September 1990, Page 62

Trade and Finance

By John T. Haldane

North and South Yemen Merge

The May 22 merger of the Yemen Arab Republic (North Yemen) and the People's Democratic Republic of Yemen (South Yemen) into the Republic of Yemen promises to provide significant economic advantages to the new nation. Strategically located at the mouth of the Red Sea, the new country's 12 million inhabitants make it the most populous nation on the Arabian peninsula. Its assets include combined oil reserves estimated at up to 10 billion barrels, considerable agricultural potential and the port of Aden.

Officials in Sanaa already are predicting a healthy boost in agricultural production. Exports of fresh fruit and vegetables are increasing and the abolition of border controls will encourage expansion of the more fertile agricultural areas. Local agro-industrial projects using highly developed technology, including edible oil refining, dairy operations, carton manufacturing and canning and baking, also will benefit from the expanded market provided by a unified republic.

While Sanaa will be the political capital of the new state, Aden is destined to become the commercial center. A plan to modernize and expand Aden port is already under study, with the assistance of the United Nations. The Yemenis hope to turn it into a large free port that could seriously compete with Dubai as a redistribution center to Africa, Europe and the Arabian peninsula.

The most obvious advantage of unity, however, is the increased potential for developing new oil fields. As the Oil and Gas Journal put it: "Creation of a single new state, Yemen Republic, from the merger of North and South Yemen will integrate two oil ministries that have handled the Arabian Peninsula's most exciting oil play for the past five years."

A joint Yemen Company for Investment in Oil & Mineral Resources was established in 1989 to supervise development in the 2,200-square-kilometer neutral zone straddling the Marib Al-Jawf basin in the north and the Shabwa basin in the south. A consortium comprising the Hunt Oil Co. and Exxon Corp. of the United States, Compagnie Francaise des Petroles of France, Machinoimport and Zarubezhgeologia of the Soviet Union and the Kuwait Foreign Petroleum Exploration Co. has been awarded a concession to oversee exploration and development. Reserves are estimated to be at least 5 billion barrels.

Gulf American Business Conference

The National U.S.-Arab Chamber of Commerce announced that a business conference for 250 Arab and 250 American companies will be held Oct. 14-17 at the Gulf Hotel, Bahrain under the auspices of the Gulf Cooperation Council (GCC) and in cooperation with the GCC Federated Chambers of Commerce. The conference's sponsor, GulfAmerica, believes the conference will give U.S. firms a good opportunity to build upon the already existing share of more than $10 billion worth of business between the U.S. and the Gulf States. The meeting will cover such topics as high technology transfer; reconstruction opportunities in Iraq; banking and finance; and the petrochemical industry.

Recent Aid Loans

The World Bank recently made loans to Algeria ($96 million), Egypt ($62 million), Jordan ($150 million), Morocco ($250 million) and Sudan ($82 million) for a wide variety of economic development projects.

The Islamic Development Bank made new loans to Egypt ($32 million), Iraq ($10 million), and the former South Yemen ($5 million) for power and agricultural projects.

The Arab Monetary Fund lent $163 million to Algeria to finance economic reforms and $26 million to Egypt for balance of payments support.

In addition to the above institutional loans, Saudi Arabia has provided Iraq with $40 million for a Basra hospital and Egypt $97 million for three agricultural and transportation projects.

U.S. Agricultural Exports to Middle East Break Record

U.S. agricultural exports to the Mideast and North Africa reached a record $4.1 billion last year, up eight percent from $3.8 billion in 1988 and 41 percent from $2.9 billion in 1987. The Department of Agriculture predicts that U.S. agricultural exports to the region will continue to make strong gains throughout the early 1990s.

Several factors have contributed to this growth in exports. Demand for food is increasing rapidly because of urbanization. Population growth in the region has been approximately 2.8 percent annually. In the past two years, Iraq, Algeria, Syria, Tunisia and Turkey have suffered crop production shortfalls. Also, American farm products have become more competitive, as prices have risen for many commodities from Europe because of reduction in government export restitution payments and subsidies to European farmers.

Most of the countries in the Middle East were more dependent upon imports for food in 1989 than in the early 1980s, except for Saudi Arabia, the United Arab Emirates and Morocco. National leaders are increasingly concerned with problems related to food prices, subsidy costs and slow progress in raising agricultural production to achieve food self-sufficiency.

The strongest gains for U.S. exporters were made in Algeria, Egypt and Iraq. Algeria is the third major market in the region. Egypt and Iraq are approaching the $1 billion market as outlets for U.S. products. These three countries accounted for over half of U.S. agricultural exports to the region.

Gulf Arabs Targeting Economic Expansion in the Pacific Rim

The booming economies of the Pacific Rim countries are the next target for expansionist downstream affiliates of state oil companies in the Middle East. After breaking into the established but slowly growing U.S. and European markets, Saudi Arabia and Kuwait have embarked on a much more demanding task: gaining entry to the highly protected Japanese downstream business and other lucrative Far East markets.

Saudi Arabia appears to be making progress in its attempt to crack Japan's reluctance to admit newcomers to its downstream business. Recent top-level contacts between Tokyo and Riyadh will lead to formal meetings between representatives of the two governments later this year. However, Japan wants to ensure that establishing a Saudi-owned operation in Japan will be part of an overall program to reform Japan's refining and marketing operations. Tokyo will be seeking guarantees that the Japanese market will be provided with stable deliveries of crude oil and products over 10 years or more.

Japan is not the only country marked for attention. Kuwait is growing increasingly active in Thailand, China, Indonesia and Pakistan. The first of Kuwait Petroleum's retail gasoline stations is scheduled to be opened in Thailand shortly. The Kuwaiti company hopes eventually to build a chain of at least 200 retail outlets. In China, the Kuwait Foreign Petroleum Exploration Co. (KUFPEC) is a partner with Arco in a major gas discovery offshore of Hainan Island in the South China Sea. In Indonesia, KUFPEC is a partner in three concessions, two of which contain oil fields under development. KUFPEC also is a partner in a consortium in Pakistan which recently found a large gas field in the eastern part of the country.

John T. Haldane is a Middle East specialist who has served as a foreign service officer in Baghdad, Cairo and Beirut, and as an international economist in the Commerce and Treasury departments.