Instead of the post-Ramadan surge which many of the region’s financial analysts and traders had augured during the slow days of summer, important Middle Eastern stock markets converged to a measly November diet in the bear’s kitchen. Over the coming months, these markets will have to deal with the poor investor confidence of which the selling mood speaks volumes—all the more so since corporate results and macro indicators may be much friendlier than the share price performance toward the end of 2006.

Downturns across the region
The Cairo and Alexandria Exchanges retained their ground with continued sideways trading, but the Tadawul Index of the Saudi Stock Exchange moved south by about 2,000 points, or 20%, between Eid Al Fitr and November 26. The Dubai Financial Market was not far behind with a drop of 17%, the Doha Securities Market lost 15%, and the Abu Dhabi Securities Market retreated by about 12% over the period.
The Bahrain Stock Exchange shed the gains it had made between mid-August and late-September and dropped back to levels in the 2,100 points range. The Kuwait bourse similarly weakened more than 5% and receded below 10,000 points in late November.
In Amman, the market gave up over 8% and in Beirut, the BLOM Index fell 7%—but that was its closing before the country received another blow through the assassination of Industry Minister Pierre Gemayel, after which the Beirut Stock Exchange shut its doors for several days, along with most of the country’s businesses.
This means that with exception of the smallish North African bourses in Tunisia and Morocco, Arab stock markets had nothing to boast of in the period immediately following the fasting month of Ramadan, a period which many experts had assumed would lead the markets to new consolidation or signal growth impulses after the correction phase that hit GCC and Levant capital markets in the first half of 2006, with some variations in terms of exact timing and severity of the respective share price drops.
While the danger of a crash in regional stock markets was thought distant by a substantial share of market protagonists in 2005, by the spring of 2006, capital market experts had noted that the downturn could no longer be considered a brief interlude. Many still expected the second half of the year to bring new promise, however.
With the year-end in sight, that optimism seemed increasingly premature, even as analysts said that the valuations of GCC equities are reasonable and offer good new potential—also given that the burst of the bubble in 2006 was fairly predictable because the region’s capital markets rally was driven by the oil boom and toward the peak of the rally, the ratios between oil prices and GCC equity market valuations had become excessive.
“At the market peaks, a significant disconnect developed between oil and regional equity pricing,” said Dubai-based investment firm Gulf Capital Group in a recent report, while concluding nonetheless that the markets are poised for future growth.

