Is Middle East business right to be so optimistic?

High oil prices, economic and some political reform, combined with a youthful demographic profile, are among the reasons cited by business leaders for optimism about the immediate outlook. This at a time when Iraq is still in chaos, Iran is stalling foreign inward investment with its nuclear ambitions and Palestine remains a potential flash point.

The contrast between the Arab world and the United States is stark; Arab confidence stood at 75.5% compared with 40.5% in the normally confident US. Furthermore, the survey did its best to eliminate the feel-good factor of high oil prices by concentrating on three non-oil sectors: financial services, healthcare and travel and tourism.

A tale of three sectors

A look at what is happening in these three sectors is a useful way of understanding why business is so confident in the Middle East.

Financial services are booming, admittedly thanks to being flushed with funds from oil revenues, and euphoric stock markets. But the new Dubai International Financial Centre and Qatar Financial Centre, with world-class regulatory environments, show that this is more than a mere passing bubble.

Healthcare is also benefiting from higher levels of government funding, but here the private sector role is expanding with a greater role for health insurance and new privately-funded developments like the Dubai Healthcare City.

Meantime, the Middle East has become the world's fastest growing market for travel and tourism; an amazing development given the constant images of Middle East unrest broadcast on global television. But substantial investment in new aircraft and holiday destinations is paying dividends.

The three sectors above are all benefiting from the investment of oil money at home rather than abroad to meet the aspirations of young populations for jobs and opportunities.

Economic reform

Economic reform is acting as a multiplier to the impact of oil wealth on the Middle East. Nowhere is this more felt than in the real estate sector where the freeing of ownership restrictions is contributing to a massive boom in property development, at first focused on Dubai but now spreading outwards to Doha, Abu Dhabi, Beirut and Jeddah.

Real estate is a major driver of any advanced economy, and the past restrictions on this sector have held back the Arab world from realizing its full economic potential. For real estate is a key driver of consumer spending, which is now emerging to challenge oil revenues as the main source of GDP in some countries.

Businessmen and women can feel this sort of thing in their bones, and are therefore right to be very optimistic about the future. However, Arab stock markets on the other hand may well have moved too far ahead of events, and could still suffer a correction while business continues to perform well; a similar phenomenon has occurred in China over the past five years.

Caveat emptor: today's business optimism may all be in the share prices, even if it is justified by present circumstances, and confidence can probably not be sustained at these levels for that much longer.