The GCC economic outlook in 2004

The war in Iraq this year will almost certainly prove to have been a historic turning point for the economy of the Middle East. Invasion by a foreign power is about as bad as things can get.

And although the post-war world is still evolving, the new shape of the region is pretty clear, with a clear split between the pro-Western countries and the rest.

This is more than a matter of high-level political debate. It also comes down to the man-in-the-street, and the popular will and the reality that democracy is not always aligned with Western interests in the Middle East. Indeed, the development of democracy may backfire badly against its Western supporters.

Saudi Arabia is almost a no-go area for Westerners these days who are sand bagged inside their residential compounds and guarded by tanks. Non-Muslims have never been particularly welcome in the Kingdom and today many feel more like prisoners than guest workers.

The rejection of the $25 billion Saudi Gas Initiative earlier this year was a decisive moment. Saudi Arabia turned its back on two years of negotiations with eight global energy giants, and massive foreign direct investment and decided to go its own way. Shell and Total already have one replacement joint venture with Saudi Aramco; expect to hear about some more in 2004.

Qatar was the most obvious beneficiary of the collapse of the SGI. ExxonMobil has transferred its LNG investment to the tiny Gulf state which is also now accommodating the US military personnel who have left Saudi Arabia to placate Islamic public opinion. Its capital Doha is a boom town right now.

But the UAE and Dubai in particular, is the biggest winner in the post-war era. Arab investment is flooding into Dubai residential and hotel projects, and there are reports of large investors moving money out of Saudi Arabia and into Dubai.

Energetic and ambitious Dubai is developing its economy with a series of free zones which it has successfully extended to the service sector with the Dubai Internet City and Dubai Media City. And 2004 will almost certainly see the launch of the biggest of them all, the Dubai International Financial Centre.

This worries Bahrain which has claimed the prize of regional financial centre for the past two decades or more. The DIFC is a major new competitor, albeit based on Western and not Sharia Law. The Bahrain Financial Harbour and the 2004 Bahrain Grand Prix, the first time Formula One has raced in the Middle East, are tangible signs of a fight back.

Bahrain can also feel its tourism sector slipping away to Dubai which offers better quality hotels and more for tourists to do. Weekly demonstrations also concern Westerners living in Bahrain and are not good for tourism.

Elsewhere, Kuwait is certainly moving forward, and if 2004 proves to be the year that the security situation in Iraq is successfully addressed then Kuwait could be in for a good year. In any event the oil price outlook for 2004 is again very good which will support the local economy.

Indeed, all the GCC nations look set to enjoy a fifth year of the Great 21st Century Oil Boom in 2004. High oil prices benefit GDP directly, and that will help to offset declining production in Oman where LNG gas development has not been pursued fast enough and Omanization has gone to fast for the local economy to absorb without a negative impact.

Overall, 2004 will be a good year for GCC economies. But watch out for inflation as the continuing fall of the US dollar will drive up the cost of euro imports and that will be passed on in high prices to consumers. The construction booms in Dubai and Doha will also import building price inflation into the local economies.