Gulf poised for heady surge into 2008 & beyond: the oil boom experienced over recent years shows no immediate signs of abating. Economic analyst Moin Siddiqi looks at the future of the Gulf producers, who stand to earn $5 trillion in potential windfalls over the next 25 years if strong prices and demand are maintained

Middle East, The, March, 2008 by Moin Siddiqi

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THE SIX MEMBER states of the Gulf Cooperation Council (GCC), Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, are witnessing breathtaking growth thanks largely to the quadrupling of oil prices since 2002. In cumulative terms, total earnings in the 2002-06 period were estimated by the International Monetary Fund (IMF) at $1.5 trillion, compared with $730bn in 1997-2001. This has lifted the region's economy, creating a deep pool of liquidity, which in turn has stimulated an investment boom, especially in the property market. The National Bank of Kuwait notes: "The current boom is likely to be sustained for at least three more years," meaning that "the expected seven-year run of above average growth will make it the longest expansion in three decades". Robert Eid, managing director of Saudi-based Arab National Bank, agrees: "This is a golden age for the GCC countries."

At around $800bn, the area's nominal output is already comparable to Australia in size. On current expansion, aggregate GDP could surpass the milestone $1 trillion mark by end-2009. GCC economies have grown at an annual average real rate of 7% in the past five years--far above the lacklustre 3% growth seen during 1998-2001, on IMF figures. Encouragingly, the non-petroleum sector (led by construction) is providing the momentum, with several infrastructures, tourism, shopping malls and real estate projects under construction. The sector has had positive 'multiplier-effects' on the non-oil economy, notably financial services and transport. Manufacturing is also supporting regional growth, as energy intensive processing industries such as petrochemicals and metals have received sizeable investments in recent years. This is most evident in hydrocarbon-rich Abu Dhabi, Qatar and Saudi Arabia, but is now also a regional-wide trend.

Despite rising oil prices unleashing strong government capital spending, the prosperity/progress is mainly private sector led. Economic liberalisation, privatisations and greater foreign participation in regional markets are generating new opportunities, particularly in finance, telecoms, transport, tourism and manufacturing. In fact, the non-oil sector's contribution to real GDP growth rose from 49% in 2003 to 84% in 2006, the IMF estimated. The Gulf region is rapidly diversifying and attracting higher levels of foreign direct investment (FDI)--a marked contrast with previous decades. A study by Wall Street bank Goldman Sachs concluded that the GCC bloc was among the best performers in its rankings for enhancing growth conditions, with a vigorous focus on diversification and deregulation. The UAE, which had embarked on large-scale diversification before the oil boom, remains a regional leader.

With the labour force expanding at about 4% per annum, job creation is a challenge across the region. Robust private sector growth has created new employment. However, expatriate workers, reflecting skill mismatches and nationals' higher expectations about pay and conditions, are filling the bulk of positions. Schemes obliging private firms to employ more nationals (mainly in Oman and Saudi Arabia) have had some impact and the authorities are now focusing on education and vocational training to match nationals with the demands of private firms. The IMF advises that more flexible employment procedures and measures facilitating labour mobility, along with human capital development, should help relieve labour supply bottlenecks and create jobs for the young/growing population.

GCC states (with the exception of Kuwait) have received sizeable FDI over the past half-decade, with respective governments opening key sectors to regional and global investors. According to UNCTAD's 2007 World Investment Report, FDI inflows into the GCC rose from a modest $1,517m in 2001 to $14,263m in 2004, $26,348m in 2005 and $32,442m in 2006. Such flows are buoyant in the UAE, Saudi Arabia and Qatar, reflecting the rash of downstream energy and construction projects underway in these countries, as well as improvements to their respective business regulations. Saudi Arabia and the UAE (led by dynamic Dubai) have received $32,332m and $29,290m, respectively, over 2004-07, whilst GCC's inward FDI stock in 2006 totalled $112.6bn--representing nearly half of the Middle East's total ($242.6bn), excluding North Africa.

Public private partnerships with foreign companies are also being encouraged to implement regional infrastructure projects. Dubai-based private equity group, Abraaj Capital, reckons that, over the next decade, the GCC bloc needs $188bn to upgrade transportation, including ports; $155bn for power utilities and $130bn for the water sector. Meanwhile, healthcare and education would require $49bn and $18bn, respectively.

Expanding the role of the private sector in the provision of public services, opening government procurement and domestic sectors to competition, as well as lifting price controls will encourage private funds in basic infrastructure.