to work, the Gulf states—
and especially Saudi Arabia—need to demonstrate commitment
and compliance.
The other obvious option is taxation—in the form of direct
income taxes and less-direct sales taxes, luxury surcharges, high-
way tolls, license fees, and similar levies. Taxation has been uncom-
mon and hidden in the Gulf for decades now in the form of import
duties, hotel taxes, and the like. The basic social contract has been
one by which citizens accept a relatively limited role in political