Look under the hood

Bolstered by high oil revenues, governments are going to pump money into infrastructure projects in 2004. Beyond the headline figures, however, the same underlying problems need to be dealt with.

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By  David Ingham Published  January 1, 2004

|~|protesters_feb04_200w.jpg|~|Joblessness is on the rise even in the GCC and demands for ‘localisation’ are growing stronger.|~|The figures, at least, look respectable. According to the World Bank, GGC countries all enjoyed ‘real’ GDP growth in 2003, albeit at slightly varying rates, and will enjoy further growth in 2004. The smallest increase in GDP was Oman’s at 2.2% and the largest was posted by the UAE at 6.3%. The other GCC states registered rates in the 4% range. Although the pace will slow in 2004, GCC countries are still looking at real growth rates of over 2%. At the bottom end of the scale, Saudi Arabia’s GDP will expand by 2.1% in real terms and Kuwait’s by 2.2%, according to the World Bank. Qatar will top the scale with 8.2% real growth and Bahrain, Oman and the UAE will all expand in the 4% range. “Oil prices are expected to remain at this [current] high level, which is above their budgeted numbers,” says Iyad Duwaji, managing director, Shuaa Capital. “All in all, governments continue to run surpluses and the trickle down effect is obvious. We’ve seen rising financial markets, we’ve seen increasing economic activities, booming real estate sectors and it seems that 2004 will be a continuation of what we are seeing now.” In 2003, GCC countries’ public coffers were swelled by an oil price of around $28.5 per barrel. Bolstered by high oil revenues, governments are going to pour money into development projects this year. In its 2004 budget, Saudi Arabia said it will invest SR63.65 billion ($16.97 billion) in education, which will include the construction of 3,030 new schools and three new universities. SR42 billion is also being put into what are called ‘new projects’, which include the construction of 150 new hospitals, the refurbishment and expansion of existing ones and the improvement of water, sewage and transportation infrastructure. All over the Gulf, the construction sector is booming. Qatar, with a total population of just 600,000 and plentiful revenues from oil & gas, is spending big on development projects. Hotels are springing up, Qatar Education City, a multi year campus development, is beginning to rise out of the landscape and work on a new airport starts in the middle of the year. US $2 billion will be spent just in the first phase of the project, which is scheduled for completion in 2015. Bahrain is also getting in on the act. The first contracts to build the $1.3 billion Bahrain Financial Harbour are close to being awarded and construction of a $150 million Formula One race track is underway. Construction, it is clear, is going to be a major driver of economic growth for the GCC in 2004. “The pickup in construction activities will generate demand for goods and services in other related sectors, such as aluminum, steel, cement, carpentry,” says Dr Said Al Shaikh, chief economist at National Commercial Bank in Saudi Arabia. He is tipping the construction industry to grow slightly faster than the rest of the private sector. Construction is also a key driver of economic growth in the UAE, particularly in Dubai, where a building boom has been sparked by the decision to encourage foreigners to buy property on a freehold basis. “This business itself is acting as a locomotive now, pulling the entire business cycle up,” says Abdul Aziz Al Ghurair, CEO of Mashreqbank. “Because of the real estate boom, contractors are having a good year, sub-contractors are having a good year, the suppliers to the construction industry, furniture makers; people need cars because they live further away from the office. Everybody is benefiting. It’s becoming a locomotive for the country’s economy.” The possible downside? Whilst construction and infrastructure projects are key engines of economic growth anywhere in the world, oversupply is a possibility. If anything could derail the growth of Dubai’s booming market, says Abdul Aziz Al Ghurair, it would be a supply glut that could drive down prices. “The price [of real estate] will only come down if there is way oversupply and hopefully the developers would see that and stop building new developments because it harms everybody,” he says. Al Ghurair calls for the creation of a bureau that will publish information on new and potential developments, thus ensuring that supply and demand can be matched.||**||Headline GDP figures|~|reading_paper_200w.jpg|~|Commercial courts could be one way of giving investors greater confidence.