February 19, 2007	Monday	Safar 1, 1428

Middle East

THE economies of the Gulf region are expected to continue on their strong economic growth path despite last year's sizeable drop in share prices and the rise in short term interest rates. The surge in oil revenues gives the Gulf Cooperation Council (GCC) countries the means to increase fiscal expenditures, undertake mega-infrastructure projects and invest in various industries. The government sponsored projects will provide a stimulus for the private sector to grow.

After growing at an average of around 8.5 in 2003, 5.9 in 2004, and 6.8 per cent in 2005, and an estimated six per cent in 2006, real gross domestic product (GDP) growth for the region is forecast to grow at a healthy 5.0 per cent in 2007.

The United Arab Emirates (UAE) is believed to have recorded the highest real GDP growth in 2006 of 10.2 per cent, followed by Qatar at 7.5 , Kuwait 6.5, Saudi Arabia 6.2, Bahrain six and Oman five per cent.

GDP: Qatar is expected to lead the pack in terms of real GDP growth in 2007 rising by 8.6 per cent as the country boosts its natural gas production by 42 per cent on top of the 8.9 per cent increase of 2006. The UAE will follow with real GDP growth of 7.2 per cent, Oman 5.9 per cent, Bahrain five per cent, Saudi Arabia 4.2 per cent, and Kuwait 4.1 per cent. The lower growth rates projected for 2007 compared to 2006 is mainly due to the slight decline in crude oil production expected this year.

The index of the GCC stock markets dropped by more than 60 per cent from the peak attained in late 2005, and is down by 46 per cent since the beginning of the year. The unravelling of stock market bubbles tend to be a complex and long process. It took the US and the UK stock markets three years to reach their trough following the burst of the technology bubble in March 2000.Their respective indices dropped by 50 per cent from their peaks and then assumed a slow and gradual uptrend in the following three years. At present the two markets have not yet regained their previous highs.

Although retail investors appear to have lost hope of a strong price recovery any time soon, nevertheless, the region's stock markets are not far away from reaching a trough. However, the markets are expected to stay thereafter in a trading range to establish a solid base. Any uptrend that is likely to follow will not be anywhere close to the boom conditions seen in 2003-2005. It will be those with a longer-term investment horizon and reasonable expectations who will see the market through this phase. The positive outlook of the GCC economies will be affected only marginally by the sharp slide in share prices.

Wealth: The decline in the "wealth effect" of shareholders in the region will have some impact on overall consumption expenditures, but this will be more than compensated for by the expansionary fiscal policies followed by the governments of the region. Saudi Arabia is projecting a 13 per cent increase in government, expenditures in its 2007 budget, to SR380 billion ($101 billion) out of which SR140 billion ($37.3) or 37 per cent are allocated for capital expenditures. The region's infrastructure such as roads, sewage and water networks had suffered in the past decade and badly need overhauling.

Over $1,000 billion has been announced in infrastructure and real estate projects in the GCC, with more than half of these projects already underway, translating into one of the largest construction booms in the world. There are also plans to spend more on education and healthcare and on schemes to encourage private sector employment. The oil producing countries of the region are also spending billions to boost their oil production and refining capacity to meet future world demand.

Inflation in most of the GCC countries is expected to retreat in 2007 as supply bottlenecks ease, especially in the housing markets of the UAE and Qatar. The average inflation rate of the six Gulf countries was as low as 0.8 per cent in 2002, 1.3 per cent in 2003, 1.8 per cent in 2004, 2.7 per cent in 2005 before rising to four per cent in 2006. The rate is projected to edge slightly lower to 3.6 per cent in 2007. A breakdown of the aggregate figure shows the UAE had the highest inflation rate in the GCC in 2006 at 9.9 per cent, due to rising rents, which has a weighting of 30 per cent in the consumer price index.

Inflation in the UAE is expected to drop to seven per cent in 2007. Saudi Arabia's inflation rate is likely to remain unchanged at the 2006 level of 1.8 per cent. In Kuwait, which revalued its currency in 2006 to contain imported inflation, price growth will fall to 2.7 per cent in 2007 from 4.2 per cent in 2006.Qatar's inflation is likely to drop from eight per cent to six per cent in 2007. Oman's inflation will slip to 2.5 per cent in 2007 from 3.1 per cent in 2006 while Bahrain's inflation is expected at 2.7 per cent from 3.1 per cent last year.

Oil prices have risen from an average of $35 a barrel in 2004 to $53 a barrel in 2005 and an average of $65 in 2006, an increase of more than 22 per cent on 2005 level. Total oil revenues are estimated to have reached $400 billion for the six Gulf countries in 2006, up from $320 billion in 2005. External current account surpluses are estimated at $170 billion in 2006, up six per cent on the year before and accounting for 28 per cent of GDP, compared to 13 per cent of GDP in 2003.

Nominal GDP growth rates are expected to surge this year supported by expansionary fiscal policy and an active private sector. After growing at the average rate of 25.7 per cent to $597 billion in 2006, this year's nominal GDP for the six Gulf states could exceed $700 billion. Saudi Arabia saw its nominal GDP grow from $215 billion in 2003 to $347 billion 2006 and it is forecast to hit $380 billion in 2007. The Kingdom used part of its oil surplus to reduce its huge domestic debt, while other Gulf countries used the surplus to increase their foreign asset accumulation.

Debt: Saudi government debt dropped from 82 per cent of GDP in 2003 to 46.5 per cent in 2005, 28 per cent in 2006 and is forecast to decline further to 24 per cent of GDP in 2007. Recent estimates put Saudi Arabia's foreign assets at $250 billion, Kuwait's foreign assets are believed to have grown from $60 billion in 1995 to well over $200 billion recently, while UAE's foreign assets are estimated at more than $500 billion.

Unlike in the 1970s, when the oil windfalls were largely recycled into US Treasuries and the Western banking system, there are indications that GCC governments and companies are investing in other Arab countries — primarily into projects, private equity, real estate and capital markets in Egypt, Jordan, Lebanon, Morocco and Tunisia, underpinning economic growth and job creation in these countries.

The world is coming to terms with the new economic phenomenon of persistently high growth in the GCC regions similar to the boom economic conditions in China, India and Russia. All sectors are forecast to do well especially insurance companies, healthcare, public utilities, transport, telecommunications and IT companies, construction and related manufacturing, petrochemicals, pharmaceuticals, fast food, consumer durables, entertainment, tourism and various professional services among others. Banks and brokerage firms will experience a slow down in profitability growth, to around 10-15 per cent, down from 22 per cent in 2006.

Despite the likely decline in growth of retail spending due to the wealth-shrinking effect associated with the sharp slide in equity prices of 2006, consumer demand is expected to stay strong. Equally important, there is plenty of steam left in the investment cycle, as the governments and the private sector look to implement expansionary projects across most economic sectors. The bubbly conditions of the past few years will not continue, though there will be no slump.

Competition will be on the rise as the days of easy money generated by having exposure to the region's stock and real estate markets are over. Cost control will become increasingly challenging. For many businesses, the biggest issue will be the shortage of skilled employees. While the economies of the region will remain sensitive to adverse regional developments and uncertainties, nevertheless, they are expected to maintain the current uptrend for several years to come supported by the positive outlook for the world oil market, and a more confident and efficient private sector.