Gulf back on track for growth
Published: 31 January 2011
Oil prices fuel steady but uneven recovery
After nearly two years of economic distress, the Gulf region of the Middle East is back on track for growth. The pace of recovery is uneven – some economies are doing better than others – but the region as a whole is expected to grow more rapidly this year than it did in 2010.
To put this in perspective, the Middle East had six years of exceptionally strong growth from 2003 to 2008. That boom came to an abrupt halt at the end of 2008 as the global financial crisis took its toll.
The region began a slow return to normalcy in the first months of 2010 and the recent spate of data coming out of the Middle East – including the most recent PMI figures – indicates a new growth cycle is under way.
After two years of being bearish, Simon Williams, Chief Economist for HSBC Middle East and North Africa (MENA), is finally getting upbeat on the prospects for growth in the Gulf.
Among the oil producers, the return to USD100 oil is a huge lift for public finances and will encourage strong growth in government spending
“Recovery has come late to the Gulf, and the pace is more muted than elsewhere, but I can finally see growth picking up, led by places like Qatar, where we are looking at double-digit growth in 2011,” Mr Williams said. “More broadly, among the oil producers, the return to USD100 oil is a huge lift for public finances and will encourage strong growth in government spending.”
Indeed, one of the key drivers for this growth is the rising price of crude oil – which has been nudging the USD100 mark since the beginning of 2011. High oil prices mean increased revenues for oil-producing nations, which leads to increased public spending.
However, not everyone in the region benefits from higher crude prices. Some countries such as Egypt and Jordan are expected to feel the pain as rising oil prices translate into higher food costs and inflation, which in turn can be a catalyst for political instability.
Compelling opportunities
Mr Williams agreed that the region could be split into those that benefit from rising commodity prices and those that lose but he was quick to point out that the Gulf has a concentration of “commodity-price-gain winners”. These economies offer particularly compelling near and long-term opportunities for investors.
Take, for instance, Qatar. Even before its World Cup bid Qatar’s economic story had been remarkable. This is set to continue. The latest data from Qatar’s Statistics Authority shows that third quarter GDP in 2010 grew a staggering 21.1 per cent year-on-year in nominal dollar terms. This stunning growth figure did not surprise Mr Williams, who pointed out that Qatar’s US dollar GDP increased 12-fold from 1998 to 2008 and the country’s per capita GDP was now well over USD70,000.
“As well as substantial oil assets, Qatar has the world’s third-largest natural gas reserves and only began to monetise its gas reserves relatively recently,” he said. “There was already a transformation under way and I had strong growth numbers in my forecasts even before the world cup bid was won.”
The successful World Cup bid inevitably strengthens what was already a very positive growth story
Preparations to host the World Cup in 2022 would have a direct impact across the domestic economy and turn a good growth story into a very good one, he said. This, in turn, would have a knock-on effect on the rest of the region. Construction, design and service companies – many of them from Dubai – would find plenty of opportunities in Qatar.
“The successful World Cup bid inevitably strengthens what was already a very positive growth story,” he said. “The investment projects that had been talked about before – in terms of developing the country’s infrastructure, service sector, water networks and airport – all those projects now have to get done.”
He pointed out that one benefit of the World Cup bid was the likelihood that the increased attention would change perceptions of the Middle East as simply a place of political conflict and a source of oil and gas.
Turning to Dubai, Mr Williams said that while the emirate had its problems, the underlying strength of its real economy had been overlooked.
“The painfully abrupt downturn in Dubai’s fortunes from late 2008 was more marked than anywhere else in MENA and we are still digesting the after-effects not just of the bust but of the boom that went before,” he said.
“But some, looking in from the outside, mistakenly believed that Dubai was just a real-estate story. It isn’t. There is a service sector in Dubai that even now is showing real growth. This export-oriented service sector sells trade, logistics, transport, leisure, retail and wholesale services to a Gulf region that is being lifted by USD100 oil.
“Dubai Airport is the twelfth-busiest and second-fastest-growing in the world. Its port is thriving, its hotels are still showing occupancy rates in the 65-70 per cent range.
“Everyone knows about the problems in Dubai; but I fear many have lost sight of the things that are already going right. The service sector is the heart of Dubai’s real economy and will drive the emirates economic story for some time to come.”
Mr Williams acknowledged that the key risk for the region was its dependency on oil. He pointed out that while a high oil price was “growth positive”, it could discourage reform and create vulnerability.
The Middle East hasn’t been a destination for capital and I think that’s changing. It is a region which is coming of age
“Saudi Arabia in 2003 balanced its budget with oil at USD23 a barrel,” he said. “This year it will need oil at USD70, if not USD75, a barrel to balance the budget because spending commitments have risen so sharply. That’s fine in an environment of USD100 a barrel oil but, if prices were to fall substantially and remain low, that will create a strain.”
Apart from inflation, the region faced a problem with currency regimes tied to the US dollar, he said, adding: “This was suitable in earlier times when the US was the prime driver of global commodity prices because that meant a link between the US economic cycle and the regional economic cycle. That link has weakened. I think it is a problem that many emerging markets, including the Middle East, are seeking to deal with.”
Mr Williams said there was much to be optimistic about in the region. The Gulf differed from other parts of the world not so much because of the pace of economic growth but the strength of the key economic fundamentals: strong public spending, low levels of public debt and no budget deficits anywhere in the region. This made investment in the Gulf well worth considering.
“What investors get is exposure to rising commodity prices and to strong budget and external account fundamentals,” he said. “It is a market that has been overlooked by many for too long. The Middle East hasn’t been a destination for capital and I think that’s changing. It is a region which is coming of age.”
Simon Williams
Simon Williams is HSBC's Chief Economist for the Middle East and North Africa. Based in Dubai, he joined HSBC in 2006 and has more than 15 years’ experience as a Middle East analyst.
Mr Williams leads HSBC's macro view of the Middle East and North Africa for equity, fixed income and FX clients across the globe. He has degrees in economics from the LSE and in international relations from the University of London.
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