LONDON, 9 November 2004 — Despite fears that the 25 basis points discount interest rates hike imposed recently by central banks in the Gulf Cooperation Council (GCC) will have a dampening effect on asset prices in regional stock markets, the GCC markets are set for another year of strong growth in 2004 into 2005 thanks largely to the buoyant oil prices.
The latest quarterly regional economic report of Standard Chartered Bank, for instance, predicts that total oil export revenues in the GCC could top $180 billion in 2004; and GCC countries are likely to achieve a fiscal surplus of $60 billion in 2004, equivalent to about 15 percent of the combined GCC GDP. GDP growth rates forecasted for 2004 are all high, except for Oman at 4.3 percent.
The good news is that Qatar, according to Standard Chartered Bank, will have the highest GDP growth rate in 2004 at a massive 10 percent; followed by Saudi Arabia and Kuwait at 8 percent each; and the UAE at 7 percent. The bad news is that the forecasts drop dramatically in 2005, with the Kingdom, for instance, struggling to maintain a GDP growth rate above 1 percent. Qatar is the only GCC economy predicted to maintain a growth momentum of 6 percent in 2005. The same applies to current account, with the Kingdom projected to have a $49 billion surplus in 2004 falling to $24 billion in 2005.
The latest GCC Market Review for October 2004 of Kuwait-based investment bank, Global Investment House similarly is bullish about the outlook for the GCC markets in 2004 and 2005; and for the world oil price scenario. Oil prices, says the Review, will continue to remain at a much higher level throughout the current year mainly due to strong demand; low stock levels; continuing uncertainty over Russian oil giant Yukos; tensions in Iraq and Nigeria; and the slow rehabilitation of oil supply infrastructure damaged by the hurricane in the Gulf of Mexico.
The re-election of President George W. Bush will no doubt boost the outlook for oil sentiments of the above two reports, given that demand may further rise as the US tries to restore its strategic oil stockpile to accepted levels.
However, even Global Investment House, characterized by its generally optimistic views of the GCC markets, is hedging its bets. “We don’t believe the oil prices to go down substantially in the short term which will lead to a considerable fiscal surplus for all the GCC economies,” stresses the Review. “However, this is not to say that the current GCC valuations are driven merely by a strong liquidity in the system. Liquidity is only one of the factors, which has been driving the markets, but the important things are the overall fundamentals and structural changes in the economies which are going to drive the GCC stock markets further.”
In September 2004, the UAE and the Saudi stock markets were the strong performers with a net gain of 6.5 percent and 4.8 percent respectively. Concerns of over-valuation of GCC stocks in terms of price to book and historical price to earnings; that such ratios are unsustainable especially for banks in the GCC in the short-to-medium-term; over-investment; and the fact that demand will slow but capacity will rise leading to pressure on margins, have been dismissed as “unfounded” by some analysts including those from Global Investment House.
The Review points to the continuing diversification of the GCC economic base away from oil, and with the opening up of other sectors such as telecoms, banking, and real estate. Corporate earnings are up and the momentum would not be sustainable in an economic climate that is not buoyant and with plenty of business opportunities. Global Investment House predicts that private sector finance and investment and privatization should provide “further stimulus to GDP growth”. The cement production and construction industries are signaled out for buoyant growth, with GCC cement consumption estimated to increase from 38.274m tons in 2003 to 50.295m tons in 2004. Not surprisingly it recommends GCC cement companies as a good investment option.
The Review has a catchall style which is heavy on numerical increases or decreases relating to this or that stock ratio, criteria, or fundamental. However, it pays scant attention to structural and policy details especially as may impact on market risk and confidence.
The construction industry in the region, for instance, may be booming due to the buoyant real estate market, which some analysts stress is due for a correction. However, the death for five construction workers at Dubai International Airport’s expansion project, has once again raised concerns about health and safety provisions and safeguards in the GCC.
Independent labor unions are absent, and investigations tend to be carried out internally usually by the companies involved. There is a general concern that a construction and property market boom is driving unrealistic production schedules for projects to be completed as soon as possible.
In the area of foreign investment, the Middle East, including the GCC countries, got a general thumbs down from the World Bank in terms of trying to cut back or remove barrier to foreign direct investment. The World Bank Report - Doing Business in 2005: Removing Obstacles to Growth, albeit based on a narrow set of criteria confined generally to the ease of doing business in countries, commends reform efforts in only seven Middle East countries.
Lack of transparency; high minimum capital requirements; restrictive property ownership laws; slow transition to private ownership; an erratic government bureaucratic culture; a legislation lag compounded by drawn-out ratification and implementation procedures, are all factors which can make foreign investment in the GCC and Middle East painstakingly frustrating and disincentivized.