Harvest of oil revenues will continue
The broad consensus of international and regional financial institutions and banks is that oil will be the major force behind Arab economic and capital market trends for years to come, which also means that the region’s influence in the current account triangle of Western consumers, Asian manufacturers/new consumers and Middle Eastern oil suppliers is likely to increase.
In long-term perspectives, the global thirst for oil will not relent and oil-producing economies are bound to harvest the benefits. Within this outlook, the region’s economies and sectors will have further development opportunities, and various methods of share price modeling show that there are plenty of Middle Eastern companies with attractive upsides to their current share prices.
This is true even as 2006 results of listed companies suffered on the whole, due to shortfalls in their investment-related income and because some companies incurred losses that depressed the picture. As the National Bank of Kuwait pointed out in an analysis of earnings by UAE companies in the first nine months of 2006, one group of 14 companies with sound core earnings and accounting for over 60% of market capitalization achieved 27% growth in their net profit to a total of over $5 billion.
That was a much better performance than suggested by the modest 5% profit growth for 66 listed companies with published results, due to the fact that 23 companies reported declines in earnings and 11 incurred losses.
Thus, by global and local reasoning, investors will be well-advised to review the performance of Middle Eastern equities in the first nine months of 2006 and the entire year neither in search of short-term profit nor obsessing over the year-on-year slowing of earnings growth by many companies—which already a year ago seemed hardly avoidable for the 2006 earnings season, when corporation after corporation in the third and fourth quarters of 2005 had announced stellar growth rates in profits.
However, quick and speculative gains may not be easy to come by in the coming months and analysts now tend to see the consolidation phase of Arab stock markets as bound to take more time than expected earlier in 2006, which implies that rallies and bull runs in the near term will be the exception rather than the rule. But by measuring price to earnings as well as price to earnings to growth ratios, researchers such as Gulf Capital say that Middle East equity markets—with the exception of Saudi Arabia—are priced attractively in the long run.
Another matter of importance for the development of Arab equities is the regulatory environment and market culture. In this regard, several GCC countries moved to implement strict regulations and standards in order to purge violators of corporate disclosures and transparency issues.
UAE, Kuwait and Saudi Arabia tried hard to implement these rules and presented several companies to trials for lack of transparency and insider trading.
Additionally, the GCC countries realized that trading awareness and diversification are key aspects of sound capital markets. Governments encouraged education of market participants and supported the creation of increased awareness in the minds of inexperienced investors who were following the market trends and buying stocks without conducting fundamental analysis.
IPOs
The stock market correction did not prevent GCC investors from looking for quick profits through subscription in initial public offerings by Gulf companies in 2006.
IPOs of large companies such as Emaar the Economic City in Saudi Arabia, Al Babtain Power and Telecommunications, Advanced Polypropylene Co., Saudi Research and Marketing Group, Qatar’s Al Rayyan Bank, Bahrain’s Al Baraka Banking Group, the UAE’s Emirates Integrated Telecommunications (DU) and Kingdom Hotels Investment were oversubscribed several times.
The IPO trend is expected to continue in 2007, with 65 planned or rumored IPOs currently included in the IPO Monitor of regional business information provider, Zawya.
More than half of these IPOs are scheduled for Saudi Arabia and another 20% for the UAE, clearly indicating that the GCC markets will again dominate the regional IPO scene in 2007 as they did in 2005 and 2006. In Egypt, privatization and sales of already listed but state-owned companies will continue to appeal to investors.
Some of the high profile companies planning to go public or be privatized in the GCC are Saudi Development Bank (Inmaa) with $2.8 billion IPO, Saudi Arabian Mining Company ($1.06 billion), Saudi Aramco with $1.01 billion, Bahraini United International Bank ($800 million) and the privatization of UAE’s International Petroleum Investment Co. for between $540 million and $810 million.
Syria, where plans to launch the Damascus Stock Exchange are more likely to be implemented in the latter portion of 2007 than early on, could bring a boon to local investors through public offerings of new joint venture banks even ahead of the formation of the bourse. Later on, when the bourse’s rules have been tested and the playing field is open, the country has strong potential for its own IPO wave.
In Lebanon, where a number of IPOs scheduled for 2006 have been postponed until 2007 because of the summer conflict, the new year’s IPO prospects may have become open questions as long as the country’s political struggles preclude a clear investment picture.
To secure the interest of investors in future IPOs where political risk is not the problem, observers say that markets need to free themselves from overpricing issues through excessive issue premiums. One such example was the August 2006 IPO of Red Sea Housing Services in Saudi Arabia. The company’s asking price of 58 Saudi riyals ($15.5) per share represented a premium of SAR48 added to the share’s par value of SAR10. Analysts said that the SAR48 premium was 35% above the stock’s fair value.

Quick and speculative gains
may not be easy to come by
in the coming months

On the other hand, investors are also likely to stay alert to the unfulfilled promises that marred some IPOs such as the flotation for 20% of the Hariri family’s Oger Telecom on the London Stock Exchange and the Dubai International Financial Exchange, which was called off in the last minute in November because of “adverse market conditions.”
Integration of markets or expansion of corporate networks?

Other than tunisia and morocco, Arab stock markets had nothing to boast of
following Ramadan

One aspiration of Arab capital markets is convergence into larger trading realms. As a herald of greater integration of Arab capital markets into globalized trade, the DIFX was overall off to a slower start than its promoters had announced at its launch in September 2005. Similarly, rapid integration and eventual mergers of other Middle Eastern stock markets are not to be counted on with certainty for 2007.