|~|Burrow down into the headline GDP figures and some concerns emerge. The World Bank’s predictions for economic growth are based on an average oil price of $28.50 in 2003 and $25.50 in 2004. Already, analysts are talking of prices in the low to middle twenties, which would reduce the amount of money available for investment in infrastructure. However, the real problem facing GCC economies is perhaps not so much the price of oil, but their over reliance on it. In Kuwait, for example, oil accounted for 92% of exports in 2003 and 72% in Saudi Arabia. Even in Bahrain, which is supposedly less oil dependent, the black stuff accounted for 65% of exports in 2003. The UAE was the least dependent, with oil accounting for 36% of exports. When oil is up, Gulf countries do well, but when it falls, the picture changes. The private sector urgently needs to account for a greater chunk of economic activity in most GCC countries, both to reduce vulnerability to oil price fluctuations and to reduce unemployment amongst nationals. “Growth in Saudi Arabia is around 5%, but this is not enough when unemployment is around 9%,” says George Abed, managing director of the IMF’s Middle East department. “Countries with these unemployment problems need growth of at least 6-7%.” For the record, Abed’s figure of 9% for Saudi unemployment is definitely on the conservative side. Some estimates range as high as 30%. Unemployment has also become a huge issue in Bahrain. Protests about joblessness are a regular occurrence and the government is promising to deal with the problem. Only last month, the country declared its aim to ‘Bahrainise’ the travel sector, hypermarkets, furniture showrooms and car showrooms. Talking about the travel sector specifically, manpower development director, Ahmed Al Banna, said: “There are no accurate statistics on Bahrainisation in this sector, but it is estimated to be below 35%. Our target is to achieve maximum Bahrainisation, which could be met only if we have qualified Bahrainis who could replace the expatriate staff.” Ultimately, there is no quick fix to the problem of joblessness. “It’s going to be a continuing dilemma for some time and I don’t think we’ll see a resolution to this problem in the short term. It’s not only to do with allocation or budget, but there are structural issues related to it that have to do with the labour law, the legal system and other factors that influence job creation in the country,” says NCB’s Al Shaikh. There are many ideas on how to get the private sector doing more, but they all boil down to one thing: give it a chance. Amongst the most basic issues is the need for Arab countries to do more business with each other.||**||Global trade bodies|~|shk_zayed_200w.jpg|~|The construction sector is booming across the GCC, but supply and demand need to be kept in step to avoid a price crash.|~|Whilst Arab countries are understandably keen to join global trade bodies, they do very little trade amongst themselves, despite various agreements that aim to work towards that goal. “There is the general Arab trade agreement, which includes most of the countries in the Arab league, to promote intra-Arab trade and to liberalise trade arrangements among the Arab countries,” says the IMF’s George Abed. “The sooner we proceed with this initiative the more the region can benefit from the initiatives coming from the outside.” Christiaan Poortman, vice president, Middle East and North Africa, World Bank, explains the need to join the global trading system and unleash the private sector. “There is this basic issue of needing to lock into the outside world, so that they can benefit in terms of exports but also import the knowledge and knowhow they need,” says Poortman. “Associated with that is a greater emphasis on the private sector, creating an environment that is more open and welcoming to the private sector and also tapping into private sector finance. Public sector finance just has too many limits on it.” For an example of how the private sector isn’t doing enough, look at Saudi Arabia. The government’s own 2004 budget statement said that GDP grew 12% in 2003 to reach SR791.9 billion ($211.17 billion) in current prices and by 6.4% to reach SR677.6 billion ($180.69 billion) in fixed prices. Those figures are at odds with the World Bank’s estimates (see opening table), but whichever numbers you prefer to use, the country’s growth was largely down to high oil prices. Even by the government’s own generous estimates, the private sector grew by a more modest 3.7% in current prices and 3.4 % in fixed prices in 2003. That 3.7%, while respectable by most countries’ standards, is barely in line with Saudi Arabia’s population growth. Furthermore, oil revenues played a part in helping achieve that figure. Should oil prices taper off in coming years, private sector growth could suffer. “If we look at economic growth and exclude oil, it was exceptional to have 4% growth in the non-oil GDP this year,” says Al Shaikh. “But if oil prices were to change [fall] dramatically, even the private sector growth that we have seen in the last few years may not be possible.” His wish list includes the implementation of several laws that have been passed, such as the capital markets law, and the insurance law. Another helpful step, in his view, would be the creation of commercial courts that could hear cases involving both local and international investors. Joining WTO would also help the Kingdom’s non-oil exports, although when that will happen still isn’t clear. Reducing the list of industries closed to foreigners might also boost investment. Ultimately, economic reform and joblessness are questions that will have to be solved in the long term. As far as 2004 goes, the bountiful oil revenues of 2003 will carry over into moderate to high growth in 2004. Of course, there is always the possibility of another geo-political shock that could frighten investors, but as Abdul Aziz Al Ghurair says: “With this thinking, I would never do anything. I would never even drive my car.”||**||

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