Cover Story : Boom Times



Change of tack: Oil-rich Middle East states are pouring their money into infrastructure

Twenty years ago, petrodollars flowing into the oil-producing countries of the Middle East were recycled into London and New York real estate markets and US treasury bonds. In the current oil boom, the flood of petrodollars is being invested closer to home, in Dubai and Doha real estate and in fast-growing local economies.

Economic growth in the six countries of the Gulf Cooperation Council, or GCC, reached 26.6% in 2005 and 18.7% in 2006, according to the Washington, DC-based Institute of International Finance (IIF). These oil- and gas-producing countries bordering the Gulf comprise Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman.

The economies of most of the countries in the Middle East have witnessed high growth rates for the past four years due to the increase in energy prices and strong growth in the private sector, says Youssef Hussain Kamal, minister of finance of Qatar. The cost of ongoing and upcoming projects in the GCC countries in the next five years will total almost $1.2 trillion, Kamal told the IIFs 10th annual meeting of Middle East and North Africa region bank chief executives in Qatar earlier this year. Development costs for such projects in Qatar alone are estimated at $130 billion. These big figures exceed the capacities of the banking sector of the region, he says. Therefore, the development of capital markets and related tools are an urgent need.

Effective capital markets will help to attract the wealth of individual and institutional investors from outside of the region to contribute to regional economic development, Kamal says. Further consolidation of the banking sector in the region will create bigger and stronger local financial institutions that are able to compete more effectively with the foreign banks that are entering new markets in the region, he adds.

While no one can predict the future of oil prices with any certainty, Brad Bourland, chief economist of Riyadh-based Samba Financial Group, says demand for energy from China and other emerging markets has created a new structural reality in the oil markets that likely will keep prices high for decades to come. This will be the year in which the boom moves from being an oil-revenue story to one of broad-based private sector growth, Bourland predicts. Saudi Arabias economy has doubled in size in the past four years. To put this in more tangible terms, an economy the size of Malaysia has been added to the Saudi economy since 2002, mainly due to rising oil revenues, he says. Industrial activity outside of the oil industry was the fastest-growing sector in 2006, spurred by higher petrochemicals and metals production.

Structural reforms that were delayed by the first oil boom of the 1970s have been implemented in recent years and have strengthened the economic fundamentals of many countries in the region. Meanwhile, Islamic financing products have expanded rapidly in the past five years, as financial institutions have sought new ways to tap into liquidity in the region.

Despite these advances, the Middle East remains a politically unstable region. From the first Palestinian uprising in December 1987 through to the current sectarian violence in Iraq, the past 20 years have had their share of political troubles. There is always a possibility that political developments could have some destabilizing effects on the investment environment. Another worry is the threat of inflation, which could be difficult to control in a fast-growing region where most currencies are pegged to the dollar. Nonetheless, the economic outlook remains favorable, due to strong private consumption and large investments by the public and private sectors.

Gordon Platt