Northern Gulf Outlook

Bahrain

Preliminary data suggests the economy grew by 4.9% last year. Bahrain should continue to perform well in 2004, boosted by low interest rates, expansionary public finances and high oil prices. Domestic confidence should benefit from tangible evidence of the government's policy of economic diversification, the most visible example being the April Formula 1 Grand Prix, the first to be held in the Middle East. The direct impact on the economy from the 30,000 attendees was substantial and the race, and its worldwide audience, is likely to help raise Bahrain's profile as a tourism destination.

Elsewhere, Aluminium Bahrain's USD 1.7bn scheme, aimed at doubling the Kingdom's production in the sector by 2005, is on track. The strong regional demand for aluminium has led to a further USD 1.3bn expansion plan to be mooted. Initial construction of the Bahrain Financial Harbour has also begun, as Bahrain seeks to capitalise on its reputation for good financial regulation and Islamic finance. However one concern has been the recent rise in social unrest. Although it involves only a small minority, it does highlight that not all the population approves of the country's recent liberalisation.

Growth forecasts:

2003 4.9%, 2004 4.5%, 2005 3.0%

Kuwait

The Kuwait economy enjoyed one of its strongest performances in recent years in 2003. Real GDP growth is estimated to have rebounded to around 6% after contracting in each of the previous two years. Buoyed up by record oil receipts both the budget and current accounts registered sharply stronger surpluses. Budget revenues for the fiscal year ending March were targeted at KD 2.97bn, but H1 revenues alone were KD 3bn. The current account surplus is estimated to have reached at least USD 9bn, double the surplus in 2002.

2004 has got off to a strong start. Oil prices and output have remained above expectations in Q1 and could turn out to be much stronger than originally planned. Robust money supply growth combined with low interest rates will also act as a continuing stimulus to non-oil sector activity. Add in the obvious growth opportunities provided by Iraqi reconstruction, as well as the psychological boost to confidence of the capture of former Iraqi president Saddam Hussein,
and economic prospects are bright. There are, however, a number of ongoing issues. Structural reform remains disappointing, a casualty of sluggish decision-making. Unemployment is rising: 8.2% of the local one million population are unemployed. According to Planning Ministry figures, the number of registered job seekers at the Civil Service Commission has risen seven-fold in the past seven years.

The election of a new government in 2003 has done little to accelerate reform. The long-delayed privatisation bill has still not received parliamentary approval. Likewise the fate of project Kuwait is still undecided. However, in January, Parliament agreed to allow foreign banks to operate in Kuwait, raising hopes that reform may at last be moving nearer to the top of the agenda. Surplus liquidity is also raising some concerns about a possible downward correction in the local stock market in 2004.

Growth forecasts:

2003 6.0%, 2004 2.5%, 2005 1.0%

Qatar

Previous heavy investment in Qatar's oil and gas sectors has paid off. The economy is booming. Preliminary data from the Planning Council suggest nominal GDP growth hit 8.8% in 2003. We estimate the economy grew by 10% in real terms. Oil has driven growth, but non-oil sector activity has also bounced back strongly after a period in the doldrums.

According to the central bank, the fiscal accounts are expected to register a QR 5bn (USD 1.6bn) surplus in FY03/04, almost 42% higher than in FY02/03 and equivalent to an estimated 9% of GDP. This is despite an almost identical percentage rise in major project spending from QR 4.3bn to QR 6.2bn. Project spending has trebled since FY99/00. The budget for FY04/05, due at the end of March, is unlikely to reverse this trend. Firmer than expected oil prices will help compensate for possible output cuts and ensure the fiscal accounts stay in healthy shape. The mix of surging liquidity (M2 money supply increased by 16% in 2003), low interest rates, rising commodity prices and US dollar depreciation has generated inflationary pressures. This has been particularly noticeable in the booming construction sector.

Medium term prospects remain extremely positive. Increasing volumes of gas will provide a cushion against future oil shocks. Liquified Natural Gas exports are projected to hit 20m tonnes by 2005, climbing to 60m tonnes by 2010.

Growth forecasts:

2003 10.0%, 2004 6.0%, 2005 6.5%

Gill James, Chief Economist Middle East South Asia, and Daniel Hanna, International Economist Middle East.