Reasons to be optimistic about the GCC real economy

The dot-com bubble that went bust in 2000 did nothing to stop the advance of the Internet, and the creation of many great global companies. Likewise the correction that has hit over—inflated Gulf stock markets in the past month or so should not be taken as a good indicator for the outlook for the real economy.

Saudi Arabia will boast a budget surplus of more than $50 billion this year, according to Samba Group, whose economists always err on the cautious side. The UAE will have perhaps $15 billion or more in unplanned income from oil, ditto Kuwait, ditto Qatar, and even Oman and Bahrain will enjoy higher than expected energy related income.

Yet in terms of the GCC real economy there are few signs of a boom in progress, except if you pass by Dubai or Doha where the cranes are really swinging.

Standby for a catch-up in the rest of the Gulf States as oil revenues surge beyond the amounts required to pay off old debts. State-run institutions have also been cautious so far, fearing that oil prices might suddenly dive as in late 1998.

But that is changing. Abu Dhabi is the first to join the spending party, but Saudi Arabia is about to let rip. It is well known that the Kingdom is serious about internal reforms, and the best way to make such reform universally popular is to make them at a time of great prosperity.

Thus for Saudi Arabia a renewed burst of oil riches has come just at the right time to enable the Kingdom to manage a peaceful transformation to a more modern nation, albeit one with a distinctly Saudi identity. Maintaining your own identity is one advantage of being extremely rich.

It is hard to see this boom fading away anytime soon. World energy prices seem locked into a high-price phase thanks to high demand and physical limits to supply, particularly from refineries.

Not since the 1970s have the Gulf States had it so good, and investment at home and not abroad is the mantra for the 2000s. Thus the real economy is going to undergo a huge wave of investment in all manner of infrastructure and projects, and probably attract foreign direct investment as well, which will be welcome this time rather than shunned as in the past.