Oasis Economies

While political tensions in the Middle East often grab international headlines, relatively little is written about a growing source of stability within the region. The rise of a diversified, open economy is no longer exclusively dependent on oil revenues, says a report by Booz Allen Hamilton                          

The region’s economic development continues to gain momentum, despite being largely unrecognised. If this economic oasis can flower, it suggests that the future of the Middle East is more hopeful – and more complex, than many realise.

Scepticism and sustainability
Deregulation and privatisation have become tangible very recently in the Middle East, leading people to question: if this seeming mirage is real, then why now? What is spurring it?

“Today, oil-producing countries, mainly those in the Gulf, use extra revenue to reduce foreign debt, boost liquidity, develop trade ties and attract foreign investment,” points out Joe Saddi, Senior Vice President with Booz Allen Hamilton. They are determined to build wealth for themselves and make the current oil boom pay off in the long run. Governments are looking at a number of ways to achieve sustainable wealth. They realise they must develop a middle class, along with the sort of job base that can sustain it. In a region where half of the population is below the age of 20 – and where the unemployment rates can be considerable – a sustainable middle class is an even more viable solution to long lasting economic expansion and political stability.

Today’s Middle East is different; “The region’s leaders are committed to catching up to, and in many cases, surpassing the rest of the world in terms of economic vitality,” adds Richard Shediac, Vice President with Booz Allen Hamilton. This is largely due to visionary individuals in positions of authority who are eager for progress and willing to move quickly.

However, the region’s progress often goes unseen due to stereotyping and the region being misunderstood. There are a number of innate paradoxes governing the mind of the Middle East decision makers and which are essential facets of the region’s business culture. Understanding the attitudes and assumptions that shape the way business is conducted makes it easier to recognise future opportunities and navigate the challenges that lie ahead.

Late yet eager
Those familiar with business in the Middle East will recognise a specific rhythm. Economic developments move with astonishing rapidity – following a long period of incubation before a decision is finally made.

The deregulation of the telecommunications sector in Saudi Arabia started in 1998. The industry operated like many other sectors in the Middle East, but Saudi Arabia decided to open it up to competition, spurred by a desire to become more efficient and by an interest in joining the WTO. “Only four years later, the Saudi Telecommunications Company sold 30 per cent of its shares in a public offering valued at around US$4 billion,” stressed Karim Sabbagh, Vice President with Booz Allen Hamilton. Investors demonstrated the market’s readiness by offering to buy US$9.6 billion worth of shares. Overall, the deregulation has had major effects on quality of service and pricing.

The ‘late yet eager’ mentality may reflect regional leaders’ desire to avoid laissez-faire economics, by developing legislation that enables smooth transition and restructuring of state-owned companies. This cautious approach ensures privatisation efforts are successful and that new entrants can enter the market at a favourable time.

Risk averse yet bold
The desire to modernise rapidly is expressed in bold, creative decision making. Some leaders took brash actions to effect change and send signals to the private sector and society. The private sector then followed suit – Palm Island and other initiatives in the UAE are examples of daring actions that created the momentum for change. Bold decision-making in one key project sets the course for others to follow.

“The need for bold steps to turn around education systems is felt strongly in the labour-abundant and resource-poor countries of the region,” Shediac emphasised. In boasting; ‘our people are our greatest asset,’ Jordan’s education reform for the knowledge economy initiative brought together 17 domestic organisations, 17 global corporations, and 11 governmental and non-governmental organisations to implement a public-private partnership model in 2003. Information and communications technology (ICT) firms sought to develop local high-tech skills, hundreds of schools were refurbished, teachers trained and the entire Jordanian public school system will soon be connected by a high-speed broadband network. Qatar’s leaders have prioritised creating a cutting-edge school system that harnesses technology for learning. The country’s Supreme Education Council (SEC) is playing an integral role in the development and implementation of major reform in the schools.

