In its latest economic publication covering the Gulf Cooperation Council (GCC), National Bank of Kuwait (NBK) states that the private sector has played an important role in the ongoing economic expansion in the Gulf, unlike the previous oil boom in the 1970s. Private businesses have boosted their investment across a number of vital industries, providing the GCC economies with a new dynamism unseen in the past.
Consumers too have helped the current boom along. Rapid population growth combined with a rise in purchasing power, particularly among GCC nationals, has resulted in healthy and steady growth in consumer spending, rejuvenating the business sector in the process. Booming personal lending is one noticeable sign of strength of consumer spending, though part of it is also explained by the boom in equity markets. Personal lending has grown more rapidly than other forms of bank lending during the past few years.
Higher oil prices combined with increased production levels have resulted in a massive fiscal windfall in the GCC. Oil revenues tripled between 2002 and 2005, rising from 25% of GDP to 38%. In contrast, growth had averaged 18% in the 1990s. Growth in 2006 is expected to have remained rapid, despite some slowdown as a result of a retreat in oil prices later in the year and output reductions due to cuts in OPEC quotas.
According to the NBK report, GCC countries are putting the current windfall from the oil price rally to good use by investing a large part of it in the domestic economy and providing a strong impetus for growth in other sectors. Domestic spending by governments has accelerated, averaging 14% in the past four years.
Capital spending has been an important beneficiary of this growth, with governments increasing their spending on infrastructure and projects. Project activity in the GCC region has boomed, with governments sponsoring more than half of the projects launched since 2003. Around 600 government-sponsored projects worth in excess of $200 billion have been launched since 2003 throughout the GCC. While much such spending has come from ministries, municipalities, and other government-owned entities such as national oil companies, there has also been a flurry of projects resulting from private-public partnerships structured as build-operate-transfer projects, independent water and power plant projects, or joint ventures.
NBK reports that Saudi Arabia and the UAE, which have enjoyed the most sizable windfalls, accounted for more than half of the project activity since 2003. Qatar followed with its vibrant liquefied natural gas sector taking most of the investment. Although a large part of the investment focused on a number of strategic sectors linked to oil, such as gas and petrochemicals, the period saw increasing investment in infrastructure and real estate projects.
It is estimated that less than 20% of the initiated projects have actually been completed as a result of the slow project implementation in the region. The bulk of planned investment remains in the pipeline and is expected to be a strong driver for growth in the coming years. Indeed, project activity accelerated in 2006, with work starting on some 252 megaprojects. More projects are scheduled to enter the implementation stage in 2007, with 250 projects worth $250 billion currently in advanced execution stages. Another 261 projects worth $281 billion are at the early planning or feasibility stage.
Despite the hike in spending, according to NBK, GCC countries managed to save about two-thirds of the increase in oil revenues received since 2002. Fiscal policy has been relatively prudent compared with what it was during the previous oil boom in the 1970s. Government spending as a percentage of GDP has remained largely unchanged over the period at 30%, while growth in expenditures has been easily outpaced by revenue growth.
This has allowed the continued accumulation of large fiscal surpluses, which have regularly exceeded 10% of GDP for four GCC countries—Kuwait, Saudi Arabia, the UAE, and Qatar. In Oman and Bahrain, where oil production has been on the decline, budget surpluses have been more modest.
A large part of the oil windfall has been used to repay public debt and to accumulate financial assets in stabilization funds. The combined public debt of GCC countries dropped from 60% to 18% of GDP between 2003 and 2006. Saudi Arabia saw the largest decline, having paid down $85 billion in debts. During the same period, financial assets of the public sector increased by $368 billion, bringing total asset holdings to an estimated $700–$1,000 billion. Kuwait and Saudi Arabia have been the largest savers, followed by the UAE.
NBK notes that the GCC economic performance has benefited from robust growth in consumer spending that averaged 10% in the past four years, pushing aggregate spending to an estimated $220 billion in 2006. Incremental increases in GCC-wide aggregate private consumption averaged $18 billion a year between 2000 and 2006. Per capita private consumption increased sharply as well, reaching $6,000 compared with the $4,000 average seen throughout most of the 1990s.
Much of this growth is owed to the favorable demographics that characterize the region and to accelerating growth in government spending. Readily available consumer lending and the wealth generated from booming equity markets have also had a positive impact on consumer spending growth.
GCC population growth has averaged 3.4% per annum in the last four years, among the highest rates in the world. While this growth was led by the flow of migrant workers to meet strong demand for labor, it was also supported by high fertility rates.
Rapid population growth combined with a rise in the participation rate, especially among women, has doubled the economically active population over the past decade. The population aged 15 to 60 years hit 23 million at the end of 2006 (constituting 64% of the total). Of these, 12.6 million were employed.
The unprecedented boom in GCC equity markets has been an additional force driving growth in consumer spending in the last few years. Between 2003 and 2006, GCC markets saw average per annum gains in stock prices of 31% as measured by the SHUAA Capital GCC Index, despite a large correction in 2006. This pace of growth far outpaced other emerging markets during the same period. This has greatly boosted the purchasing power of households across the Gulf, especially as small investors have been increasing their activity in the market.
According to NBK, the oil windfall and growth in government spending have built significant momentum in the business sector. Unlike previous oil booms, this one has been accompanied by soaring private investment. Iraq’s openness to trade since 2003 and the privatization drive in a number of GCC countries have been positive factors as well. The private sector has invested some $120 billion since 2003 in about 500 projects, and at least three times more is in the pipeline. Private investment was particularly strong in Qatar and the UAE.
The financial services, transport and storage, communications, construction, and manufacturing sectors have all recorded double-digit growth since 2003, having benefited from the bulk of the private investment.
Investor confidence has also manifested itself in the scramble by GCC companies to expand their activities in the region. A number of leading companies have expanded in the GCC, and in some cases beyond, either through acquisitions or through organic growth. In 2006, as many as 39 large publicly traded companies, with a total market value in excess of $48 billion, announced plans to invest outside their home markets. Roughly a third were seeking to target other GCC opportunities, while the rest sought markets in the Middle East and North Africa (MENA) and Asia.
© 2007 Al Bawaba (www.albawaba.com)
