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MAY 2000 GCC COVER STORY |
GCC Economies: Time for RevivalAs the second half of 2000 approaches, in a special report from the Gulf, Julian Taylor examines the economic progress made in the region during the first months of the new century and highlights some positive indicators for continued regional prosperity.Assuming oil prices remain firm, the Gulf Cooperation Council (GCC) states, which saw their oil revenues rise to nearly $82 billion last year against $59 billion in 1998, will see strong improvements within their economies in the next few years.The International Monetary Fund (IMF) estimates real gross domestic product (GDP) growth in the GCC will increase to over three per cent this year, while a report by the Riyadh-based GCC General Secretariat, estimates the number of joint projects among GCC countries will reach nearly 400, with investments totalling $9.8 billion. Despite this optimistic forecast, the Gulf states are not satisfied. The reasons are simple: while economic growth may be accelerating, demographic pressures remain a major threat. With an average of around 70 per cent of the region's indigenous population under the age of 30, population growth will continue to outstrip economic growth, pushing up unemployment rates among GCC nationals and depressing real per capita income growth. In the case of Saudi Arabia for example, GDP has plummeted from $14,000 per capita in 1986 to an estimated $6,000 today. Progress is also being made in opening up areas still inaccessible to private and foreign investment The only credible solution would be for the GCC states to accelerate sustainable economic growth. Last year saw some sweeping policy initiatives in this direction, in the area of capital investment in Saudi Arabia, new company law in Qatar and foreign ownership of real estate in Bahrain. Progress is also being made in opening up areas still inaccessible to private and foreign investment. In the power sector, for example, more Gulf governments have been persuaded the private sector can help boost performance. This is creating new opportunities for international developers. At present, Abu Dhabi is in the midst of its first independent power project (IPP), under construction at Taweelah by CMS Energy of the US, with a further two under review. Striking developments are also taking place in Oman where rapid progress is expected with two fast-track IPPs, the 240-mw power station at Sharqiya and the larger Barqa project. The two IPPs are the first to be offered for 100 per cent foreign ownership. Both have demanding timetables for completion. Sharqiya is scheduled for commissioning in 2002, while the 400-mw, 20 million-gallon-a-day Barqa plant is set to come on stream in 2003. In further efforts to make the region more attractive to investors, Gulf Arab states are now discussing plans to develop a cross-listing of shares between their stock exchanges. Hit by economic volatility on the back of fluctuating oil prices, Gulf stock markets had a mixed year in 1999. Most will improve their performance during 2000, but will need a unified and practical financial system related to clearance, settlement and market capital to compete efficiently in a global scenario. At present, Oman and Bahrain allow firms to cross-list their shares, while Bahrain and Kuwait have an agreement to cross-trade listed firms. To meet the demands of the global economy, the GCC states are also amending their rules and procedures. Their adoption of an $80 billion customs union late last year was part of a long-held ambition to forge a powerful economic bloc that would be able to compete and trade with the world's other unified commercial regions. The GCC states are embarking on economic liberalisation to keep their fabled wealth from melting away The deal, which was struck at last November's GCC summit, was a pre-condition laid down by the European Union (EU), for a free trade agreement with the Gulf states to enable their petrochemical and aluminium industries to penetrate the European market. It also gives the region a stronger collective bargaining position in the World Trade Organisation (WTO), which demands lower tariffs of its members. So far, the deal has received mixed reactions. In fact, analysts have expressed doubt that the union will give the GCC more clout in international markets and greater pulling power to attract foreign investors. They believe member states will need more extensive foreign investment in order to diversify their economies away from oil sales, which comprise three-quarters of government income. Meanwhile, the GCC states are embarking on economic liberalisation to keep their fabled wealth from melting away. Saudi Arabia is leading the way with a set of reforms aimed at adapting to changing global currents and diversifying the revenue base away from a single source. As a result, the kingdom's economy is growing again. This year, however, will be a test of whether the government's reformist rhetoric can be turned into a reality. With a serious shortfall in revenues brought on by the oil price slump, Saudi Arabia began 1999 with wide-ranging reforms to tackle its economic downturn. Currently, the economic picture is changing, but reform continues to be at the top of the government's agenda. The government is currently negotiating aggressively to join the World Trade Organisation. It has