Saudi Arabia too has made a similar bold commitment to progress, with the setting up of the King Abdullah University of Science and Technology – an international, graduate-level research university dedicated to scientific achievement.

Traditional yet progressive
Decision-makers in the Middle East are fundamentally progressive, despite the region being tradition-bound. They face the challenge of how to grow and prosper without losing their cultural identity and there is a constant tension between modernising and Westernising in the region. Modernisation is valued - within traditional parameters.
“The Islamic banking system guided by Sharia law highlights the tension,” points out Shediac. Modern Islamic banking has emerged and the region is the incubator for this industry, which is growing at a global annual rate of 15 to 20 per cent.

Focused yet flexible
In today’s global market, fixed business plans don’t exist, and in the Middle East, decision-makers tend to follow a five-year planning cycle, but never consider these plans to be permanent. They realise the importance of a clear direction, but with so many economic changes, strategies must be open to rapid change. A market that is regulated one day may be deregulated the next: focus and flexibility must go hand in hand.
Governments facing challenges in opening up the economy to foreign investment are developing special economic zones, luring capital to contained, controlled environments. “Many Middle Eastern countries are experimenting with smaller economic oases that limit risk – a sign of focused, yet flexible, planning and a change from attempting transformation on a national level,” avers Shediac.

Ambiguous yet determined
Outsiders may not recognise the depth of the region’s determination to grow economically, from pushing to replicating practices that have proved successful elsewhere. The Middle East’s leaders are seeking to learn from the experiences of others, while adopting tailored solutions that will work best within their countries. “Democracy is one such issue in which the region is consistently progressing,” Shediac outlines. Some parts of the MENA region introduced universal suffrage early on, including Lebanon (1952), Egypt (1956), Morocco (1963), and Jordan (1974).

Other parts are introducing gradual reforms. During the recent restructuring of the Abu Dhabi government, a foundation was laid for municipal councils with local representation. Similarly, Saudi Arabia introduced elections at the municipal level in 2005. Women have begun to stand as candidates in these elections; they have been elected to the chamber of commerce and industry in Jeddah. In 2006, Kuwait allowed for the first time women to contest and vote in the country’ parliamentary elections.

Exclusive yet diverse
Human capital is increasingly important as the region’s economy moves away from oil dependency. The region is welcoming diverse talent and is ensuring it can retain this talent, while nurturing its own.

The ‘exclusive yet diverse’ tension in the region extends to the financial capital. In a bid to attract foreign investment, a number of Middle Eastern countries have begun to allow non-nationals to own property, thus increasing the number of long-term residents who create wealth and add diversity to the population.
“Incentives have also been implemented for non-nationals who want to participate in capital markets; such incentives attract a higher rate of investment and accelerate development,” Saddi emphasises. This has prompted professionalism and transparency to increase in the region.

The road to oasis
“The emergence of a new regional, diversified economy is a fundamental shift that will affect corporate investment and geopolitical activity,” adds Sabbagh. The Middle East may be developing a new type of economy, different from any other that has preceded it.
This phenomenon is being spurred by a broad group of decision-makers trying to build a bridge between the Middle East culture and its economic potential. They understand that if the region is to thrive, they must foster the innate entrepreneurial spirit of their people, create the solid infrastructure needed to compete on a global level and provide a range of middle-class opportunities to people who would otherwise be disenfranchised. If they manage to create this unique economy, the oasis blooming today won’t be a mirage, but an attractive, sustainable, fertile valley.
 

 
Bahrain the world’s fastest growing finance centre
Bahrain has been recognised as the world’s fastest growing financial centre in the third edition of The City of London’s Global Financial Centres Index (GFCI3). Bahrain has risen 59 points in this well-respected ranking of the world’s financial centres; the fastest growth by any financial centre. The GFCI report, which publishes the top 50 rated financial centres, ranks Bahrain 39th, up three places from the previous addition and ahead of neighbouring Qatar. Moreover, Bahrain has raced ahead of a number of other emerging financial centres, previously ranked higher than it, such as Mumbai (48th); Beijing (46th) and Johannesburg (41st).
Of the Gulf States covered, Bahrain is the only one to have moved up the Index in the last six months, whereas Dubai has slipped two places to 24th and Qatar is down three places to 47th.

