The rise of the Middle East has been a fairy tale story. The desert nations have shown fantastic growth over the past decade and this growth has been fairly inclusive and the governments have been able to sustain it over the period of time. But the question remains that whether the politically turmoil region will be able to sustain such high growth rate. May be yes?
If ever we wanted to see the impact of the commodities boom on a particular region Middle East is the best example. The region has been witnessing high growth rate due to oil and non oil sectors but it is crude and natural gas that has helped the desert nations reach where they are today. According to me Middle East has a strong case to become an economic powerhouse. This is something their governments also understand and thus we have seen the formation of Gulf Cooperation Council (GCC) which includes Saudi Arabia, UAE, Kuwait, Qatar, Oman and Bahrain.
The economic growth in Middle East is likely to remain fairly robust in coming few years in the wake of positive outlook on oil and natural gas prices. The region been an export oriented economy and a net oil exporter is best poised to utilise the price rise of black gold. Oil accounts for more 90% of Kuwait, Saudi and Iraq’s oil export and more than 70% of their fiscal revenues. On average oil accounts for roughly more than 50% of regions exports.
Been a net oil exporter which traditionally forms a huge chunk of any country’s trade balance most of the Middle East countries have a positive current account balance. One of the strongest attribute of economies in this region. The average current account surplus in the region is more than 20%. Large amount of earnings through oil exports also keeps the fiscal situation of the region in check with most of the countries having a Fiscal balance of 11%. With another year of high oil prices the current account and fiscal balance is likely to remain positive and both are expected to witness marginal growth in 2008. The economy will not only benefit from high oil prices but also from increase in production of oil from OPEC countries. The benefit of investments made in the exploration sector is likely to be seen in the way of rise in production. High oil prices are also likely to reduce the debt burden of the region. According to a recently released paper by a economic governing body current account situation in the region will not reverse unless oil prices come below USD 30 which is a far cry and at current demand supply situation looks nearly distant possibility.
The growth witnessed due to the oil price rise has also had its spill over effect on the non oil sectors like real estate. We have recently witnessed fantastic growth in the real estate both commercially as well as residentially as rich and famous people across the globe want Middle Eastern countries to be their holiday homes. Tourism has also flourished in the region over the last decade thus bringing in foreign capital for the region. The country is also likely to benefit from the investments made by sovereign funds of governments of these countries in markets like India, China and other mature markets.
I expect the region to continue with its robust growth scenario as according to my estimation of oil demand till 2015 I see demand rising by 2.5% p.a. Also the astonishing growth witnessed in the BRIC (Brazil Russia India and China) will be the big drivers of growth in the desert region. Today GCC has 40% of proven oil reserve and 20% of natural gas reserves it is the only region that can truly utilise the boom in energy prices to its use.
My big concern for the economy is its political scenario and rigidness in government policies. More than these two there is another impending threat on the desert are and that is the regional instability which is not allowing the region to grow to its fullest capability, to me this is something which can very well derail the drive of becoming economic superpower.
Some of the things that the economy has to do to achieve further growth and maintain it are as follows:
1) Better Education standards and quality human resource: Among the country in its league the Middle East has got some of the lowest educational standards. If we look at India and Japan the growth in these two countries have been attributed to the quality of human resource available especially due to robust primary and secondary education institutions. Today most of the region gets its working population imported. Hoards of Indians, Pakistanis and Bangladeshis working in Middle East either in lower or higher level jobs. India’s outsourcing boom was only due to the exceptional talented young minds in the country.
2) Transparent and more flexible economic policies.
3) Low Investment rate: One of the big drivers of growth in the country is the kind of investments made. The Investment rate in the region is close to 15%. Some of the developed and developing economies in the world boast of an investment to GDP ratio of 25-30%. According to me this is likely to change in coming couple of years. With Islamic banking picking up and more and more companies becoming sharia compliant we would see slew of money coming from Middle Eastern countries.
There are few risks the economy faces:
1) Slowdown in the US: Frankly to me this doesn’t look like a big risk to the economies of the region. I feel the region is largely insulated from the slowdown in the region. As the largest export partner for the region is Asia. Also today US is no longer the only driver of oil prices; this mantle has now been taken by china which is still very much on high growth trajectory.
2) Global slowdown: Because of its export oriented nature it is highly affected by global economic activity especially Asia and Europe. With picture looking grim for Europe as well as Asia ex China and India it is likely to marginally affect the oil kingdoms.
3) Commodity Shock: According to me probably the biggest risk that the economy faces. With oil prices near the three figure mark there could be contraction of demand if prices remains at such high level. Fiscal situation in lot of oil importing countries is moving from bad to worse and if this continues they would be forced to pass on the price hike to the consumer thus straining demand. Also an oil shock has got all the power to derail the world economy. Oil at USD 150 could very well decelerate the world growth form 4.5 – 5% to 2 – 2.5%.
4) Political Instability: This is something that the oil kingdoms have to overcome. The region for quiet some while has been affected by war, by terrorism and I again reiterate the if the region is able to overcome this it has the full potential to be the third strongest block after G7 and BRICS.
According to me Middle East is a pot of gold which is still waiting to reap benefits. This is just the start of fantastic era of growth in the region. The best way to invest in the region would be either buying the currencies or stocks of companies listed in some of the Middle Eastern exchanges. The risk of buying stocks for a large investor is lack of liquidity. Most probably that is the reason why real estate is booming in the country as investor’s money is flowing into land in the area.
Middle East is also a good play for some of those investors who want to benefit from commodities boom but either has burned their hands in volatile market or a too scared to enter at these levels.
Written by: Chirag Sheth
(This is my first article on Middle East and this would be followed by an analysis of some of the economies of this region)
