This post is a continuation from my last post about the future economy of Dubai and the region. By the way, I am not an economist – these facts have been gleaned from various articles in the local business press over the last couple of months and the interpretations are my own ruminations of a complex and difficult topic.
While many western countries are suffering economic slowdowns (such as the US with the credit crunch and house prices), the economies of the gulf countries are growing at high rates. Inflation is a concern, just as it is elsewhere. It is now around 10% per year, up from just 2% or so four years ago. Much of this is due to supply bottlenecks but also the rising price of food and rent. A recent report in the local press blamed the current surging oil windfall with too much and too cheap money chasing too few goods and services. In other words, the problem is not that there is not enough money, but the inability to spend it due to shortages in labour and materials! The decline in the US dollar to which many of the local currencies are pegged also does not help the rising cost of imports (although this has bounced in recent weeks).
For Dubai, the proportion of the economy based on oil and gas is now down around 6% as tourism and the financial sector have proportionally increased. Travel and tourism takes up 22.6% of the UAE’s GDP. Construction is a huge economic contributor as anyone here will tell you with the amount of both public and private sector work carrying on. For example, one of the construction companies in Dubai, Nakheel, plans to deliver homes for 3 million people over the next 5 years. Many nations in the region have established sovereign wealth funds which they are using to fund acquisitions in international markets as benign investors.
Some figures on GDP growth: Due to population increases and the large amount of construction activity, GSP growth of 16% is forecast for 2008. GCC countries forecast growth (nominal GDP) over next three years to be 16% per year. The previous three years the economy has been running at 19.4% growth. Real GDP growth is forecast to go from 5.6% in the last three years to 6.6% in the next three years with UAE and Qatar to perform the best. ING estimates that the construction boom will last another 3-5 years with another USD 2 trillion of construction work in the pipeline.
Also, UAE is among the top 5 countries in the world (behind Norway, India, Indonesia, and Denmark) with the highest levels of consumer confidence – although figures are lower than this time last year reflecting the general global downturn. Job prospects are one of the keys to the high ranking for the UAE. While the US lost 260,000 jobs during the first four months of 2008, the UAE added 640,000 during same period.
Much of the regional growth is fuelled by oil revenues. A recent article out of Stratfor notes that oil exporting companies will gain a financial windfall with increased energy prices and along with this, they gain increased political power through directing where oil is exported and also influencing regional governments. But this is only possible if the oil continues to flow, particularly for countries in this region to achieve stability to export oil out through the Straits of Hormuz. The excess cash can be used to “buy peace” with neighbours, as well as for domestic infrastructure investment. For example, Saudi Arabia is constructing large cities in the desert to attract and house new workers and prepare for a post-oil world.
One statistic –oil revenue for 2008 in the region exceeded US$400 billion last year with the UAE earning 56 billion (up from 22 billion in 2003) and Saudi Arabia up to 172 billion (up from 70 billion in 2003 and a paltry 34 billion in 1998). By comparison, the US pays in oil imports the same as its defence budget.
So what is my take on all this? If stability in the region ensues (which requires overcoming the Sunni-Saudi, Shiite-Iran tensions) and oil prices remain relatively high, then revenues will continue to be high into the medium term. As Stratfor points out, with economic power comes political influence. Saudi Arabia, with 40% of its population under the age of 15, remains the key with its major growth prospects and continued oil revenues.
The long term sustainability of local developments remains the question. And for this, we must turn to cultural matters (which as anyone will tell you who has studied foresight, the future lies more in the inner world of intention, values and culture rather than the development of the external world of technology, construction and the economy).