The economies of the Gulf region continue to exhibit signs of strong economic growth despite the sizeable drop in share prices in the first half of the year and the recent uptrend in short term interest rates. After growing at an average of around 8.5 percent in 2003, 5.9 percent in 2004 and 6.8 percent in 2005, real GDP growth for the region is forecast to grow at a healthy 6.0 percent this year. The UAE is believed to have recorded the highest real GDP growth last year of 8.5 percent, followed by Qatar 8 percent, Saudi Arabia 6.8 percent Kuwait 6.5 percent, Bahrain 6.2 percent and Oman 4.5 percent.
The index of the GCC stock markets dropped by around 28 percent since the beginning of the year and by more than 50 percent from the peak attained in late 2005. In other international stock markets the losses incurred following the burst of stock markets’ bubble came to an end within a year. For example, NASDAQ of the US dropped by 59 percent from its peak in the first year after the bubble was burst before stabilizing. The Hang Seng index of the Hong Kong stock market was down 58 percent within a year from reaching its peak before establishing a new base. We expect the region’s stock markets to reach the trough of their current down cycle later this year. However the uptrend that is likely to follow will not be anywhere close to the boom conditions we have seen in 2003-2005.
The positive outlook of the GCC economies will be affected only marginally by the sharp slide in share prices. 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.
The combined inflation average of the six Gulf countries was as low as 0.8 percent in 2002, 1.3 percent in 2003, and 1.8 percent in 2004 before rising to 2.7 percent in 2005. The rate is projected to edge slightly higher to 3 percent this year. A breakdown of the aggregate figure shows Qatar had the highest inflation rate in the GCC in 2005 at 8.8 percent, followed by the UAE at 5.4 percent, Kuwait 4.2 percent, Bahrain 3.3 percent Oman 1.9 percent and Saudi Arabia 0.4 percent. It is expected that the UAE will have the highest inflation rate this year of around 6.5 percent and Saudi Arabia the lowest at 1 percent.
Strong economic activates and the surge in bank credit facilities are behind the expected upturn in inflationary pressures. Higher import prices due to the weaker exchange rate of the US dollar, and the Gulf currencies pegged to it, vis-à-vis the European and Japanese currencies have also contributed to higher consumer prices. The surge is real estate prices across the Gulf countries will not show up in the region’s inflation figures as these are not featured in the consumer price indices. Rent on the other hand constitutes a sizeable percentage of these indices. Only when real estate prices start feeding into higher rents, similar to what Dubai has been experiencing recently, would real estate related inflationary pressures become more visible.
Oil prices have risen from an average of $35 a barrel in 2004 to $53 a barrel in 2005 and are expected to reach an average of $65 for the current year, an increase of more than 20 percent on last year’s average. Total oil revenues this year are estimated to reach $400 billion for the six Gulf countries, up from $320 billion in 2005. External current account surpluses reached $170 billion last year accounting for 28.3 percent of GDP, up from just 12.9 percent of GDP in 2003.
Nominal GDP growth rates are expected to surge this year supported by high oil and natural gas prices. After growing at the average rate of 25.7 percent in 2005 to $597 billion, 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 $307 billion 2005 and it is forecast to hit $350 billion this year.
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. Saudi government debt dropped from 82 percent of GDP in 2003 to 46.5 percent last year and is forecast to decline further this year to 27 percent of GDP. According to the IMF, Kuwait’s foreign assets grew from $60 billion in 1995 to well over $150 billion recently, while UAE’s foreign assets are estimated at more than $400 billion.
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 banks, brokerage firms, insurance companies, telecommunications and IT companies, construction and related manufacturing, petrochemicals, pharmaceuticals, fast food, consumer durables, entertainment, tourism and various professional services among others. All this will have a profound implication for businesses operating in the region and the way they should be managed in such a high growth environment. Management needs to change both its outlook and approach and the question that each CEO and chairman of company in the region should ask himself is the following: Do I have the team, the financial resources, the strategic plan and the business acumen needed to seize the opportunity.
Managing in a low growth environment is different than when economic growth conditions are surging and expected to be sustainable. Instead of being opportunistic and reactive, management needs to be forward looking and proactive. Hiring of staff and the firm’s expansion plans should be based on long-term considerations. Each company should have its strategic plan in place, with annual budgets constituting an inherent part of it.
Business leaders today are in a better position to assess the risk/return profile of the Gulf countries, putting more emphasis on their growth potential and less on regional risks. While the economies of the region will remain sensitive to adverse developments and uncertainties in the short term, nevertheless they are expected to maintain the current uptrend for several years to come supported by the positive outlook for the world oil market.
What the region needs now more than any time before visionary leadership in business and politics who can look beyond the short-term obstacles and current uncertainties to a new and more resilient Middle East assessed on a medium to long term perspective.
(Henry T. Azzam is Founder & CEO of Amwal Invest.)