However, on the level of corporate expansion and investments, the region’s equity markets are set for further enhancements. Some of the strategic privatization investments in Egyptian companies are prone to originate from investment firms and other corporations in the Gulf, and there is a strong likelihood of expanded equity participation by Gulf companies in firms in Jordan, Syria, and, provided that political fundamentals improve, Lebanon.
In one example for infusing capital into regional firms, Dubai International Capital invested $272 million in the Amman-based Jordan Dubai Capital Investment Company.
Such involvements are less prominent but for regional economies no less meaningful than high profile international investments by the likes of Dubai International Capital, which in 2006 included the purchase of UK engineering firm Doncasters and assumption of a $1 billion stake in DaimlerChrysler.
A recent report by International Institute of Finance (IF) and Dubai-based Hawkama, a corporate governance institute, said that GCC companies acquired close to $26 billion worth of assets in UK, Europe and North America in the first eight months of 2006.
Despite the scrutiny of Arab investments in US-linked companies and the problems that marred Dubai Port World’s acquisition of P&O over the group’s US operations, the 2006 trend of international investments by regional corporations is bound to continue in 2007, while the importance of Arab investment firms grows in regional and global capital markets.

The race to host a central bank for the western Gulf region sees Bahrain and the UAE emerging as the top two candidate nations and, barring any more fanciers, one or the other is likely to be the location of a central financial institution for the Gulf Cooperation Council (GCC). If the organization achieves its 2010 target of monetary union, the choice will probably be either Abu Dhabi or Manama. The two cities are bidding hard.
Late entries, however, cannot be ruled out, with Saudi Arabia also tipped to enter the lists. News of this came at a routine meeting of the region’s central bankers in Abu Dhabi at the end of October 2006. During a break at this event, GCC Secretary General Abdulrahman bin Hamad al-Attiyah said that Saudi Arabia had not yet submitted a bid to host the institution, but elsewhere Hamad al-Sayari, the governor of the Saudi Arabian Monetary Agency (SAMA), said that this should not be taken as confirmation that his country would not throw its hat into the ring.

Saudis an expected entrant
Many had been expecting the Saudis to make the contest a three-horse race, with some analysts wondering if their current reluctance is tactical, as they awaited more details to emerge on the other two offers.
Others have pointed out that there is still plenty of time for the Saudis. Not only is 2010 some way off, but there are many in Gulf capitals who wonder at the likelihood of that target being reached. Skeptics argue that the GCC has not had a good track-record in working together on economic issues, as spats over Free Trade Agreements have illustrated.
Nonetheless, the “race” does give observers a chance to study the form. Abu Dhabi is certainly a strong contender, known as the economic and political powerhouse of the UAE and a key global player in energy and investment markets. This gives it a substantial financial and banking community and the resources to match.
UAE Central Bank governor Sultan bin Nasser Al-Suwaidi confirmed in late 2006 that the UAE bid was submitted well in advance of Bahrain’s recent counter-offer, an indicator of Abu Dhabi’s confidence that it will be the eventual winner.
Al-Suweidi also took the opportunity to propose that any single currency in the GCC should, in the longer term, lose its dollar-pegging. He argued that it would not make sense to have a single currency linked to a hard currency and that the currency should be free floating. He also dismissed an idea that it could be linked to a basket of currencies, arguing that within such a basket there would always be one dominant currency.
According to Steve Brice, senior economist at Standard Chartered Bank, in an ideal world, the Gulf Central Bank would be in a better position to set interest rates than the US Federal Reserve. He further said that there seems to be some acknowledgement of this within the region as long as central bank’s intentions were flagged in advance, so businesses can protect themselves against the different currency and interest rate exposures they might face.

Problems ahead for the union
One particular concern regarding the proposed union is the differing inflation levels in the various participating countries. The UAE has a much higher rate of inflation, for example, than Saudi Arabia. Of all the convergence criteria including public debt, currency reserves and interest rates, inflation will be the most difficult to meet before the single currency. Without it, the union will not work.
However, Muhammad al-Mazrouei, assistant secretary general for economic affairs at the GCC, is not worried. At a meeting of GCC central bank governors in Abu Dhabi in October 2006, he said that inflation is transitory and limited to certain sectors such as real estate. He further dismissed concerns over frailing to meet all the criteria, recalling that even the Europeans violated the criteria, and still launched a single currency.
But what about Bahrain? The island emirate also scores highly. While the kingdom lacks Abu Dhabi’s hydrocarbon clout, it has long been known as the Gulf’s financial and banking capital, with its lack of oil and gas obliging it to specialize in such sectors such as this. It has also emerged as the hub for Islamic finance in the region, while also possessing good economic transparency and a lack of excessive bureaucratic regulation. At the same time, the central bank of Bahrain’s stringent laws governing the local financial sector have also won praise internationally.
According to a new study conducted in the region by Dubai-based Fusion Marketing and Management in conjunction with a US company, SurveyMonkey, the organizers of the Leaders in Dubai Business Forum 2006, Bahrain ranks second only to Dubai for ease of doing business.