The GFCI report ranks financial centres based on external benchmarking data and current views of competitiveness, drawing its conclusions from 1,236 responses from professionals in the financial services industry for a total of 18,878 city assessments. Factors of competitiveness are grouped into five key areas – people, business environment, market access, infrastructure and general competitiveness.

Bahrain has a highly diversified economy, expanding at more than 6 per cent per annum according to Standard and Poor’s 2007 report. The Kingdom’s GDP currently stands at US$15.7 billion from Central Bank of Bahrain’s latest figures, to which its well established financial sector contributes more than 25 per cent.

Nomas unveils US$800mn residential project in Manama
Bahrain-based Nomas Enterprises is building a US$800-million waterfront residential complex in the Al Fateh area of Manama. The project will encompass 35,000 sq.m and include some 950 homes. Tenders for the work are likely to be issued in the next few months and the company says it will unveil more details of the development at that time. The entire project is scheduled for completion by 2010.

BMMI gets US$2.8bn US contract
Bahrain Maritime and Mercantile International (BMMI) has won a contract valued at up to US$2.8 billion to supply food and other products to US troops in three Middle Eastern countries, according to Pentagon reports. BMMI will supply and distribute food to the US Army, Navy, Air Force and Marine Corps in Bahrain, Qatar and Saudi Arabia till March 2009. The Defense Supply Center in Philadelphia chose BMMI after receiving a total of five responses to a notice seeking bids. BMMI, based in Bahrain, is a wholesaler and retailer of packaged food, toiletries, beverages, cosmetics, tobacco and household products.



Abu Dhabi Fashion Week
Against the stunning backdrop of the Emirates Palace Hotel and in an arena built to reflect the Arab World’s distinctive architecture, the inaugural Abu Dhabi Fashion Week featured the collections of top international and regional designers.

Two of the oldest and most respected global fashion houses, Missoni and Emilio Pucci, participated in the fashion week. These two design houses represent generations of unbroken success and achievement in international fashion. Showing alongside them were top Arab designers like Rabih Kayrouz from Lebanon, the UAE’s Aisha Desmal and Saudi designer Amina Al Jassim. Twenty-one young ladies from the Sheikh Zayed Private Academy also showcased a fashion collection.

Alice Teeuwen of Maven, said: “It is wonderful; there is enormous creative talent in this region and watching that talent emerge and blossom is very exciting. The importance of this event can be seen not only by the presence of great international designers at the Abu Dhabi Fashion Week, but also by the number of buyers, VIPs and key opinion-makers from the international industry who came to Abu Dhabi--people like the Editors-in-Chief of Vogue and Elle, the CEO of Calvin Klein Europe and representatives of great fashion houses, such as Maria Luisa Trussardi.”

UAE hotels produce double CO2 emissions compared to Europe
Five-star hotels in the UAE are producing twice as much CO2 compared to similar hotels in Europe, according to an award-winning study on carbon emissions by the hotel industry. The study, undertaken by Farnek Avireal, the Dubai-based facilities management company , found that on average, a 5-star hotel in Dubai produced 6,500 tonnes of CO2 annually while a similar hotel in Europe produced only 3,000 tonnes. Furthermore, Dubai hotels on average consumed between 275 to 325kw/h of power per guest, compared to 100kw/h per guest in a similar hotel in Germany, a difference of 225 per cent.

“The combined output of CO2 from Dubai’s 300 hotels is approximately 500,000kg,” said Markus Avireal, the company’s general manager. “We estimate that hotels can save between 25 to 30 per cent of the current energy consumption by using energy efficient technology. This technology is particularly useful for properties in hot climates, where cooling systems are operated for most of the year and at high capacity during the summer months. And the potential energy savings apply to any type of building, from residential and commercial complexes to shopping centres, hotels and hospitals.”