recently opened the kingdom's mutual fund markets to outside investors and plans to allow foreigners to own property and make other investments without barriers (see Saudi Arabia Survey, page 24). A Supreme Economic Council has also been formed to broaden discussion of economic policy and advise the government on reform, privatisation and taxation. Since the formation of the council, things have been moving at a more rapid pace. The government recently announced plans to privatise the collection of municipal fees as part of the kingdom's drive to give the private sector a bigger role in the economy. Municipal fees reached $312 million in 1999 and are forecast to increase this year due to an expected rise in business activities in the kingdom. The government is also working on imposing mandatory medical insurance on expatriates starting later this year, as part of the drive to cut government spending on health care in the kingdom, where some six million expatriates live and work. Meanwhile, major sectors such as power and telecoms are undergoing sweeping restructuring programmes. In December, Saudi Arabia launched the privatisation of its power sector with the establishment of the Saudi Electricity Company (SEC), merging its mainly state-owned regional power firms to promote economic diversification. The government plans to invest as much as $117 billion by 2020 to meet the growth in demand for power from a soaring population. Such investments would lift power generation to 70,000mw a year, three times the current capability. During the same month, Saudi Arabia, which is a leading member of the Organisation of the Petroleum Exporting Countries (OPEC), with a current production quota of 7.438 million barrels a day, formed a council to set oil policy. The Supreme Council for Petroleum and Minerals will decide on the size of Saudi Arabia's oil production as well as domestic fuel prices. The 11-member council, which was formed to speed up decision-making in the energy sector and invigorate development, will also oversee the operations of Saudi Aramco. Despite increased revenues, oil projects are set to remain a low priority and any new spending is likely to be directed towards reviving refinery projects, with the upgrade of the 400,000 bpd Rabigh refinery a priority. The estimated $2 billion project was shelved in 1998 as oil prices collapsed. Other large-scale projects include a 1,400 million-cubic feet a day gas processing plant at Haradh, a gas recovery unit at Berri and a 90-mw power plant at Abqaiq. Two major new petrochemicals plants are also being planned this year by Saudi Basic Industries Corporation (Sabic), which has solicited companies to prequalify for construction of two ethylene crackers, one to be based in Yanbu and the other in Jubail. Each plant will have a capacity of 800,000 tonnes a year (t/y). A steel rolling mill is also being built in eastern Saudi Arabia. The 450,000-tonne plant, to be located in the industrial city of Jubail at a cost of $100 million, is expected to start commercial operations by the end of June. For the first time expatriates will pay more for utilities than their actual cost The United Arab Emirates' return to moderate growth is expected in the next couple of years. The UAE economy is expected to see a return to modest real growth of 2.7 per cent in the year 2000 and 3.4 per cent in 2001. The UAE has become the world's third-ranking export and re-export centre after Hong Kong and Singapore, with a foreign trade network extending to 179 countries, according to a recent study. Foreign trade in goods totalled $57.2 billion in 1998. Privatisation moves in the power and water sectors are advancing rapidly 1999 was a bad year for the UAE economy. Traders suffered cash flow problems, contractors had few new construction opportunities and retailers reported sluggish demand. On top of that, the government kept a tight grip on expenditure. This year, however, will be different. Imminent changes will have far-reaching implications on the economy and on business and is expected to usher in positive changes for UAE businesses and the commercial sector. With oil prices rising, domestic spending will increase, big projects will see fruition, and above all, some of the UAE's most ambitious projects such as Dolphin, Saadiyat and the official stock exchange will become a reality. Similarly, corporatisation and privatisation moves in the power and water sectors are advancing rapidly. However, private power seems to be placing a greater financial burden on consumers. In fact, the emirate of Abu Dhabi has increased electricity and water charges by as much as 80 per cent for expatriates from 1 January for electricity, to 20 fils (three cents) per kilowatt. Nationals pay five fils (less than one cent) per kilowatt. The changes mean expatriates will for the first time pay more for utilities than their actual cost, currently running at 2.8 cents for a kilowatt of electricity and 5.23 dollars for 1,000 gallons of water. For UAE banks, 1999 was a turbulent year, which brought a regulatory onslaught that prompted most banks to sit it out until the new year. A nearly $350 million fraud by Madhav Patel of Solo Industries Group and the previous year's Dubai Islamic Bank fiasco forced the authorities to issue stringent directives on corporate restructuring of locally-registered banks, insist on international accounting standards by