Speaking at the MENA Economic Forum in Kuwait in November 2007, Ibrahim Dabdoub, CEO of the National Bank of Kuwait, declared that the “Arab banking landscape is being transformed” by the four horsemen of globalization, liberalization, technology and staggering regional growth. He noted that from now on, banks would have to prime themselves for competition and should seriously consider consolidation. “Success,” he said, would mean creating an ideal “economic, financial and institutional environment.” His words are as good a blueprint as any for the GCC banking sector in 2007.

Historically slow growth
Historically, conditions have stifled growth for Arab banks, but this is no longer the case. At the turn of 2007, the Arab banking sector finds itself, at last, in an environment conducive to sustained investment and strong economic activity that should persist until 2010. What has prompted this about-face? Among other factors are strong growth fundamentals, high liquidity and genuine moves to diversify and reform. And while oil prices remain high, there will be demand for lending as new and ambitious real estate developments are announced—and built—at a staggering rate. Both assets and revenues are set to increase, propelled by IPOs, bullish stock and property markets.
As profits boom, the new areas are emerging with strong growth potential. These break down into two categories: those that are already gaining momentum and those that show promise. In the former, there are new opportunities for corporate banking in an “energized” private sector and the financing of real estate projects, given the thriving commercial, office and residential markets. There’s also Islamic banking and brokerage and investment services as sectors to watch. In the “promising” category are on-shore private banking and wealth management services, as well as investment banking, which should accelerate as more family-owned businesses go public, new industries expand and private equity moves across borders. Finally, look for substantial prospects for financing oil, gas and infrastructure projects.
Nonetheless there are always challenges—maintaining bullish performance—and threats—bubbles and geopolitical risks in a region known for its turbulence. As local competition intensifies, weaker banks tend to move towards speculative lending without putting the necessary risk-reward structures in place. Capital markets are increasingly being used as alternative sources of financing; likewise, investment funds have begun to overtake low-cost deposits. Meanwhile, fiscal reforms and labor policies may actually have a negative impact on a low-cost sector that is already feeling the bite. Just as worrying is the threat that the technology sector, the WTO and market liberalization will open up profitable business segments to foreign banks that can, in turn, pick off local customers already looking for higher-quality service and better performance.
Attention should be paid to the underdeveloped regional operating environment, where the combined assets of all Arab banks are less than the total assets of Barclays Bank PLC. The environment is further limited by numerous structural weaknesses. A low spending capacity for development has held back innovation. Compared to their international counterparts, GCC banks invest relatively little in tech, and the regional human resources pool lacks real and sustainable talent. There is also an excessive dependence on interest income, while risk management and corporate governance remain weak.
Banks are employing a variety of strategies as they forge ahead, however. Some have sought out mergers with larger partners, while others have exploited niches such as Islamic and private banking to diversify revenue streams; as competitors seek to differentiate themselves, some banks have integrated strong IT platforms and process control. Furthermore, the culture and concept of corporate governance is slowly beginning to work its way into the banking consciousness.

New problems arise
However, these developments have spawned a new set of structural problems. They include speculative lending by smaller banks and an excessive number of new banks emerging that are liquidity-driven, rather than predicated on a real business plan or strategy. Meanwhile, effective asset and liability matching and large dividends in an era of rising capital requirements are also a concern. Also, in banking, at least, size does matter: smaller banks quite simply cannot compete with their larger, often foreign, counterparts. These competitors are financially stronger, better-equipped to absorb and diversify risk and technologically sophisticated, with a greater ability to innovate. They can also hire better bankers, often importing professionals from abroad—and raiding the best employees from local banks. In addition, several niches may prove vulnerable, such as private banking and wealth management, areas that offer new options to businesses that previously kept their wealth onshore.
With an ever-broader array of choices and products, customer loyalties in the Arab banking sector are set to be tested. Technological advances now offer customers greater options—and flexibility—in where they bank, and foreign banks tend to provide better access to capital markets, as well as strong experience in wealth management. These factors, especially in conjunction with generational transfers of wealth, could lead many customers to abandon longstanding family ties with local banks and move their business to more competitive foreign branches.
So what must Arab banks do to compete? First of all, they must recruit and train better-quality staff—from abroad if necessary—and improve their tech infrastructure. They also must be able to offer objective, comprehensive assessment of risks and rewards while coming in line with internationally accepted standards of corporate governance.