Bonhams auction breaks records
Bonhams, the UK-headquartered international fine art auction house, broke three world records at its inaugural Middle East art auction in Dubai. The auction achieved total sales of over US$13 million – almost three times the expected result, with a phenomenal 94 per cent of the lots sold. The auction saw for the first time an artist from the first Middle East achieving sales of over US$1 million, with Iranian Farhad Moshiri’s stunning Swarovski crystals and glitter on canvas ‘Eshgh’ (Love). The auction also wrote Moshiri into record books as the highest achieving Iranian artist. Breaking the world record for an auctioned Pakistani work of art, Gulgee’s ‘Polo Player’ sold for US$336,000 – more than four times the reserve price.

“This is an unbelievable result for our first auction in this market, and proves beyond doubt that the UAE is an emerging commercial hub for modern contemporary art from the region,” said Matthew Girling, Bonhams, Chief Executive Europe and Middle East.




Kuwait’s revenue reaches $63.6bn
Kuwait’s revenue collection reached a staggering US$63.6 billion till February, the first 11 months of the current fiscal. This is the highest ever revenue collected by Kuwait, which sits on about 10 per cent of global crude reserves and pumps 2.5 million barrels per day. According to a statement by Kuwait’s finance ministry, the revenues favourably compare with the projected income for all of 07-08 at about US$31 billion and were up 18.2 per cent compared to corresponding period last year. Oil revenues jumped 17.6 per cent to about US$60 billion in this period.

The figures reflect a sharp rise in the price of oil, which contributes around 94 per cent of total revenue in Kuwait, OPEC’s fourth largest producer. Kuwait has adopted a conservative price of US$36 a barrel in calculating oil revenues but the price of Kuwaiti oil touched a record high of US$98.85 a barrel at the time of going to the press.

Kuwaiti firm buys shares in Petrodar
Kuwait’s Al-Kharafi Group has bought a 3 per cent stake in Sudanese oil company Petrodar Company. According to KUNA, the official Kuwaiti news agency, Al-Kharafi has agreed to buy the Petrodar stake for US$500 million from Al Thani, a Dubai based firm. The Kuwaiti group signed the contract for the Al Thani long with Sudapet, an existing shareholder in Petrodar.

Sudapet Director-General Saleh Jaafar said that his company and Al-Kharafi had agreed to buy Thani’s 5 per cent stake in Petrodar, with Al-Kharafi acquiring 3 per cent and Sudapet picking up 2 per cent.

Petrodar is a venture between China National Petroleum Company International (Nile) Ltd, Petronas Carigali Overseas Sdn Bhd, Sudapet Ltd, Gulf Oil Petroleum Ltd and Al Thani Corp. The Chinese company holds the majority 41 per cent stake, Malaysia’s Petronas 40 per cent, with the remaining divided between Sudapet, Gulf oil and Al Thani.

Kuwait dissolves parliament, sets May election
Kuwait Emir Sheikh Sabah al-Ahmad al-Sabah dissolved the country’s parliament on March 19 after a political crisis forced the government to resign, less than a year after it was sworn in. The standoff had paralysed political life and delayed crucial economic reforms in the state, with the outgoing government complaining of lack of cooperation from the assembly. Tensions flared between the government and the assembly, when lawmakers demanded another pay rise for public sector employees who comprise more than 90 per cent of working Kuwaitis. The demands put parliament on a collision course with the government, which had raised salaries in February to counter high inflation. A bill to set up a financial markets regulator and to open up the stock market to more foreign investment was also stalled in parliament. Deputies had also forced the cabinet to set up a fund to buy back bad debts Kuwaiti nationals incurred from shopping sprees, in a blow to plans to reduce dependence on the state. The fresh elections are expected in May.The country’s parliament has been dissolved four times since 1963.

