Gulf Shock Reverberates Worldwide : Economics: Some nations are poised to capitalize on a rebuilding boom while others are facing up to oil dependency and the costs of a drawn-out conflict.

Uncertainties posed by the Persian Gulf War are plaguing businesses and governments worldwide as they try to plan for a future with more unknowns than knowns.

Will oil prices soar or plummet? How will trade be affected? What will the Middle East look like when the battles end? Will this be a quick victory for the allied or a drawn-out, economically debilitating ordeal?

In the short run, the conflict has put on hold countless trips, loans and projects and made citizens of the Global Village wary of terrorist attacks and economic turmoil.

Fewer tourists toddled into Harrods, the famous London department store, for its annual January clearance sale. At La Defense, a Century City-style business center on the outskirts of Paris, security guards now patrol the grounds outside the headquarters of IBM and other big companies. Officials of the World Bank in Washington have halted travel to the Middle East and have suspended funding for more than $1.5 billion in public works, agricultural and telecommunications projects.

“Everything literally goes into the deep freeze,” said C. Fred Bergsten, director of the Institute for International Economics in Washington.

Yet many executives and policy-makers from Australia to Alberta and Mexico to Malaysia say it’s too soon to tell whether the war will have a profound effect on nations and their industries.

“It’s topic No. 1 in the executive suite around the world, but it hasn’t set off panic buttons and I don’t expect it will,” said Lester Korn, chairman of Korn/Ferry International, an executive search firm with offices worldwide. Although there have been disruptions in travel and other business operations, Korn said that in general, “multinationals are going forward with their plans. I don’t foresee that changing unless the war becomes a very prolonged one.” But, he acknowledged, “I might feel quite differently a month from now.”

Of far more concern in some countries is the deepening recession hobbling the United States and other nations. “Business decisions are on hold, but more because of the recession than the war,” said Douglas McWilliams, chief economic adviser for the Confederation of British Industry, the largest trade organization for British business.

And in Germany, where the economy is getting a boost from efforts to rebuild what was East Germany, crackdowns in the Soviet Union are of as much concern as the Persian Gulf War. “Ramifications (of activities in the Soviet Union) may be very serious,” said Lothar Griessbach, the representative of German industry and trade in Washington.

Engaging perhaps in wishful by thinking that the war will end soon, some nations say they are poised to capitalize on a rebuilding boom once Iraq and Kuwait begin to patch themselves back together. The impoverished Philippines, for one, plans to send thousands of construction workers and pipe-fitters.

Times correspondents surveyed attitudes of business and government leaders worldwide about the war. Here are their reports.

Asia

In energy-needy Japan, which imports 70% of its oil from the Middle East, the key issue is whether the oil can make its way out of the gulf region.

So far, however, the war’s effect remains minimal. Japanese analysts say a three-month war with oil at $50 a barrel (well above current prices) would reduce gross national product growth by only three-tenths of one percentage point, not a big loss in an economy projected to grow by more than 3% this year.

Since winter is waning and Japan has a 142-day supply in reserve, there is little immediate fear of an oil shortage, according to Tsuneo Ishihara, a spokesman for Arabian Oil Co. The joint venture, of which 77% is owned by Japan with the rest shared by Saudi Arabia and Kuwait, supplies 8% of Japan’s oil.

But the war has dealt some setbacks and made oil delivery a much tougher proposition. A storage tank at Arabian Oil’s key facility, the Khafgi oil operation in the Neutral Zone between Saudi Arabia and Kuwait, was destroyed by an Iraqi rocket on the second day of fighting. Production has been halted, and there are no plans for reopening the facility.

Japan’s seamen’s union has refused to allow Japanese-chartered ships to go into the Persian Gulf. Japan is consequently chartering foreign vessels to pick up its oil. Kyodo Oil Co. says it will import crude oil from Saudi Arabia from the western Saudi port of Yanbu on the Red Sea to avoid the more dangerous Persian Gulf.

Middle East trade with Japan comes to roughly $30 billion, with most of that in oil imports. But Japan also exports about $7.8 billion to the region, mostly in machinery. The amount accounts for only 3% of Japan’s total exports. “The bulk of those exports are in plant and machinery so those businesses are going to be hurt,” Shigeji Uejima, managing director of Mitsui & Co., told a local newspaper.

The machinery would be sent for Japanese-managed construction projects. According to Nikkei Sangyo Shimbun, a trade publication, Japan is involved in ongoing building projects worth $415 million in Iraq, $1.4 billion in Kuwait, $4.5 billion in Saudi Arabia, $5.9 billion in Iran and $3.1 billion in United Arab Emirates.

Japanese shipbuilding, already shaky before Iraq’s Aug. 2 invasion of Kuwait, is suffering a sharp drop in orders. December contracts for ships fell 70% from the year before.