Banks must improve in order to compete
Success will also hinge upon improving core banking business, offering broader product lines, better advising services for clients, and strengthening their brands, in addition to improvements in the three most basic determinants for customer satisfaction: lower prices, better service and a higher level of convenience (both through wider branch networks and online banking services). Local banks should also play to their strengths, and highlight the value-added they can bring to the table, such as local market and customer knowledge and offering tailored services and products.
Much like the consolidation trend among Western banks in the 1990s, which saw the formation of “mega-banks,” Arab banks must also expand geographically, buying or merging with other banks in the region. To do this, governments and regulators should play an active role in ensuring the vitality of Arab banks by supporting the consolidation process across the region. However, they must be equally vigilant in preventing mergers that would create banks with too a large market share, threatening the stability of the sector, as well as those that could give foreign banks control over domestic sectors. They should introduce supervisory methods that suit new, larger banks, update local legislation on mergers and reform labor policies regarding layoffs as merged banks seek to maximize efficiency and productivity. Banks should also change their attitudes: acquisition targets have become limited due to the undervaluing of shareholders, paired with the tendency of controlling shareholders to overvalue their independence. Misplaced national pride and even tribalism present further challenges to expansion.

In addition, more basic issues also need to be addressed as banks eye the regional market. The Arab banking sector needs a degree of homogenity, especially in terms of labor, management, corporate governance, accounting standards and tax laws.
Yes, as Dabdoub said, the future competitiveness of Arab banks ultimately depends on the achieving the optimum economic, financial and institutional environment. This must be coupled with macroeconomic stability, bringing fiscal reform, privatization and market liberalization drives. In addition, more vigorous financial regulation and supervision must be implemented, to foster the kind of enabling institutional atmosphere banks need to operate effectively: a legal framework, a culture of corporate governance, genuine transparency and disclosure as well as greater emphasis on education and labor market reform.
Time will tell … but the clock is ticking.

looks good for 2007

Simply put, the economic outlook for the Middle East in 2007 is good. Investment flows, GDP projections, and international demand forecasts for the region’s export commodities, oil and gas, point to a year of growth for the Middle East-North Africa (MENA) region.
Within the forecast-happy pages of the World Economic Outlook (WEO, a product of the International Monetary Fund) the outlook for the Middle East region “generally remains favorable, given that oil prices are expected to remain high, and regional GDP growth is projected at close to 6% in 2006. With continued prudent financial politics and little growth in oil production, GDP growth is expected to moderate slightly to about 5.5% in 2007.”
These growth forecasts position the region well ahead of global averages for GDP developments in 2006 and 2007, which the IMF projects as 5.1% and 4.9% respectively. However, this big picture view easily crumbles into divergent and contradictory country details.
A look into country-specific assessments, such as the latest country risk summaries by the Economist Intelligence Unit (EIU) issued in November 2006, reveals assessments that are far apart. Oman gets solid “A”s for sovereignty, currency, banking, and economic structure risks. Iraq, however, receives straight “D”s in all these criteria.
Kuwait scores high in the finance-related risk categories, Egypt received risk assessments in the “B” range, Jordan was given a negative outlook on currency risk because of energy cost pressures, Syria got no more than a “CC” in political risk because of “Western antipathy to the regime” and potential sanctions over the Hariri investigation.
When examining Middle Eastern economic and socioeconomic prospects, it simply must be taken into account that this is not a region with so-called natural boundaries, but instead features plenty of unnatural boundaries, political and otherwise.
In consequence of this reality, even definitions of the region vary—implying from the start a less coherent picture of the Middle East as a world region than, say, North America, Oceania or Latin America.
These divergences make it more complicated to evaluate information such as the region’s position in global flows of foreign direct investments. The UNCTAD 2006 World Investment Report (WIR) credited Western Asia with having achieved the largest increase in FDI inflows worldwide with an 85% gain to a total of $34 billion. However, when breaking down the numbers, the WIR listed Turkey as one of the region’s major destinations for inward FDI flows, ranking it second after the UAE as the region’s top country for FDI inflows with $12 billion in 2005.
In all economic views on the however-defined region, oil features as the Middle East’s economic platform, unavoidably so because of its global importance as commodity and its dominant role as revenue source for the region’s most powerful economies. This means that oil economies traditionally have received a large share of analytical attention, even as large parts of the Middle Eastern population have historically been unable to benefit significantly from the oil economy.
The WEO, which groups the western Maghreb countries with Africa but Egypt and Libya with the Middle East, allocates a little under three pages to the Middle East in its 34-page chapter on country and regional trends.
Much of that space is dedicated to discussing how growing oil revenues have impacted and are likely to further impact producer countries, from reduction of government debt and improvements of the fiscal balance to inflationary pressures and risks of overheating of property prices and financial markets.
As the cherry on top of the cake, the WEO projects that the Middle East’s current account surplus will rise further to 23% of GDP in 2006—to around $280 billion—before starting to decline in 2007.
The region is indeed well positioned to do well in achieving return on its blessings, especially as the WEO asserts that the management of the oil-generated wealth has improved and “most countries have appropriately begun to use the opportunity provided by higher revenues to increase spending to address long-standing structural problems.”
The report expects that the Levant countries and Egypt will benefit from a supportive environment on both the regional and global levels, but acknowledged that near-term economic prospects for the region’s oil exporters are “generally more propitious” than for the energy have-nots.

