An Oasis in the Crisis

For years, Dubai, Abu Dhabi, and other Gulf states seemed to run rings around sleepy Saudi Arabia when it came to economics and finance. Dubai benefited from a flood of expatriate bankers and other professionals attracted by the emirate's beaches, bars, and laissez-faire financial system. And the sovereign wealth funds of other Gulf states invested in hedge funds and private equity and took stakes in Western banks. The conservative Saudis, by contrast, mostly parked their cash in U.S. and European government bonds.

These days, with growth tumbling and credit hard to find, the Saudis' cautious approach looks smart—and is making the kingdom more attractive as an investment destination. Abu Dhabi and Kuwait have taken huge hits on their investment portfolios. And on Feb. 23, the central bank of the United Arab Emirates—the confederation of Gulf sheikhdoms—bought $10 billion in bonds to bail out beleaguered Dubai, which is struggling with $80 billion in corporate and government debt.

The Saudis' foreign holdings, meanwhile, have largely escaped the global equities crash. And tightly regulated Saudi banks haven't seen major hiccups even as neighboring countries have had to bail out their banking systems. "Saudi corporations and individuals have very little debt compared to other countries in the region," says Fahad A. Almubarak, chief executive of Morgan Stanley (MS) Saudi Arabia.

A REALITY CHECK ON PROJECTS

While the plunge in oil prices has hurt, the Saudis have salted away piles of cash. They have more than $500 billion in foreign assets—enough to pay for five years of imports—and an additional $226 billion in deposits in the domestic banking system. Riyadh plans to draw on these funds to increase infrastructure, education, and health-care spending by an estimated 10% this year, to about $150 billion. "Saudi Arabia is one of the countries least affected by the financial crisis," says Said A. Al-Shaikh, chief economist at National Commercial Bank in Jeddah.

That's not to say everything is rosy for the Saudis. Al-Shaikh is forecasting 2% real gross domestic product growth this year, down from 4% in 2008. The once-sizzling real estate market has gone cold, and banks have tightened lending. So the Saudis will have to pull back on some of the $600 billion in big projects they have in the works. A $20 billion-plus Saudi Aramco petrochemical plant with Dow Chemical (DOW) at Ras Tanura has been delayed, and there's likely to be a reality check on plans to build a half-dozen new cities in remote areas. At a minimum, Riyadh will need to give more financial support to such projects, even though they were supposed to be largely financed by the private sector.

But Saudi Arabia is looking more attractive to business. The country is by far the biggest market in the region. King Abdullah has introduced changes in the government, getting rid of some conservatives and appointing a woman as deputy minister of education, a first for the kingdom. And while Saudi stocks are off by more than half in the past year, prices have stabilized in recent months even as most other markets have continued to plunge.

Investors are betting that at least some megaprojects will continue. A $10 billion refinery venture with France's Total (TOT) looks solid. And major initiatives such as King Abdullah Economic City, a vast waterfront metropolis planned for the Red Sea coast, are unlikely to be scrubbed. "Once we get to the other side of the valley of the global recession," says Brad Bourland, chief economist of Riyadh-based Jadwa Investment, "Saudi Arabia will emerge as an extremely attractive place to invest."

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