year-end, announce the imminent enforcement of a new banking law, propose an increase in bank capital and announce a steep hike in cash reserve ratios beginning this year. Investors in UAE stocks also suffered a bruising year in 1999 and will see little respite in 2000. In fact, 1999 was the worst year in the history of the UAE stock market, and witnessed its worst contraction. Almost everybody ended up losing. Most investors lost actual cash, while others saw the book value of their shares shrink. The outlook remains bleak for 2000, analysts believe. The construction and real estate sector also witnessed a remarkable slow-down in 1999 due to market depression and other factors. Investment in that sector dropped by about $16.4 billion as compared to about $43.5 billion investment in 1998. Many agencies in the sector were forced to cut back on profit margins, with the ultimate beneficiary being tenants. This situation may improve this year with new projects being planned. An independent power project (IPP) is planned in the Jebel Ali industrial area by the Dubai Investments Park Development Company. The station will initially have a capacity of about 120mw and serve industrial users in the park. In the gas sector, Abu Dhabi alone is expected to spend nearly $2 billion on projects. The emirate has recently channelled more than $1.2 billion into boosting onshore gas production to meet growing domestic demand for power and petrochemical feedstock. Similarly, Abu Dhabi's petrochemicals plans will move forward as the joint venture Borouge project to produce ethylene and polyethylene begins production in 2001. Surging oil prices may have helped spark a revival In neighboring Oman, developments are equally impressive. A feasibility study for a proposed $2.5 billion aluminium smelter has been successfully completed and an implementation review is underway. The project will be built in the northern city of Sohar, which is being promoted by the Omani government as one of the major industrial areas in the Gulf. The construction of the $250 million Sohar port started in November 1998 and plans are also under way to build a petrochemical plant. The long-standing Muscat wastewater project has finally returned to action with the completion of a first strategy report. So far, Oman has been able to take the difficult steps necessary to put itself on a path of solid growth by tackling structural problems. But the main stumbling block to its future growth will be the significant challenge of employing the thousands of young Omanis entering the job market every year. With a population of 1.6 million and an estimated 500,000 students expected to enter the job market in the next five years, the task will not be easy to achieve. Surging oil prices may have helped spark a revival in Oman's economic fortunes, but fundamental weaknesses remain and challenging times lie ahead. Kuwait recently adopted a series of measures to open up the country to foreign investment Bahrain's economy is more diverse than that of Oman and in many ways better integrated into international markets. The small Gulf island is now slashing taxes on food and consumer goods following an economic recovery due to rising crude oil prices. A five per cent tax on food is to be abolished while a 7.5 per cent tax on consumer goods including fabrics, electrical appliances and computers will be reduced to five per cent. Firmer oil prices have helped Bahrain reduce budgetary deficits and improve its investment climate. In fact, Bahrain started the year with a newly appreciated need for public spending on a variety of projects to help revitalise the economy. The plan calls for spending nearly $2.8 billion on infrastructural projects alone up to 2002. However, a $5 billion petrochemical and oil refining project planned to be set up in Bahrain remains on hold with no sign it will be built soon. Although Qatar's domestic and foreign debt remains relatively high despite a rise in oil prices, the government is improving its fiscal and debt management. In December, Qatar laid the foundation stone for a $1.2 billion petrochemical complex, which is part of the Gulf state's plans to exploit its huge energy resources. The plant, which is 51 per cent owned by the state firm Qatar General Petroleum Corp, is designed to produce 500,000 tonnes of ethylene, 450,000 tonnes of high density polyethylene and about 50,000 tonnes of hexene-1 a year from mid-2002. The project is Qatar's fifth petrochemical venture and is part of an industrialisation drive aimed at exploiting its gas reserves, the third largest in the world. Like its sister states, Kuwait is trying to revitalise its economy. For that, the government recently adopted a series of measures to open up the country to foreign investment and encourage the private sector. In addition to taxes, a number of laws that would encourage foreign investments are awaiting Parliament's approval. They include allowing foreigners to trade on the stock exchange and to fully own local businesses. Foreigners currently have to have Kuwaiti partners. Kuwait is also to set up a body to tackle the emirate's economic and financial problems. It will have five to seven members with expertise in economic, financial and legal affairs, and will be directly responsible to the cabinet. Copyright © IC Publications Limited 2001. All rights reserved. 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