Energy, money and blood
The sub-division of the Middle East into oil and non-oil based economies has been long standing and reveals sharp differences in areas such as GDP and current account surpluses.
But while it seems prudent to not entangle the regional identity issues into considerations of Middle Eastern economic growth prospects in 2007, it is necessary from an in-region perspective, to approach the outlook for the region’s diverse economies in the coming year not on a oil versus non-oil basis, but within a—perhaps somewhat provocative—triangle of the forces of energy, money and blood.
Energy is still the primary economic resource and export commodity of the region. Money reflects the productivity of the Middle Eastern economies in both their oil and non-oil segments. Blood, in a very figurative sense, represents the population development and human capital growth potential of these economies.
In another sense, however, the term blood can be used to symbolize the risks of intra-country, intra-regional and even extraneous armed conflicts targeting Middle Eastern countries—risks which have risen disturbingly in recent months.
The link between energy and money is very strong in the current period, much more so than in the final years of the last century when then Crown Prince Abdullah of Saudi Arabia urged the kingdom’s people to increase their efforts towards economic diversification. Exploitation of the energy resources oil and gas for a rather long period translated nowhere as easily into cash flow as it did in 2005 and 2006 and will, according to forecasts, in 2007.
From the economic outlook perspective, today’s renewed strong earning prospects of oil and gas exploitation and processing mean that more of the region’s countries are currently engaging in energy sector developments. In particular, the North African countries are aggressively prospecting new exploration blocks for oil and gas. At the same time, countries from one end of the region to the other are engaging in new refinery projects, expanding processing and often also transportation capacities for oil, gas or both.
These investments imply that the ratio of energy exporting to non-energy exporting countries in the region over the coming years will shift towards more producers and a wider spread of energy wealth.
Egypt has opened exploration concessions near its southern border and on its northern coast. Jordan, one of the main energy import dependent countries, has initiated exploration of its large oil shale deposits. Even Lebanon, where proven offshore gas reserves have remained untapped for non-economic reasons, has at least theoretical potentials to develop its energy resources as well as refining capacities.
In this context it has to be noted that the longer-term prospects of oil export-based economies are of course laden with their own question marks. Research by Credit Suisse recently investigated the sensitivity of oil producing countries to oil price changes.
CS found that the OPEC member countries in the EMEA region (Europe, Middle East, and Africa) derive about 77.5% of their fiscal revenues and 44% of their GDP from the oil sector.
According to the report, the nine countries—Algeria, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and the UAE—face theoretical vulnerabilities to their fiscal and current account balances in 2007 if oil prices drop significantly, but the CS researchers considered the possibility as remote since the countries’ break-even prices for crude oil are significantly below the bank’s forecasted Brent oil price of $63 per barrel in 2007.
Excluding Iraq, Qatar would be most vulnerable to a decline in oil prices with a break-even price of about $47 per barrel in 2007, CS said, whereas Algeria, Saudi Arabia, the UAE, and Kuwait would not feel much pain before oil prices were to drop below $40, since their projected break-even prices range between $38.8 for Saudi Arabia and $22.4 for Kuwait.
In short, the energy exporters are not expected to run into any short-term danger of building new fiscal deficits. “Existing and potential fiscal reserves of the EMEA oil exporters suggest to us that the public sector’s debt-to-GDP ratio in these countries will likely continue to decline,” CS said.
On another note, however, a 10% decline in world oil prices would impact the current account balances of the regional energy exporters with some significance. In this regard, Saudi Arabia is the most sensitive, CS said, and 10% lower oil prices would impact its current account as percentage of GDP by -5.2%, followed closely by Qatar with a projected impact of -5.1%.
These pronounced potentials for direct influences of oil price fluctuations only underscore the importance of alternative money flows and investment strategies that are playing out in the region.
The annals of the developments funded with big money—new industrial cities in sectors such as petrochemicals and manufacturing, tourism-related real estate mega projects like Dubailand or the numerous new artificial islands along the Gulf, and entire new population centers such as the multi-billion dollar King Abdullah Economic City project in Saudi Arabia—are just writing in their forewords and first pages. In 2007 and the following years, these projects will start to unfold their economic performance, showing whether their strategies produce the expected returns.
In another manifestation of the liquidity impact on the entire region, intraregional flows of foreign direct investments in the sectors of real estate, tourism, finance, manufacturing, telecommunications, and services can be counted upon as development areas for channeling new or increasing flows of money, predominantly from the Gulf region to other parts of the Middle East.

