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 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 percent in 2003, 5.9 percent in 2004, 6.8 percent in 2005, and an estimated 6 percent in 2006, real GDP growth for the region is forecast to grow at a healthy 5.0 percent in 2007. The UAE is believed to have recorded the highest real GDP growth in 2006 of 10.2 percent, followed by Qatar 7.5 percent, Kuwait 6.5 percent, Saudi Arabia 6.2 percent, Bahrain 6 percent and Oman 5 percent. We expect Qatar to lead the pack in terms of real GDP growth in 2007 rising by 8.6 percent as the country boosts its natural gas production by 42 percent on top of the 8.9 percent increase of 2006. UAE will follow with real GDP growth of 7.2 percent, Oman 5.9 percent, Bahrain 5 percent, Saudi Arabia 4.2 percent, and Kuwait 4.1 percent. 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 percent from the peak attained in late 2005, and is down by 46 percent since the beginning of the year .The unraveling 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 percent from their peaks and then assumed a slow and gradual uptrend in the following three years. Today the two markets have not yet regained their previous highs. The correction in the Chinese stock market was swifter. It dropped 60 percent in 9 months from the peak attained in 2001 and stayed in a trading range for four years before starting a new uptrend. During this period the Chinese economy has been recording strong economic growth rates of 8 percent to 10 percent.
Although retail investors appear to have lost hope of a strong price recovery any time soon, nevertheless we believe 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 we have 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. 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 for example is projecting a 13 percent increase in government expenditures in its 2007 budget, to SR380 billion ($101 billion) out of which SR140 billion ($37.3) or 37 percent are allocated for capital expenditures. The region’s infrastructure such as roads, sewages 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 health care and on schemes to encourage private sector employment. The oil producing countries of the region are also spending billion 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 percent in 2002, 1.3 percent in 2003, 1.8 percent in 2004, 2.7 percent in 2005 before rising to 4 percent in 2006. The rate is projected to edge slightly lower to 3.6 percent in 2007. A breakdown of the aggregate figure shows the UAE had the highest inflation rate in the GCC in 2006 at 9.9 percent, due to rising rents, which has a weighting of 30 percent in the consumer price index. Inflation in the UAE is expected to drop to 7 percent in 2007. Saudi Arabia’s inflation rate is likely to remain unchanged at the 2006 level of 1.8 percent. In Kuwait, which revalued its currency in 2006 to contain imported inflation, price growth will fall to 2.7 percent in 2007 from 4.2 percent in 2006. Qatar’s inflation is likely to drop from 8 percent to 6 percent in 2007. Oman’s inflation will slip to 2.5 percent in 2007 from 3.1 percent in 2006 while Bahrain’s inflation is expected at 2.7 percent from 3.1 percent 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 percent 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 6 percent on the year before and accounting for 28 percent of GDP, compared to 13 percent 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 percent 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. Saudi government debt dropped from 82 percent of GDP in 2003 to 46.5 percent in 2005, 28 percent in 2006 and is forecast to decline further to 24 percent of GDP in 2007. Recent estimates put Saudi Arabia 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 percent —15 percent down from 22 percent 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.
What are the implications for GCC business in 2007? It is probably wise to conclude that 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. Management needs to be forward looking and proactive. 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 grow in a more competitive atmosphere.
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 their unstable regional surrounding. 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.
(Henry T. Azzam is founder & CEO of Amwal Invest.)
