The growth and development of the Gulf States’ economies depend, to a large extent, on certain sectors, e.g., oil, finance, trade and tourism, which are sensitive to the current geo-political situation. Hence, they are highly influenced by the current and future geo-political developments. If the fundamental indicators show that a country will be stable, then the magnitude of investment, both foreign and domestic, is going to be positive and vice versa.
One should look at the tour of the U.S President to the region in this context. The major impact of the tour on the investment climate seems to be negative due to the increased tension and possible military confrontation between USA and Iran. This is illustrated by the clash between the two countries this week in the Strait of Hormuz.
This clash resulted, inter alia, in a price of $100 per barrel of oil and the price rise was only halted by the expected recession in the U.S economy. Since all the GCC economies depend almost entirely on the energy sector the region’s geo-political stability is considered to be a key factor for the Gulf countries’ future development.
The common market between the GCC countries which came into affect as of 1 January 2008 is considered to be a major factor in determining the future shape of the economies of the region as a whole. The common market involves the free movement of people and commodities between its member states and the equal rights of their citizens to live, work and invest anywhere across the region. This development is going to have a huge structural effect on the economies of the GCC countries. The current, unequal development is the most striking salient feature of the different regions of these countries. Therefore, the future direction of investment will determine, to a large extent, the increase or decrease in the economic prosperity or impoverishment of the peoples of these countries. If the highly developed regions of these countries (e.g., Dubai) manage to attract most of the investment in the future at the expense of the less developed areas, then this will have a serious consequences for their peoples in terms of employment and business opportunities. This will result in the poverty gap that already exists widening further. But since the development process in the GCC countries is mostly motivated and partially lead by their governments, the necessary structure that may redirect a major portion of the future investment to these less affluent regions is almost guaranteed.
If the newly established common market is coupled with the pegging of the GCC currencies to the U.S. dollar and the common currency for this common market, due to be introduced in 2010, then the future economic shape of the region might become clearer. If the economic policies of the GCC countries results in the establishment of a common financial market and a common monetary and financial policy, then the common Gulf currency might be one of the four or five most powerful currencies in the world. The GCC economies will also be the fifth largest economic block in the world in twenty years’ time, given the current rate of growth. This will probably involve in un-pegging the GCC currencies from the U.S. dollar, although the dollar might still constitute a cornerstone of any future basket of currencies against which the new Gulf currency’s exchange rates would be set.
The current high rate of inflation, which was unknown in the economies of the GCC countries only five years ago, is considered to be one of the main threats to their future economic prosperity and their political stability. High rents, both commercial and residential, are thought to be the main factor behind this high rate of inflation, coupled with the imported inflation that has resulted from the weak value of the U.S. dollar. The political leaders of the region are fully aware of this danger. This is why the ruler of Dubai, the most prominent amongst the economic zones in the region, has imposed a 5% cap on the level of the current rent starting from 1 January 2008, a move that was followed by the authorities in Abu Dhabi, capital of U.A.E. High inflation is damaging the competitiveness of the GCC countries and increasing the cost of doing business with them. This is why controlling the rate of inflation and bringing it down to an acceptable level is considered to be crucial if FDI and talented people are to be attracted, as this is a determining factor in the future economic prosperity of the region.
The region as a whole is struggling to position itself as a leader amongst the financial centres of the world in terms of attracting foreign capital as well as investing abroad. For example, the GCC countries are planning to spend around a trillion UAE Dirhams (US$27.2 billion) to develop and promote its tourism sector up to 2018, of which 858 billion Dirhams will be spent in the UAE alone. This will open the door wide to foreign investors who are interested in investing in this sector, especially those who are interested in joint venture projects. On the other hand, the so-called government funds are fighting hard to establish themselves as real players in the international markets. They have spent around US$83 billion in foreign (mostly western) acquisitions in 2006 alone. If we take Dubai Ports World as an example, it has acquired and is managing more than forty ports world wide, including most recently that of Mapotu port of Mozambique in recent weeks.
The Saudi Capital Market Authority (CMA) continues its support for low- income earners victimized by last year market crash. On Tuesday, CMA listed the shares of Alinaa Bank, also known as Development Bank, for public trading. Shares were issued at affordable prices to help small investors increase their returns. Meanwhile, the business media has intensified instruction and advice for this sector. The CMA has also adopted a two-stage floatation process to reassure investors, and to avoid the frenzy caused by the announcements made in advance that are believed to be behind last year difficulties.
Following last week’s foundation of the Gulf common market and the Doha Gulf Cooperation Council (GCC) summit, there appeared the problem of discrepancies in individual incomes, which is reflected in the markets of Gulf member countries. A recent study by HSBC showed that Abu Dhabi and Dubai properties are cheaper in terms of per capita income in relation to the country’s GNP. The development of an international properties mortgagee market would be a major factor that could rectify the prices. On the other hand, properties are more expensive in other Gulf States compared to their per capita income. This price/earnings gap is most evident in Bahrain, as shown by the numerous complaints about the rise of property and land prices. Of note are the Iranians indirect efforts to purchase properties in Bahrain.
It seems difficult to assess the rise in the financial value of properties and rent values in Dubai. The rent is affected by the people’s ability to spend and the banks’ willingness to offer loans. Will this situation continue for long? This is an important question particularly if the US Dollar continues to tumble. The high rent prices indicate that Dubai is still at the climax of the property circle and that the year 2008 should bring more windfall profits for investors.
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