By avoiding the tumult of the Arab Spring revolutions, the Middle East’s Gulf countries have become the region’s economic winners, as they continually reap revenues from high oil prices, engage in mammoth social spending plans yet maintain surpluses, and enjoy a comparable stability that has attracted investment.
Yet such success is not infinite, and without increased job growth or private sector expansion, public deficits could quickly emerge. And with the expectation that the U.S. will soon become energy independent, there are real concerns about the economic impact such a shift will have on the region.
The positive but cautious assessment was among the observations made about the region’s economic challenges and opportunities at a recent conference held in Abu Dhabi by the Higher Colleges of Technology, and the Philadelphia-based Global Interdependence Center.
"[The Middle East] is the most interesting place to me," said Richard Fisher, president of the Federal Reserve Bank of Dallas, and keynote speaker at the event. Fisher lauded the rapid development of the United Arab Emirates (UAE), noting it was his second visit to its capital — his first being in 1979, when he met the country’s founder, the late Sheikh Zayed, and the city was still largely desert. "The change is miraculous," he said.
Fisher, though, asked the audience to consider the near future. "The United States is on the road to becoming energy independent, and that changes our diplomacy in the Middle East… I ask what will happen to those countries here that do not advance technologically, that do not have the drive like you here. If that transformation is not made, then you run the risk of sliding backward, rather than moving forward."
Before the Arab Spring, investments were being made across the region, and countries in North Africa and the Levant, especially Egypt and Lebanon, benefitted. But now doing so has become difficult, said Samer Khalidi, executive director of NBK Capital.
The regional investment scene still is short on capital, he said, and its public markets still do not have the transparency and legal structure needed to satisfy more investors. "Private equity is still a fairly thin market in the region," he said.
The Middle East is one of the world’s regions that now and in the future will have large population growth, Khalidi added. But he said it was a double-edged sword, as this demographic surge means increased demand but underlies the need for employment in the region — the World Bank estimates MENA needs 80 million new jobs in the next two decades.
"Are we getting the policies to drive the right type of investment in the MENA region? The answer is mixed, it’s not clear to us," Khalidi said, noting that it was private industry that would have to provide the jobs needed, not governments.
He noted that the region’s opportunities lay in the fact that it now was at the center of a number of economic and trade flows, but "transparency and consistency are where we find our greatest challenges." He added the challenge for Gulf countries was how level an economic playing field could they foster. "We have to make sure everybody here, the nationals and the residents, are able to find their place in society, and to participate in this growth in an equitable manner."
But for the moment, natural resource-rich Gulf countries like the UAE and Qatar can do almost no wrong, as oil barrel prices hover near the US$100 mark, and even the massive social spending outlays intended to ward off Arab Spring-fueled discontent — more than US$150 billion on social spending — are driving growth.
"For the oil states, it is a magnificent, magnificent time, and I hope you are enjoying it, and making money, because really, it doesn’t get much better," said Simon Williams, HSBC chief economist for MENA. "You are passing a phase of super-abundance, where governments can spend aggressively, and continue to add to their stocks of savings. Public spending has almost trebled in the last five or six years, a threefold increase in public sector outlays, at a time when the rest of the world is trying to pick a penny here and there to stave off a fiscal disaster."
Williams said in contrast to other emerging markets, the Middle East does not have any economic bubbles, as it had just gone through an extended economic downturn following the global economic and financial crisis. "Our bubbles have already burst," he said.
However, Williams said, the regional growth driven by public spending had an expiration date, requiring oil economies to continue diversifying. "When it bumps up against that revenue ceiling, when you start to see deficits emerge in our part of the world, spending growth will slow, economic growth will slow, and that’s where the private sector will have to come in and take up the strain," he said.
The ongoing woes of the Eurozone, plagued by the latest depositor crisis out of Cyprus, repeatedly came up during discussions. The Middle Eastern perspective on Europe, said Paul O’Brien, head of fixed income strategy at the Abu Dhabi Investment Authority, is that real solutions are not being formulated because of ongoing squabbling. "The political process is dominating political and economic matters," he noted.
O’Brien added the regional sentiment of Europe was that it was losing its international outlook. "They are spending a lot of time talking about Cyprus, and not enough about Africa, Asia, and Latin America," he said. "It’s a phase where Europe is very inward-looking, and not exactly keeping up with the dynamic and changing global economy."