Korea, which relies heavily on Middle East oil and has other important trade ties with the region, could be the Asian nation hardest hit by the war.

Local papers reported long lines at Korean gasoline stations in the first days of war. There has also been stockpiling of rice, instant noodles and toilet paper.

The South Korean Ministry of Energy and Resources has implemented a policy to cut reliance on Mideast oil to 68% this year from 75% last year. Conservation measures included turning off large neon signs and street lights and asking auto owners not to use their cars one out of every 10 days.

Moreover, the Korean government estimates that it is suffering $502 million in export-related losses because of the war. The nation also has had almost no new shipbuilding orders since August. Of the 4.9 million tons in orders for ships in 1990, 90% were placed before August.

“The general Korean feeling about the war is very negative,” Suk Won Kim, chairman of Ssangyong Business Group, told Associated Press. A Seoul-based conglomerate, with about $7 billion in sales last year, Ssangyong has widespread construction activities in Iraq and Saudi Arabia and is the world’s largest cement producer. “So far there is no real threat, but we hope it ends soon and won’t destroy countries in the area, including Iraq.”

Kim wouldn’t say whether he is suffering any direct losses, but Korean construction companies overall are owed $1 billion by Kuwait and Iraq. South Korea, however, sees big opportunities in construction after the war is over.

When oil prices surged higher, Asian producers such as Indonesia and Malaysia benefited. Malaysia recorded 9.5% growth and is at near-full employment, its economy boosted in part by large oil revenues. Indonesia’s windfall could be as high as $2 billion for the year ending March 31. The extra funds are being used to bolster foreign exchange reserves in anticipation of difficult times ahead.

The Philippines

Despite waves of panic buying and scare headlines before the war began, the distant conflict so far has had little noticeable effect on the Philippines’ already ailing economy.

But business leaders and government officials here say the longer the war lasts, the more problems they will face.

Like other state-owned airlines, Philippine Airlines has canceled flights since Jan. 9 to Riyadh, Dhahran and Dubai in Saudi Arabia, and it has scaled down flights to Europe from six a week to two, sharply cutting revenues.

“The Middle East is one of our most lucrative routes,” said spokesman Rolando Estabillo. More than 500,000 Filipino overseas workers are stationed in Saudi Arabia and other nearby countries.

But despite fears that foreign exchange remittances from the overseas workers, the Philippines’ most lucrative export, would plummet, more Filipinos accepted high-paying jobs in the gulf region since August than were repatriated. Only about 1,600 have been evacuated from potential battle areas near Kuwait’s border since the fighting began, officials said.

Moreover, officials here say, the rebuilding of Kuwait and Iraq after the war may require thousands more Filipino construction workers, electricians, pipe-fitters and other technicians.

Tourism, foreign investment and Manila stock markets already were suffering in this politically unsettled country. Higher Middle East oil prices last fall forced President Corazon Aquino to devalue the peso and raise gasoline, diesel fuel and cooking oil prices by an average of 35% in early December. Fertilizer and food prices quickly shot up, and inflation this year is expected to top 18%.

But falling oil prices since the war began have given officials hope that they can wipe out a $500-million deficit by October in the government’s oil subsidy fund. The higher pump prices were pegged to an anticipated crude oil rate of $30.33 per barrel, well above current rates.

Indeed, Philippine Economic Newsletter editor Guy Sacerdoti said the Persian Gulf crisis has provided Aquino “a way out politically” by giving her an excuse to raise oil prices, impose a 9% import levy to lower the deficit and institute other critical reforms demanded by the International Monetary Fund.

“Our real problem,” said Raul Concepcion, an industrialist who heads a presidential energy task force, “is the worldwide recession is having a detrimental effect on exports.”

In an unexpected boon, U.S. military bases here have pumped millions of extra dollars into local economies as warships and troops have shuttled through on their way to the gulf. About 27,000 U.S. sailors and Marines were at Subic Bay naval base for six days early this month, spending an estimated $2 million a day in nearby hotels, shops and bars.

Latin America

Foreign ministers from Brazil, Mexico, Colombia, Argentina, Venezuela, Peru and Uruguay--all members of the Rio Group--have called a special meeting for Monday to discuss the effects of the Persian Gulf War on their region.

As that high-level meeting suggests, Latin America has much at stake. Higher interest rates caused by uncertainty over the war would increase the already overwhelming payments on the region’s $423-billion foreign debt, a legacy of the last oil boom.

Oil importers Argentina and Brazil could find their economic restructuring programs wrecked by higher energy prices. And exporters Mexico, Venezuela and Ecuador fear a repeat of the price roller coaster of a decade ago. Then, they launched ambitious development plans financed by oil, only to abandon them when prices plunged.

The foreign-educated economists now in charge of finances in most Latin American governments have taken precautions to prevent a repeat of the volatility.

