Gulf economies

THE GCC states are experiencing a broad-based economic boom. The elements of the economic boom in the GCC are rapid growth in consumption and investment, both by the private and public sectors, fast growth in bank credit to the private sector, a strong pick-up in construction activity, high property prices and sharp increases in regional stock market indices. Unlike the Asian boom that ended in 1997, the GCC economic boom is based on sizeable balance of payments and fiscal surpluses, substantial government assets, sound banking systems and strong corporate profits.

The GCC economies have substantial needs for public and private infrastructure investment. These infrastructure projects are financed through a mixture of sources, including bank credit and capital market debt but, more importantly, private equity. This is a key difference from earlier booms in the region or the Asian experience of mid-1990s. The run-up in stock market prices in the past three years reflected a combination of a fundamental strengthening of corporate performance and market exuberance, which varied from one market to the next.

There are many sound investment opportunities in the GCC, especially in sectors such as oil, gas and petrochemicals, utilities, infrastructure, leisure and tourism, and also finance and asset management, particularly the Islamic niche. Meanwhile, a recent pledge by a billionaire prince to invest up to $2.7 billion in the Saudi bourse, the Arab world’s largest, may help lift other Gulf markets from a deep correction.

Both the UAE and Qatar stock markets have crashed in the past few months, while Kuwait and Saudi Arabia may have peaked. Yet oil revenues will probably be at a new record high this year. Investors in the UAE and Qatar stock markets are no longer happy people: Doha Securities Market is 29 per cent off its peak of late last year; the Dubai Financial Market is 35 per cent down and the Abu Dhabi Securities Market 28 per cent down. By contrast Saudi Arabia has just passed another record high and Kuwait has been moving sideways around an all-time high. In terms of price-to-earnings ratios Saudi Arabia trades on around 40, the UAE under 20 and Kuwait in the mid-teens.

Saudi Arabia will soon allow foreign residents to invest directly in the country’s stock market. The plan to allow foreigners to invest in stocks is a bold and timely decision. It will put it in a better competitive position relative to other markets in the region, and by opening it up to all who are interested in investing in it, which will make it the regional market. The Saudi market is well placed to become the regional market because Saudi GDP is 25 per cent of the combined GDP of all Arab countries and its capitalization is more than 55 per cent of all Arab countries’ capitalization.

The Gulf is the world’s largest energy exporting region, and high oil prices, along with healthy corporate earnings, have catapulted equity markets in recent years. But a crisis in confidence caused some of the sharpest falls in years in some of the bourses and concern about excessive valuations have fuelled selling momentum in recent weeks. The region’s economies are officially slowing down, but most are still a huge success and the envy of the West. According to a Reuters survey, whilst Gulf Arab economies will slow slightly this year, record oil revenues should sustain a regional boom in 2006 despite risks from inflation and asset bubbles.

After a strong performance in 2005, growth will ease in the main energy producers — Saudi Arabia, Kuwait, Qatar and the UAE — as oil output and prices plateau. The slowdown will be most pronounced in the region’s largest economies. UAE growth will dip to 5.8 per cent in 2006 from an estimated 6.9 per cent in 2005, according to the average forecast in the survey, which was conducted amongst seven analysts. In Saudi Arabia, growth will be 4.9 per cent in 2006, down from 6.1 per cent in 2005. The Saudi Arabian finance ministry estimates the economy grew 6.5 per cent in 2005, with non-oil sector growth of 8.4 per cent. Bahrain’s average real GDP growth is expected to stay at 6.6 per cent, while Oman’s should rise to 6.4 per cent. But slowdown is a long way from recession.

The impact of high oil prices on GCC inflation was acute. Dubai rental increases of 25 per cent in 2004 were followed by 38 per cent in 2005. For 2006 this prediction is easy: 15 per cent which is the maximum allowed under a decree from Crown Prince General Sheikh Mohammed bin Rashid Al Maktoum. In the GCC states, and especially the UAE and Qatar, hyperinflation may be nearer to the mark. Labour costs are beginning to take off as skilled expatriates are in short supply, and higher wages are needed to compensate for falling standards of living due to high rents; and the UAE nationals could well be up for another 25 per cent salary rise courtesy of the Government responding to inflation again.

Qatar

Qatar has one of the fastest growing economies in the world and by 2012 will be the largest liquefied natural gas supplier (LNG) in the world, too. Much has changed in recent years and it is not only mega gas deals and high prices that have helped to create a booming economy and allowed Qatar to top the ranking in the World Economic Forum’s Arab World Competitiveness Report 2005, ahead of the United Arab Emirates and Bahrain. Qatar’s economy is not only about gas, although it is committed to spending $108bn on infrastructure and hydrocarbon projects over the next five years.

The government has also been instrumental in establishing the Qatar Financial Centre (QFC), the country’s unique model for closer partnership with international firms. Unlike Bahrain and Dubai, the QFC, which was established with consummate speed in February 2005, is neither an offshore centre nor a property play, but represents a different model and a critical building block in the management of a more diverse and even wealthy economy. After some difficult years in the late 1990s, Qatar’s economy has been transformed and its sustainable growth path now looks assured.

Qatar’s economy will be over and above $60 billion by 2011 as the state enjoys one of the fastest expansions of any country in the world, according to its Finance Minister. In the last five years, the Qatari gross domestic product (GDP) doubled from $17.5 billion to over $35 billion, achieving a per capita income of more than $40,000. For the first time in decades, the government forecast is for a budgeted surplus.

This additional wealth, helped by oil production passing one million barrels a day for the first time, and liquid natural gas (LNG) output tripling, has been poured into its infrastructure.

The government has invested abroad, and one of the main channels has been through the oil stabilization fund, set up in 1999 to invest overseas in the event of any future oil price crash. By 2015, the government should be able to survive largely – and without, if necessary – oil and gas. The long-term aim is that the private sector will take over many of the services now being provided by the government, allowing it to become a regulator. Qatar’s economic boom comes after a time of slashed budgets and cutbacks in the stagnant 1990s economy - an unpopular short-term fiscal regime implemented for long-term gain. As a result, the economy has delivered more than 20 per cent growth every year for the past three years.

Qatar is fast emerging as one of the growing world markets for consumer and capital goods, services and skills, given the pace at which its economy has been galloping. The expansion is going hand in hand with the extensive development efforts that cover all sectors, including infrastructure, basic industry, real estate, tourism and energy. Oil and gas development projects alone are expected to involve expenditures of $70bn to $80bn over a five-year period. A four-year physical infrastructure development programme entails a projected $10bn in spending mainly on roads, water and sewerage projects and the first phase of the new Doha international airport.

As for heavy industrial projects, they include ventures like new petrochemical plants as well as expansion units and they are likely to cost another $10bn. To these is added a long-planned aluminium smelter project, which is finally coming off the drawing board at an estimated cost of at least $2bn. Private sector projects, particularly in areas like real estate and tourism development, are too large in number. Two major projects are expected to cost $7bn to $8bn and they are Pearl Qatar and the Lusail Urban Development project that will be spread over 35sqkm.

A number of other major real estate projects planned or under way involve an investment of at least $2bn. In the light of the above facts, Qatar is a major world destination for businessmen, investors, banks, engineering and contracting companies from the Arab countries as well as the rest of the world. The trend will continue in the years to come since the Qatari economy is expected to maintain the rapid pace of expansion in the foreseeable future. In the last five years, the Qatari GDP doubled from $17.5 billion to over $35 billion, achieving a per capita income of more than $40,000. For the first time in decades, the government forecast is for a budgeted surplus.