Governance and structural improvements
According to the International Labor Organization, the unemployment rates for young people in the Middle East and North Africa are the highest in the world, with over one-fifth of the youth workforce having no jobs.
With so much new blood seeking to enter economic life every year, efforts to improve education, labor markets, business formation rates and social networks will have to be kept up and intensified.
The World Bank said in its Doing Business 2007 publication that 61% of countries in the MENA region implemented one or more positive reforms in 2005/06 that helped improve the business climate in the respective country.
MENA countries listed in the publication as achievers included Morocco, Egypt, Saudi Arabia, and Syria for improvements in business startup procedures; Kuwait and Morocco for registering property; Tunisia for protecting investors; Egypt, Morocco, and Yemen for paying taxes; and Jordan and Syria for improvements in cross-border trade facilitation.
However, with Saudi Arabia being the MENA country with the greatest ease of doing business—ranked 38 out of 175 in the worldwide charts—and Egypt as far down as rank 165, there is still more than enough room for Arab decisionmakers to improve productivity frameworks and business climates.
The same applies to the realm of national and corporate governance, where the September 2006 charts of the World Bank Institute show respectable performance values for GCC countries such as Qatar, Kuwait, Oman, the UAE and Bahrain, but still have many of the region’s other countries in the lower half (and Iraq in the bottom percentiles) of rankings by worldwide governance indicators such as the fight against corruption and the effectiveness of government, both of which are areas where performance improvements are proven economic growth boosters.
The final note of caution must belong to the security risk outlook. When Israel and Hizbullah entered into their open military confrontation in July of 2006, the capital markets in the Gulf region responded with substantial concern. Equally, as intraregional investments increase in size, the region’s big companies in the investment realm are becoming increasingly vulnerable to any deterioration of political stability in the MENA countries where they are investing.
The danger of new conflicts in any corner of the Middle East in the coming year is thus a major factor to consider. Whether it involves rumors of wars or civil wars, this risk, more than ever before, mandates policymakers and economic leaders in every country from Morocco to Kuwait to exert their maximum influence in working for regional stability as safeguard to realizing their countries’ economic and business growth.
If, however, the political risks are handled with efficiency, based on its GDP and investments outlook, the Middle East in 2007 will have high chances of private sector economic and business success for skilled individuals and smart companies, in areas reaching from education, tourism, hospitality and real estate to media and financial services.