Growth prospects improve for the Gulf economies

Growth prospects improve for the Gulf economies

After a period of exceptional political turmoil in the spring, relative calm has been restored to the GCC economies and financial markets thanks to swift policy action, including significant new spending commitments to foster a more inclusive growth paradigm. The region now enjoys the fairly unique distinction of having improving growth prospects even in the face of elevated global economic uncertainty.

The National Commercial Bank (NCB) expects the GCC as a whole to record growth of 6 percent this year, followed by 5 percent in 2012. The strong performance will be led by Qatar, which is at the final stages of natural gas development boom, and Saudi Arabia. But even the UAE is set for a rebound thanks to its success in addressing pressure points linked to its sovereign and quasi-sovereign debts as well as signs of normalization in the battered real estate sector.

However, according to Jarmo T. Kotilaine, chief economist of NCB, “The key question going forward has to do with the pace and composition of the recovery. Even as the headline growth figures are set to significantly exceed expectations, the momentum promises to be largely underpinned by oil market tightness and increased government spending. Signs of a private sector turnaround are multiplying, but the region remains vulnerable to global uncertainties.” The most important risks pertain to the creditworthiness of the US, the debt crisis in the euro zone, and the mounting inflationary pressures in key emerging markets.

• Even as economic growth is accelerating, the GCC appears to be experiencing something of an inflation respite. Following a significant increase in price pressures in 2009-2010, inflation has broadly stabilized although it remains significantly higher in Saudi Arabia and Kuwait – around the 5 percent mark – than in the rest of the region where housing market weakness has kept price pressures at historically low levels. No major pick-up in inflation is likely, although the sharp increases in government spending and Dollar depreciation are a concern. Signs are multiplying of a pickup in money supply growth and even bank lending, but the trends in key monetary aggregates in the region are sharply divergent.

Qatar, Saudi Arabia, and the UAE are seeing rapid growth in their money supply, in large part thanks to increased government spending. Bank lending is growing fastest in Qatar, Oman, and Saudi Arabia but the pace is still historically moderate, especially in real terms.• Even against the backdrop of economic risks, the regional infrastructure boom is showing no sign of slowing down. Aviation and seaports constitute two areas where the regional economies are pursuing an ambitious long-term strategy of capacity building which is giving them a global role far above what they might otherwise enjoy based on their population.

Aviation has become one of the most internationally recognized success stories of the region as GCC carries have capitalized on the fact that two-thirds of the world’s population live within an eight-hour radius from the Gulf. Leading regional airports, which initially grew as hubs between Asia and Europe have developed an increasingly global reach. They have further consolidated their traffic flows by investing in regional tourism. The International Air Transport Association (IATA) now sees the Middle East as the world’s fastest growing market and expects air passenger numbers to increase by 9.4 percent a year until 2014. Boeing’s most recent sector forecasts project the addition of 2,520 planes to the fleets of Middle Eastern carriers by 2030.

While the global airline fleet is expected to double by 2029, growth in the Middle East should reach 150 percent. This momentum is above all driven by the so-called Big Three of regional carriers: Emirates, Qatar Airways, and Etihad. Saudi Arabia, with annual volume growth rates of around 5 percent, has the largest domestic network and enjoys considerable future potential in the area of pilgrimage-related travel. Cargo is rapidly emerging as another opportunity for GCC carriers with projected annual growth rates of 4 percent.

While the success of GCC aviation has built on international routes, also travel within the region is experiencing rapid growth. According to Kotilaine, “Favorable demographic trends and growing prosperity should drive the process further and a number of low cost carriers have emerged to develop the potential of this market. Yet further opportunities would emanate from liberalization of the hitherto fairly strict regulation.”Overall, budget airlines now control almost 10 percent of the total Middle East market in terms of capacity on intra-regional flights. This represents more than a doubling from 2006 but is clearly below the global average of just over 20 percent and the European average of around 30 percent. The track record of the regional budget carriers has been mixed with Air Arabia and flydubai the most notable successes. But a number of operators have closed down due to restrictive regulations and disadvantages in the area of operating costs.

Matching the ambitions of the airlines, airports are among the main focal points of the Gulf region’s $2 trillion infrastructure boom. The Middle East as a whole is expected to have aggregate traffic flows of over 400 million passengers by 2020 and potentially as many as 700 million by 2030. The GCC region has a currently active airport project pipeline of more than $90 billion, led by the Al-Maktoum International Airport in Dubai which aims to become the world’s largest airport with 160 million passengers a year. The New Doha International Airport should by 2015 reach a capacity of 50 million passengers. Some $10-$20 billion is expected to be spent on upgrades of Saudi airports by 2020. As an important new departure for the region, some $10 billion of this is expected to come from the private sector. The most important projects are the upgrades of the King Abdulaziz International Airport (KAIA) in Jeddah and the Prince Mohammed bin Abdulaziz International Airport in Madinah. The new KAIA will significantly transform Jeddah’s ability to operate as an international hub. The project is to be developed in three phases up to 2035 with a total target capacity of up to 70-80 million passengers a year. Madinah’s capacity is set to reach 12 million by 2022.

A great deal of attention of GCC transportation policy has focused on the development of sea ports which in many ways match the potential offered by airports. Foreign trade volumes in the region have grown at double digit rates over the past decade, a process above all driven by oil and gas. Supplying the rapidly growing Asian markets will underpin further expansion in this area. In response to these demand needs, the some $40 billion worth of commercial maritime projects are currently underway in the GCC.

In addition to capacity extensions at existing ports, the region has a number of completely new ventures, most notably the King Abdullah Economic City and Ras Al-Zour ports in Saudi Arabia, the Khalifa Port and Industrial Zone (KPIZ) in Abu Dhabi, the New Doha Port in Qatar, and Mubarak Port on Bubiyan Island in Kuwait. Some of the regional railway ventures will further increase the reach of these ports. The region’s largest ports are currently Jebel Ali in Dubai, which ranks among the global top-10, Jeddah Islamic Port, and Salalah Port in Oman. – Arabnews