Traffic, inflation, competition and capacity constraints, and the top of the business cycle

You hardly need to spend much time in the Gulf States to appreciate the traffic congestion that now characterizes the boom cities of Doha and Dubai. Journeys need to be carefully planned and organizing larger functions can be difficult.

Likewise ask many senior executives their main problems and it will be a balance between high rents which are putting severe upward pressure on salaries, competition from new rivals in many sectors and horrendous recruitment stories. It is hard to find the right staff in a market where moving job is not encouraged. And it is very expensive and time consuming to bring them in from abroad.

Governments are also having problems in balancing their policy objectives. Rent caps help to keep inflation down but paying competitive salaries to public sector workers has the reverse impact. Meanwhile, building material inflation rates of around 20 per cent keep construction costs soaring.

Market top?

What the classic business model suggests is that this mixture of factors will begin to dampen the boom and eventually reverse it. The logic is clear: how can you maintain profits if your costs are spiraling, and your market is shrinking due to new competition?

On the other hand, the liquidity that fuelled the boom in the Gulf States is perhaps now falling, but not much from the supercharged levels of 2006. Saudi Arabia is pumping around one million barrels per day less than last year at prices around $58 per barrel when this article was written, a revenue shortfall of $58 million a day.

This sort of decline in revenues does not immediately impact on government spending in the Gulf States. But much in the way that an economic boom is leveraged off the back of rising oil revenues, so the reverse is also true and a gentle unwinding may be in process.

End of the boom?

Whether this will be enough to make a dent in the traffic, inflation, competition and capacity constraints, looks unlikely. However, this may be the beginning of the end and these problems could begin to ease of their own accord as the boom recedes.

This presents Gulf businessmen and women with a dilemma: do they continue with expensive expansion plans and risk being caught overextended in a downturn? Or do they decide to back pedal now and accept that losing some business might be a useful tactical retreat to secure long term survival?

It is impossible to generalize on these questions and it will be up to senior executives to weigh up the pros and cons in their own sectors and its position in relation to the business cycle. But times are changing.