A new kind of boom in the Oil States

The GCC is going through another economic boom fired by continued strong oil prices, economic reforms and the reality and prospects of further direct inward investment. Local stock markets are soaring, massive new projects are announced every day and budget deficits are a thing of the past.

This is happening at a bad time for the global economy, and for that matter the rest of the Middle East. Even the impact of September 11 on the Oil States has been positive with Arab investors now more inclined than ever to keep their cash at home.

GCC nationals returning from the United States have also significantly increased local demand for products such as luxury cars. And the momentum of economic reform, privatization and foreign direct investment is growing everywhere.

This week saw USD2bn in new foreign investment in petrochemical plants in Qatar, Dubai declared its target of USD2bn in foreign direct investment per annum and the Saudi authorities began to arrange a face-saving compromise over the USD25bn Saudi Gas Initiative, the largest FDI in world history.

Local stock market liquidity has really taken off in 2002, powering Kuwait to a four-year high after the weekend. Saudi stocks took a brief pause last week to digest the impact of the government's privatization programme, amid some concern that the market might be swamped with new share issues.

Meanwhile, real estate is also attracting a lot of investment interest, whether in Bahrain or Dubai. At the moment individual home buyers are simply thinking in terms of saving on rental payments, but it can not be long before a speculative market sets into regional real estate, which is dirt cheap by international standards.
The nice thing about this business boom is that it should continue for some time. Oil prices seem under control, and output will rise once the world economy begins to look up. Moreover, all the economic multipliers of economic reform will compound this stimulus.

For instead of oil wealth being spent by inefficient state organizations, it will increasingly be channeled into the more efficient private sector. That means a rise in productivity on top of a general rise in liquidity. No wonder regional stock markets are rising - rational investors have good reason to be in the market.