DIFC focuses on Middle East and North Africa economic outlook

MENA's unprecedented growth is being driven by huge investments in infrastructure and the transition from oil-based to asset-based economies, which are buoyed by higher levels of liquidity. However, there is work to do before MENA - in particular GCC - economies can enjoy the spin-off benefits of fully functioning capital markets.

This optimism is being fuelled by the "unprecedented value and depth of investments in infrastructure total of more than $1.3 trillion," said Nasser Saidi, Chief Economist, DIFC Authority and Executive Director, Hawkamah. It is also driven by the sustained and unprecedented growth rates that the region has registered over the past five years.

While initially, the impulse for growth was oil-led, today it is being driven by investments (particularly in infrastructure). The private sector is contributing, leading and driving regional economic integration of markets, FDI tourism and labour flows.

"This is a time for vision and a fantastic time to be in the region. It is time for action and just as it is in a renaissance, it is a time for architects and builders," said Nasser Saidi.

"Our region is going international," Saidi said. "Infrastructure investments mean we can invest in logistics (and other services)." He noted that the region is strategically located and stands to benefit from the relocation of trade and economic activity to Asia, which is expected to deliver increased opportunities in the future. Importantly, Asia is "de-linking" from the US business cycle.

"For the foreseeable future, the income from assets and net foreign assets will exceed the income from oil for these countries. For them, interest rates will matter more than oil prices," Saidi said.

He added that Gulf countries' foreign reserves have been growing throughout the decade and are approximately US$ 365 billion in 2007 and set to grow to US$ 455 billion in 2008. What's more, total MENA foreign reserves are nearly US$ 1 trillion. Saidi forecast a permanent income increase of some US$ 550 billion at a real rate of 3%.

This "tremendous increase in wealth" and liquidity has important demographic, migration and transmission effects. Labour exporters such as Egypt, Jordan, Lebanon and North Africa are reaping the benefits of remittances, which are more stable than capital flows, FDI or ODA (Official Development Assistance). High-skilled and professional migration towards the GCC oil producing countries is more likely to be permanent as compared to the previous oil induced booms in the 1970s and early 1980s.

Saidi called for the region to separate out the management of oil revenue from investment, and to use wealth from natural resources to invest for future generations. "That is the importance of the capital markets," he said. "DIFC will take the lead."

The lack of development of MENA's financial sector is being turned around, however, several panellists called for policymakers to implement the appropriate regulatory framework and economic policies.

"Since the Islamic empire, we have not had a proper economic policy," commented Fouad Makhzoumi, Chairman, Future Pipe Industries Group, and Founder and Head, National Dialogue Party (Lebanon). "It was a trade bazaar policy rather than proper development (policy)."

Today's information boom has forced politicians in the region to address issues that used to be taboo, Makhzoumi added. "There is a change of dynamics in the region. We have the wealth that we can afford to spend. Now, political and economic development must catch up with each other."

How should investors view the MENA region? "With this prosperity likely to filter down into good corporate profitability and performance, MENA should be attractive to investors inside and outside the region," commented Henry Azzam, Chief Executive Officer, MENA, Deutsche Bank.

In terms of diversifying MENA economies, Soliman Demir, Chief Economist and Head of Economics and Strategy, Gulf Investment Corporation, called for policymakers to think about diversification in a "planned" way. "The way it is now there is still an emphasis on property," he said. "For the region as a whole, policymakers need to consider productivity."

Moderator Brad Bourland, Head of Research and Chief Economist, Jadwa Investment, reminded participants that with high growth "comes the challenges of inflation and currencies appreciating . . . even in the best of economic times."

Ala'a Al-Yousuf, Chief Economist, Gulf Finance House, pointed to a "golden opportunity" coming up at the 28th Gulf Cooperation Council summit in Doha for politicians to finally agree to go ahead with their own exchange rate policies and join the single currency later.

"The current debate about to peg or not to peg and to what is very important, but there are more important and bigger issues to consider," said Ala'a Al-Yousuf.

"With all the surpluses, it's interesting that currencies are depreciating . . . let's take the golden opportunity, let's solve it and then let's focus on the big issues that matter for the region - capital markets reform and integration, removing barriers to movement of capital, and strengthening our institutions," he said.