Economic reform still tops the GCC agenda

It may be the controversial Free Trade Agreement between the US and Bahrain, and the UAE's negotiations to follow suit that grab the headlines. But economic reform is underway at many levels through-out the Gulf States these days, often undertaken in a fairly quiet and unobtrusive fashion.

Take the telecoms sector: Just three years ago this market was dominated by state-owned champions. Now competitors are emerging in all the major markets with a huge benefit to consumers in terms of better services and cheaper prices; and with direct and indirect benefits to commerce and industry which now has access to a world-class telecoms infrastructure.

Real estate is another example: Even two years ago there were very few places where real estate was sold freehold to any buyer. Now huge development projects have changed this situation and tens of billions of dollars that might have been invested elsewhere are creating ultramodern homes and infrastructure.

The hope, and indeed expectation, among bankers is that this bridgehead of economic reform will widen. HSBC, for example, has published a report on the cement sector showing opportunities for consolidation and rationalization into a more productive industry (see News Feature on this website).

The massive upsurge in Initial Public Offerings on the GCC capital markets, with over $10 billion slated for 2005 is also a sign of economic reform on the move. The creation of deeper and wider capital markets will further fuel economic reform and development.

For in order to list a company through an IPO new levels of transparency are required for investors, and companies frequently have to perform major corporate governance changes pre-IPO.

Thus best practice is implemented and economic reform has made another conquest in the best interest of the new shareholders, and the old ones who's business in now valued at world and not local profit multiples.

Is there any downside in this process? Increased competition is surely uncomfortable to those who liked an easy life inside state monopolies. Open and transparent capital markets may attract some unwelcome new shareholders, and risk upsetting established ownership patterns.

But the cost of the status quo is now too high. Protecting the rights of the few against the greater interests of the majority will keep GDP growth rates sub-optimal, and asset valuations on the floor. The pressure for change is now irresistible, and it is only surprising that this worldwide force has taken so long to reach this region.