Mexico put in place strict fiscal controls as soon as oil prices began climbing in August. All the windfall profits from the government-controlled industry--$4 billion to date--have been used to pay down domestic debt or added to the country’s international reserves.

In addition, Mexico has established a contingency fund--now $1.8 billion--in case oil prices fall. If prices drop and Mexico does not receive the $17 a barrel for oil now in its budget, money from the contingency fund is available to make up the shortfall.

However, not even careful planning can remove the threat that a deeper U.S. recession presents for countries that are restructuring protected economies to enter the international market, with their hopes pinned largely on sales to the United States.

For example, U.S. clothing companies are cutting back on their orders from Costa Rican textile firms, said Spencer King, a director of the American Chamber of Commerce in Costa Rica.

In the past decade, the Central American nation has worked hard to diversify exports. Now, bananas, coffee and other traditional products account for less than half of what the country sells abroad.

However, many of the new exports are luxury items such as fileted fresh fish, strawberries and cut flowers, items that consumers probably would eliminate first during a recession, said King, who owns an export company.

The company’s freight forwarder has told him to expect a 10% increase in air freight prices to Miami. King worries that higher shipping costs will price him out of the market.

His competitors in Colombia will not face those same shipping price hikes because Colombia has oil. Costa Rica is 100% dependent on imported oil.

If the war continues, higher oil prices could thrust the country into hyperinflation, he said. Gasoline prices increased 13% last week and have risen one-third since Iraq invaded Kuwait. Recognizing how fragile the oil-importing economies of Central America are, Mexico and Venezuela earlier this month agreed to supply them with oil, funneling payments through the Interamerican Development Bank as part of a development plan.

The war has had minimal effects so far on Chile, used to looking after its own interests after 16 years of isolation during the Pinochet dictatorship that ended last year.

Only 8% of Chile’s fruit exports are sent to the Persian Gulf, and Kuwait was barely 7% of the Persian Gulf market for fruit, said Ronald S. Bown, executive director of the Chilean Exporters Assn. Saudi Arabia is by far Chile’s largest customer in the region, and fruit is being safely unloaded at ports far from the war zone.

This winter’s freeze in California, which Bown said has contributed to stabilizing fruit prices at a level favorable to Chile, probably will have more effect on the world market for Chile’s off-season production than the war.

But Pablo Garcia de la Huerta, a co-owner of Chile’s Rucaray fruit exporting company, said the war could hurt exports “if this phenomenon turns into a state of general violence, including terrorist attacks in the United States and Europe.”

Within days after the war started, Chile, which imports four-fifths of its petroleum but gets only 2% from the Mideast, put into practice a stabilization plan. If prices rise more than 12.5% above a reference price, consumers will pay only 40% of the increase and the rest will be subsidized by the government. The government also is imposing emergency traffic restrictions.

Canada

Canadian economists agree that the worse things get in the gulf, the worse it will be for the Canadian economy, which was already in its steepest recession since 1981-82.

The main indicator economists are now watching is, of course, oil prices. Price gyrations so far have not had any huge direct effect on Canada, however, because oil industry accounting methods delay price jumps at the pump.

“We did not feel the same kind of spike that you did in the States,” said Ruth Getter, a senior economist at Toronto Dominion Bank. In the wake of the August invasion, for instance, she notes that Canadian gasoline prices rose only a few cents per liter at the pump, and that didn’t come through until October.

All the same, Canada will suffer over the long term if oil prices shoot up--in large measure because Canada’s economy is heavily reliant on trade with the United States, and America’s economy is sensitive to oil shocks. If oil prices surge and the United States sinks into a deeper recession, Canada won’t be able to sell as many goods to America, and Canadians will feel the loss.

“The biggest impact (on Canada) of the war in the gulf is what it will do to the United States and the global economy,” said Steve Tanny, chief economist at the Toronto office of management consultants Ernst & Young.

The government had been relaxing the money supply just as the war broke out. There is concern that, if oil prices rose sharply, the government would be tempted to fight inflation by tightening money.

Before the war, the Canadian government had been raising taxes and trying to cut budget spending. When the government suddenly needed funds for its new war effort, the austerity measures were strengthened.

“The Canadian federal government is up to its eyeballs in debt, and as a result of that, they are financing the war in the gulf by cutting back elsewhere,” Tanny said.

At least two companies have received windfalls as a result of the conflict. One is Bonar Inc., a Winnipeg subsidiary of a multinational company called Low & Bonar Group.

Since 1906, Bonar has been making jute bags for potatoes, grain and seeds. Now, though, Bonar has gone all-out making sandbags for an American company that is shipping them to the gulf.

“We actually doubled our work force in the plant since about Christmastime, and we’re still counting,” said sales manager Jay Cumbers.

