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From strength to strength
Consistently high oil prices fuelled strong economic growth across the region in 2005. And the benign
conditions are set to continue in 2006. Clare Dunkley reports
If 2005 was good for the economies of the Middle East, 2006 promises to be even better. A region sitting
on 60 per cent of global oil reserves could hardly fail to be enjoying economic buoyancy. Hefty surpluses,
double-digit growth and strong private sector activity promise to be the main features of the year ahead.
While few analysts agree with headline-grabbing talk of $100-a-barrel oil, fewer still predict that prices
will move much south of $40. The implicit message from mid-December’s OPEC meeting – when
ministers agreed to convene for an extraordinary gathering at the end of January for fear of weaker second
and third-quarter demand – was that members are now preparing to defend prices at about that level.
Increased confidence about the future direction of oil prices has been underlined recently by rises in the
traditionally conservative forecasts on which governments base their budget projections. Riyadh’s outlook
for 2006 assumes an average price of about $31 a barrel, up from $25 in the 2005 budget, while Oman goes
even further – assuming $32, also rising from $25. And laying the foundations for continued growth further
down the line, the region’s oil and gas producers are heeding consumer cries and investing heavily to raise
production capacity.
The fruits of the oil boom are evident across the Gulf. In December, Saudi Arabia published a preliminary
estimate of the 2005 budget surplus, calculating it at SR 214,000 million ($57,707 million), topping
Kuwait’s KD 3,200 million ($11,000 million) surplus for fiscal year 2004/05. In Qatar, the economy is
reckoned to have expanded by 27 per cent in 2005 in nominal terms.
Happily for the region’s longer-term macroeconomic stability, the positive story is not all about oil. A
combination of bigger budgets, attempts at diversification and a sea of liquidity being invested close to
home are driving rapid private sector growth. The region’s corporate heavyweights routinely post record
profits and stock markets continue to scale new heights. The Shuaa Arab share index rose by more than 90
per cent in 2005, and this was only partly driven by the capital markets of the oil-rich countries. The stock
markets of Jordan and Lebanon, for example, rose by about 100 per cent and 70 per cent respectively, while
shares in Morocco and Tunisia put in performances that were impressive by global standards. Helped by
the mood of optimism created by a new, reformist government, Egypt’s Hermes index also climbed by
more than 100 per cent over the course of the year.
Overheating
However, the behaviour of certain bourses provides one of the few black-spots on the horizon. With too
much money chasing too few stocks, several markets are becoming very overheated – those of the UAE
and Saudi Arabia in particular. Given prevailing economic conditions, severe crashes are unlikely, but 2006
is likely to see some correction and is unlikely to produce rises on the same scale as last year. In the GCC,
the gradual rise in interest rates in line with US Federal Reserve policy is likely to tame some of investors’
wilder excesses. Rising rates will also help control inflation, the other main economic problems faced by
the six states.
Private sector growth is being driven by the soaring expenditure of cash-rich governments on infrastructure
projects. In Qatar, for example, the Public Works Authority (Ashghal) is carrying out a QR 26,000 million
($7,000 million) infrastructure upgrade programme. At the same time, private sector investment
opportunities in infrastructure are growing. Riyadh is moving forward on an ambitious tendering schedule
for a series of planned independent water and power projects (IWPPs), the model now finding favour
across the Gulf. According to MEED Projects, schemes worth more than $650,000 million are planned or
under way in the GCC, Iran and Iraq. Oil price forecasts imply that such activity will accelerate further in
2006.
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Under such benign conditions, politicians might be expected to lose some of their enthusiasm for economic
reform. However, while not all are pursuing it with a uniform degree of urgency, a raft of changes is afoot
which should see a greater role for the private sector and alleviate the region’s woeful record in attracting
foreign direct investment. Some governments are being goaded by World Trade Organisation
commitments, a process that Riyadh has begun following the kingdom’s accession in November. Cairo’s
reformers are proceeding quickly with the divestment of government assets in the banking sector, and even
Syria’s first private foreign banks have opened their doors. Maghrebi governments have also accelerated
their privatisation programmes.
2006 promises to be another year of economic good fortune across the Middle East. And with few
economic wolves at the door, governments will be at leisure to push ahead with reform and lay the
foundations for solid, long-term growth.
Source: MEED (6/1/06)