Competition, capital investment and market forces: towards a new GCC economy

Take the Gulf airlines for a moment: Emirates Airline is on a growth track only delayed by the A380's late delivery; the new Etihad Airways is expanding rapidly in Abu Dhabi and Sharjah's budget airline Air Arabia has just concluded an IPO to buy more planes. And Qatar Airways continues to forge ahead with a massive new home airport rising from the desert.

So far the loser is Gulf Air, which is now solely owned by Bahrain with Qatar, Abu Dhabi and now Oman giving up their equity stakes. This fall in status from regional to national champion is mirrored by the eclipse of Bahrain as a financial hub by upstart Dubai and even the Qatar Financial Centre.

Economic activity follows the money, and Bahrain's loss of oil revenues years ago seems to have doomed the island state to relative decline. But Sharjah's Air Arabia shows that a little imagination can produce something different, and Kuwait has also produced Jazeera Airways as a low-cost private carrier.

Boom cities

Yet the main focus of construction orders in the present oil boom is certainly the UAE and Qatar by a wide margin. Abu Dhabi, Dubai and Doha are the cities that will be most transformed by the boom. Places like Muscat, Kuwait City and Manama will have a few new buildings but the infrastructure will remain largely the same.

In a downturn or period of consolidation then the ability to keep on building will be strongest in those places with the deepest financial reserves, and the pain will be greatest where this capacity to maintain investment flow is weakest.

Also there is bound to be a re-examination of a number of mega projects and a look again at what is most financially viable. It could be that some competitors are merged to consolidate the market, and that a few of the more ambitious schemes are kicked out into the long grass of future planning.

Subsidizing success

There will also come a point when the subsidizing of new enterprises has to stop and commercial returns begin, and that could herald a shake-out in sectors where investment has driven expansion rather than the bottom line. Airlines and prestige projects could well fall under this heading in certain cases.

Indeed, more than ever the focus will be on business plans and commercial returns. However, the Gulf States are run much more as commercial concerns these days than in the past when oil booms meant huge government spending rather than the establishment of a diverse economy with many new participants.

That should meant that not only is the GCC economy more resilient to oil price downturns than in the past but that it also has a far greater capacity to recover. Market forces therefore should eventually correct the excesses of the boom years while allowing the green shoots of recovery to emerge relatively quickly.