A promising economic outlook is offsetting explosive politics in the Middle East. Sherine Abdel-Razek looks at what the future has in store for the economies of the region Scenes of clashes in Iraq and Palestine, fears of a looming civil war in Lebanon and question marks about the possibility of military action against Iran are throwing shadows of uncertainty over the Middle East. However, this is not depriving the politically-distressed region of its being a Mecca for bankers, multinational oil companies, real estate developers and fund managers from around the world. Thanks to an unprecedented rise in the price of oil during the last five years -- reaching its peak in 2007 and early months of 2008 -- the region, including a handful of oil exporting countries, has been able to sustain distinctive growth rates. According to the International Monetary Fund (IMF)'s regional economic outlook report, "The region's oil and gas export receipts are likely to amount to $940 billion in 2008, close to $200 billion more than was envisaged late last year." Ten years ago, the region's GDP was valued at $250 billion, but this figure quadrupled to hover around $1 trillion last year. These are unprecedented growth rates, according to Simon Williams, chief economist at the Middle East department of HSBC. Williams noted that while skyrocketing oil revenues are the main catalyst for growth in the region, 80 per cent of real growth in the oil-rich countries of the Gulf Cooperation Council (GCC) during this period has been achieved in non-oil sectors. This is partly due to large public investment programmes, as well as a high level of business confidence. These sectors include manufacturing and services, especially financial and retail activities. Foreign Direct Investment (FDI) inflows to countries of the region topped $80 billion in 2007, four times the level in 2002. Egypt, Saudi Arabia (mainly in the oil sector), and the United Arab Emirates (UAE) were the largest recipients, accounting for 55 per cent of the total. Countries other than oil exporters, explained Williams, are more vulnerable and less fortunate due to the pressure on the state's public finances. However, most of these countries have benefited from the petrodollar surplus since they received an influx of Gulf investments. According to The Economist magazine, while the GCC has injected $700 billion in capital in the world economy during the last six years, Asia and the Middle East region have soaked 22 per cent of the GCC's outflows in the period from 2002 to 2006. The Gulf economies have launched a series of mergers and acquisitions in the region, feeding neighbouring economies with much needed FDIs. These multi-million (and sometimes multi- billion) dollar deals include Qatar Steel's acquisition of an iron mine in Mauritania for $375 million; hunting campaigns for regional banks and financial institutions, such as Abraaj capital of the UAE buying 20 per cent of Egypt's leading investment bank EFG-Hermes, and the fiercely competed race to acquire mobile and fixed line licences by regional telecom heavyweights like Etisalat and Zain. However, the real estate frenzy is the most noticeable, with names like the UAE-based Emaar and DAMAC, as well as Qatar's Diar, developing millions of kilometres throughout the region starting with Algeria through to Pakistan. Regional economies will maintain healthy growth rates for a while, stated this week's IMF World Economic Outlook. "The short-term outlook for the region remains very favourable," it noted. "For the region as a whole, real GDP growth is expected to be around six per cent on average in 2008, slightly less than in 2007." The report further revealed that almost all countries in the region were largely unaffected by the recent financial turmoil in developed countries. As in most other emerging markets and developing countries, it said, this resilience owes much to the region's strengthened macroeconomic position and progress with structural reforms. The report pointed out, however, that the real challenge for most of the countries in the region is to contain rising inflation. The inflation caused by increased food prices and a weakening dollar is threading economies of the region along with the rest of the world. Inflation soared to double digits across the region to reach unprecedented highs in decades in Kuwait and Saudi Arabia, and up to 20 per cent in Iran. The different types of regional economies dictate different ways in dealing with this international affliction, with the aim to calm any social unrest caused by overheated prices. With most of their currencies pegged to the dollar, Gulf countries have few options since they can neither raise interest rates nor allow their currency to appreciate. They compensate their people with social pampering methods, including imposing price ceilings on certain commodities or providing cheap housing and medical services. Already burdened public finances in emerging economies in the region cannot afford such generosity. On the contrary, governments there try to lessen pressure on their budgets by either reducing subsidies, raising salaries or giving compensatory funds for the poor. The governments of Jordan, Syria, Tunisia and Egypt are in the process, or have already implemented, subsidy cuts in 2008; meanwhile, Egypt promised public sector employees a 30 per cent pay rise. With political unrest remaining high as a risk facing economies in the region, the latter have invented ways to deal with such uncertainties. The safest way to guard local economic welfare in some Gulf countries, like Kuwait and UAE, was to open their territories to US military bases. Others depend on the heavy presence of foreign investments as a source of security, as is the case in Qatar which opened its doors for foreign investments to develop its huge gas reserves. Egypt and Jordan choose to have economic ties with Israel through Qualified Industrial Zone (QIZ) agreements, or a highly controversial deal exporting Egyptian gas to Israel. Qatar and the UAE have gone a step further by aligning with the enemy of their US friends, and concluded economic and business agreements with Iran. Other threats highlighted in the Global Risks Report 2008 issued by the World Economic Forum, include any short-term supply bottlenecks -- for example, as the result of a terrorist attack -- would undermine the economic foundations of current economic growth in the Middle East. At the same time, the excess capacity needed to manage oil prices is low, and the resurgence of non-Organisation of the Petroleum Exporting Countries (OPEC) supply has led some to question the ability of Middle East oil producers to achieve price targets. One of the main elements pushing demand, and hence the price of oil, is increased Asian demand -- especially from China. Hence, any sharp slowdown in China's economy, potentially as a result of protectionism, internal political or economic difficulties, will strip the region of many oil-driven gains. The depth of such a problem is compounded since Gulf countries are venturing in the Chinese oil sector and beyond, purchasing stakes in Chinese banks, container terminals and real estate. This, despite the fact that Chinese capital markets do not yet constitute a major alternative for petrodollar portfolio investments. In turn, Chinese investments in the Middle East include oil production in Syria, the Dragon Mall in Dubai (showcasing Chinese manufacturing goods), and natural gas and planned aluminum projects in Saudi Arabia. Having an absolute population majority of youth, one of the main challenges for the region is to provide this category with the needed social welfare, high quality education and training needed to make them of added value to their economies, believes Williams. But while the region's labour force is fast growing, it either lacks job opportunities as is the case in heavily-populated countries like Egypt; or lacks needed skills as seen in the Gulf where citizens are unwilling to undertake lower-skilled tasks. In fact, Gulf countries depend mainly on imported skilled labour, with more than 90 per cent of the UAE's private labour force made up of foreigners.
