Regional liberalisation is in the air

'We would join WTO tomorrow.' The words of Saudi Arabia's Trade Minister are a useful gauge of the shift happening across the region towards liberalisation. After eight years of talks, which were at one point suspended, the Kingdom is confident of joining the organisation by the middle of the year. A remarkable reversal from their position just two years ago. Nor is it just trade, Saudi Arabian officials have made economic openness their mantra in recent months and have made a series of important announcements on financial liberalisation, privatisation and foreign competition.

Alongside the WTO negotiations the last twelve months have seen: foreign banks granted full Saudi banking licences (the first time in thirty years), foreign investors allowed direct access to the Saudi market and foreign involvement sought in developing Saudi's Gas resources. To be sure, Saudi Arabia remains one of the most closed economies in the region and many obstacles to foreign business remain. But it is also the most visible indicator of the change in government intentions in the region: from distrusting reform, to embracing it.

Liberalisation will be an important regional theme in 2004. Developments in Saudi Arabia are being mirrored, to varying degrees, across the region. Two pressures are driving change. Demographics are forcing policymakers to open markets in order to create new jobs and a wave of domestic liquidity searching for regional investment opportunities.

In the Middle East more than half of the population is under the age of twenty. As the oil boom baby boomers begin to look for jobs the labour force is set to grow at annual rate of 4-6% until 2020. Jordan, for example, must create over 40 thousand jobs a year, equivalent to 1% of its population, to keep unemployment constant at 15%.

More positively a wave of investment is also encouraging change. The region is awash with liquidity and investors are seeking local and regional opportunities. The region's equity markets tell their own story. The Kuwait Stock Exchange Index ended 2003 up 102%, followed by Saudi Arabia with a 76% gain. Qatar was up 69%, Oman 42% ahead.

This has encouraged policy makers to look to develop the local capital and equity markets. Efforts are underway to increase the sophistication of market products, such as local derivatives. Two banking offshore hubs with independent regulators are being created in Dubai and Bahrain. Several local family or privately owned companies are being encouraged to consider a public listing. One concern is that listing laws are being relaxed to encourage firms to go public. This will just store up problems for later. Nonetheless the current Amlak Finance IPO in the UAE is seen as the first of many.

Privatisation is also playing an important role in developing the local equity markets. The success of last year's Saudi Telecom public offering has encouraged the Saudi government to look at privatising other state owned corporations. The large level of investment needed to upgrade local power and water supplies are also pushing governments to turn to foreign investment and expertise. Abu Dhabi has led the way in handing over control to foreign companies in its power sector and is being copied in the other Emirates and across the region. Jordan and Lebanon's privatisation process should also pick up momentum this year given the improved regional geopolitical situation and their budgetary needs.

The most noticeable shifts have come in the region's attitude to foreign ownership of property and involvement in its natural resources. The property boom in Dubai has at least partially been caused by the change allowing expatriates to own property in certain zones. Bahrain has followed with similar steps and other countries are looking at smaller schemes.

During the 1970's Middle East government's sought to remove foreign influence on their natural resources. Now international companies are being invited back, albeit on radically different terms. Saudi Arabia is pushing ahead with its gas developments plans but this year's biggest announcement may come with the go ahead given to Project Kuwait - the development of Kuwait's Northern oil fields - despite current parliamentary opposition.

The consensus in the region is that change is needed. Disagreement now centres around the scope and pace of liberalisation. Reform will continue to be haphazard and slower than many, especially outside the region, would wish but 2004 will see further announcements consistent with this view.