ABU DHABI: Four years after a collapse of oil prices savaged Gulf Arab economies, private business activity in most of the region is thriving again. Yet problems with financing and regulation could cut short the boom.
Corporate executives and economists at the Reuters Middle East Investment Summit this week said the private sector’s gains were vulnerable, warning growth could quickly slow if oil prices retreat or governments slow spending in order to conserve their financial reserves.
“The current good growth we are seeing is cyclical and has its roots in government spending, but there are structural impediments to longer term private sector growth,” said Liz Martins, senior regional economist at HSBC.
The oil market slide of 2008, in which prices slumped by as much as three-quarters in the space of six months, revealed the vulnerability of the Gulf countries and their big state-owned oil sectors; Saudi Arabia only barely escaped recession in 2009.
Now high oil prices have ignited a consumer spending spree that is buoying private firms across the Gulf Cooperation Council (GCC).
Middle East oil exporters will enjoy a near-record surplus in trade of goods and services worth about $400bn this year, the International Monetary Fund estimates. Governments in the Gulf are channelling much of those oil earnings into social welfare and infrastructure projects.
This is helping private companies in two ways: directly, through contracts awarded by Gulf governments, and indirectly, by fattening the wallets of consumers who work for the government or receive welfare benefits.
“Stable growth we have seen across the GCC over the last six to eight quarters comes ... from the public sector boost, which has stimulated the private sector as well,” said Fabio Scacciavillani, chief economist at Oman Investment Fund.
For Gulf governments, developing the private sector has been a top policy goal since the 2008 crash as they seek to diversify their economies away from oil to reduce the risk of a similar setback in future.
Fostering small private companies has become even more important since last year’s Arab Spring uprisings, because such firms tend to create most jobs. Although Gulf governments largely escaped the unrest, they are keen to cut unemployment to remove a potential political threat.
Trends over the last year suggest they are having some success. Bank lending growth to the private sector in Saudi Arabia, Qatar and Oman has climbed into double digits and the annual rate hit 14.8 percent in Saudi Arabia during September, the fastest pace since March 2009.
The Saudi Ministry of Labour said in September that 380,000 jobs had been created in the past 10 months. Oman says it added 155,000 new private sector jobs in January-September.
The private sector boom is typified by companies such as Saudi Arabia’s Jarir Marketing Co, a retailer of books, office supplies and electronics, which plans to boost the number of its stores by at least 70 percent in the next five years and expand into other GCC countries.
“We are growing in Saudi and in the Gulf, and we want to see that we populate the GCC,” Jarir Chairman Muhammad Al Agil, who co-founded the chain with his family in 1979, told the Summit, taking place at Reuters offices in the region.
In the United Arab Emirates, one of the most diversified economies in the Gulf with the non-oil sector accounting for 62 percent of output, bank lending growth has been slower as the country grapples with the aftermath of a real estate crash.
Reuters