Another beneficiary has been Trans Canada PipeLine Ltd., a publicly traded company that operates one of the world’s biggest natural gas pipelines, running from the province of Alberta to Quebec City, north of Maine.

Trans Canada had been trying for four years to get U.S. Federal Energy Regulatory Commission approval of the so-called Iroquois Project, a $2.2-billion expansion slated to carry natural gas from the Ontario-New York state border down to Long Island.

Approval was stalled mainly because of opposition from independent oil suppliers in the Northeast.

No sooner had Iraq invaded Kuwait, said spokesman Frank Dabbs said, than politicians started lobbying the FERC to approve the pipeline. “This war is going to finally force some American consumers to face up to the risks of OPEC dependency,” he said.

Europe

The Gulf War has not tugged European business in a single, identifiable direction. Companies that have lost business in Iraq and Kuwait had already lost the sales as a consequence of the U.N. embargo. Some exports to Saudi Arabia, whose economy is being at least temporarily shaken by the war, could be lost, but that has not happened yet.

Otherwise, European business activity goes on much as before: strong in Germany, weak in Britain and somewhere in between in most of the rest of continental Western Europe. Sectors that had been hurt by rising oil prices--such as airlines and petrochemicals--had been hurt before the war began.

At pharmaceutical giant SmithKline Beecham, with headquarters in London, “it’s too early to say if sales (of medications for the battle zone) will increase because the serious hostilities on the ground haven’t begun,” said Alan Chandler, a spokesman.

Before the war, SmithKline largely abided by the United Nations embargo of Iraq and Kuwait, Chandler said, despite the exemption for medicines. Only 0.3% of SmithKline’s business had been with Iraq and Kuwait.

The construction industry, and others sensitive to rising interest rates, are feeling a sting where rates have jumped in reaction to the war. Mortgage rates in Belgium, for example, are up by about a percentage point to slightly over 10%, and Andre Mayeur, general director of Belgium’s Central Office of Mortgage Credit, said building will decline if that rate persists.

Britain’s defense companies, until recently facing hard times as recession threatened government spending cuts, are enjoying at least a temporary turnaround thanks to the Gulf War. Britain has the largest force in the gulf of any of the European allies.

Vickers, which produces tanks and other military vehicles, is speeding up production. So is British Aerospace with explosives and ammunition. But so far, the government has asked only for accelerated production of supplies that had already been on order. On a micro level, there have been some interesting twists.

Sky News, Rupert Murdoch’s answer in Britain to Cable News Network, is enjoying a modest boost in popularity itself. In addition to new subscribers in Britain, Sky News has signed a deal with an Israeli station for rebroadcast rights to its Gulf War coverage. A group of Moscow hotels run by Intourist, the Soviet state tourist agency, has signed up to provide Sky News in their rooms.

And the Solerino Institute, a private school in the Italian city of Turin, is offering a one-month, $900 course on how to survive chemical warfare. Included in the fee are $300 gas masks. “This course is the first of its kind in Italy, and we have had lots of interest,” said Pasquale Di Bari, the institute’s director.

In London, the legendary Harrods department store has noticed a drop in business.

“Fewer tourists are coming in; travel is off,” said Michael Cole, a spokesman for the Egyptian-controlled House of Fraser Holdings PLC, which owns Harrods.

On Jan. 19, Harrods instituted a policy of checking the hand luggage of everyone entering through its 14 doors. Security is a genuine concern. In December, 1980, an IRA bomb went off there, killing five persons. “Like the Washington Monument and the Eiffel Tower, we are a symbol of something,” Cole said.

Nevertheless, Harrods is proceeding with a costly expansion. The store is about to open a number of new rooms, including an Egyptian Room. Cole says customers will descend on a “Fifth Dynasty escalator into a sort of tomb” where they will find “exotic and spectacular and highly priced goods” including jewelry, perfume and clothing.

As for the British economy, Douglas McWilliams, chief economic adviser for the Confederation of British Industry, Britain’s largest trade organization, said: “Wars don’t normally do much good for anyone overall.”

The percentage of British exports going to the Middle East is just under 6%, or about $11.7 billion. “At the moment,” McWilliams said, “these exports are dropping very quickly. A very high proportion are at risk as the war goes on.”

The war’s largest economic effect will be how it changes the price of oil.

The “optimistic end of the spectrum,” McWilliams said, is that, after the war, OPEC nations will keep their production levels high while at the same time Iraq and Kuwait will want to “maximize their flow.” That could lead to low price levels for two or three years and would be cause for “rapid economic growth.”

As an oil producer, the United Kingdom is less affected by changes in oil prices than many of its trading partners. But, McWilliams said, “we do lose if the price of oil goes up because our trading partners can spend less. When the French and Italians suffer, they pass part of the pain back to us.”