Riyadh’s top hotel wins three travel industry “Oscar” nominations
Al Faisaliah Hotel, located in Riyadh Olaya district, has been nominated in three categories in the World Travel Awards, the global industry spectacle celebrating its 15th anniversary this year, with a bigger than ever series of gala events around the globe. Al Faisaliah Hotel has been nominated as the Middle East’s leading hotel, Saudi Arabia’s leading business hotel and Saudi Arabia’s leading hotel.

The Middle East winners will be announced at a glittering “Oscars” style World Travel Awards event at Abu Dhabi’s Emirates Palace hotel on October 28 after thousands of travel professionals the world over cast their votes online. “Just like with the Oscars, there’s a big sense of achievement in being nominated for an award, and the management and staff are particularly proud and excited that we’ve managed to win nominations in three categories for 2008,” said Wolfgang O Pachler, managing director of Al Faisaliah Hotel.

In 2007, Al Faisaliah Hotel had won awards for two categories – for being Saudi Arabia’s leading hotel and suite, and for being Saudi Arabia’s leading hotel for the third year in a row.

Saudi telco to invest US$15bn in acquisitions
Saudi Telecom Company plans to spend about US$15 billion in acquiring firms and licenses outside its home market during the year. The Middle East’s largest telecom company by market value will target mobile phone licenses in Bahrain and Lebanon. The firm also wants to win the second fixed-line license in Egypt.

“Saudi Telecom has so far invested SR22.5 billion in this regard. The company has started procedures to secure licenses for the third mobile phone operator in Bahrain and the second land-phone provider in Egypt. The operator made three foreign acquisitions last year. It bought a US$3.01-billion, 25 per cent stake in Maxis, the Malaysian operator, and won the third mobile phone license in Kuwait at a cost of SR3.4 billion. It also agreed to buy a 35 per cent stake in Oger Telecom, the telecom division of construction conglomerate Saudi Oger, for SR9.8 billion.

Saudi Arabia to spend $60bn on water infrastructure
Saudi Arabia plans to invest up to US$60 billion over the next 20 years to expand its water infrastructure and meet the needs of its rising population. Loay Al Musallam, head of privatisation team and deputy minister for planning and development, said the demand for water in Saudi Arabia is growing at 6 per cent annually. The kingdom’s population is expected to rise by more than 63.6 per cent to 36 million by 2032.



IAS launches $1.6bn projects in central Africa
IAS International (IAS), the Qatar-based investment company, has initiated US$1.6-billion worth of projects in the Central African Republic (CAR). One of its prominent ventures will be the Cite Lumiere, the Central African region’s first special economic zone.

Commenting on the potential of the Central African Republic, IAS chairman Issam Abu Issa said: “This development represents a turnaround point for the CAR and the region. It is our objective to create one of the first free zones in Central Africa, which we are confident will help CAR to become a future super hub and become a catalyst for its extensive economic growth and development. Investors from around the globe are becoming increasingly aware of the range of opportunities here.”

IAS has already invested in CAR, including in gold and diamond, oil and gas exploration, timber, and water plants. The Cite Lumiere project will consist of a central commercial district and two residential communities. The total size of the commercial district will be approximately 370,000 sq.m and will be divided into four zones: office park; civic zone; 5 star hotel and apartments; and shopping centre and 4-star hotel and offices. The residential communities will be approximately 1,600 separated into two communities.

Gulf Extrusions to double output
Gulf Extrusions plans to double its aluminium extrusion output in the next six years to meet growing demand, mainly from the construction sector, in the region. The firm, one of the leading extrusion producers in the Gulf Arab region, is expecting output to rise to as much as 100,000 tonnes, partly through building two new facilities in Qatar. “There are now over US$300-billion worth of construction projects planned within the next five years in the Middle East and this is expected to strain the current supply of aluminium profiles,” said Modar Al Mekdad, general manager with Gulf Extrusions. Extrusions are made from solid cylinders called billets, which are used widely in the construction industry.