Business | Opinion
Region must capitalise on petrodollar boom
Arabian Gulf should curb temptation to boost spending that will only lead to useless and unproductive projects.
- Financial Times
- Published: 00:00 December 31, 2006
The past year will be remembered in the Middle East for Iraq's tragic slide into sectarian conflict and Israel's misguided war in Lebanon. Less noticed, though no less dramatic, has been the oil-fuelled economic boom in the Gulf, a surge in financial liquidity that has the potential to transform the face of the region.
Even more impressive than the oil bonanza of the 1970s and 1980s, a consequence of the four-year rise in oil prices has been to boost the economic power of Gulf Arabs, even as their political authority wanes and their regional security is violently shaken.
The urge to translate oil wealth into political advantage on the world stage is inevitable. Most important, however, is for Gulf states to deploy their petrodollars wisely, at home and abroad, and create more robust economies that can sustain themselves through periods of low oil prices.
The challenges are particularly pronounced in Saudi Arabia, where high population growth, unemployment of more than 15 per cent among young males and a dysfunctional education system create an explosive political and social mix. It is vital that Saudi leaders combine prudent spending with economic and social reforms to spread the wealth and set the world's oil producer on a more stable political course.
Deficits
The macroeconomic recovery from the lethargy and persistent budget deficits of the 1990s has been remarkable. Together, the six states of the Gulf Cooperation Council have enjoyed double digit growth in gross domestic product for the fourth consecutive year, doubling per capita income from 1998 levels. It has made them the fastest growing economy after China and India. The current account surplus of the group was expected to reach 30 per cent of GDP in 2006 and 2007, adding an estimated $450 billion of foreign assets over the same period.
One of the unfortunate effects of the oil boom thus far has been to ease the domestic pressure on the region's autocratic regimes for political liberalisation while also reducing the urgency of economic reforms. Still, early trends suggest the Arab states are managing their oil windfall more conservatively than in the past - though this is no guarantee that the wasteful spending of previous booms will not eventually re-emerge.
At least so far, Gulf states have been saving at much higher rates than during past oil shocks and the bulk of the spending has been domestic, directed at social and infrastructure projects.
According to one estimate, by UBS Investment Bank, the rise in public expenditures over the past four years was less than 25 per cent of the increase in oil exports. This compares with an 80 per cent ratio in the 1973-1976 boom and a 50 per cent ratio during the 1978-1981 period of soaring oil prices.
In a notoriously secretive region, where the lines between the royal family's privy purse and state finance are blurred, it is hard to track the surplus. Most of the extra oil revenue goes into government investment arms, rather than into central bank reserves, making the trail all the more difficult to follow.
Departure
It is clear, however, that there is a significant departure from the past when a large share of the petrodollars were deposited in international banks. New Arab financial institutions, many of them based in Dubai, are doing much of the recycling themselves and government investment arms are diversifying across asset classes and regions. Europe has been a frequent target of investment and, increasingly, government investment arms are looking at opportunities in Asia, particularly China and India. If oil prices remain strong, as is expected, Gulf states will find it harder to resist the temptation for much higher spending, which could lead to a proliferation of useless, unproductive projects.
Though the Arab Gulf has managed, to a certain extent, to appear insulated from the turbulence around it, political instability too could yet derail the economic resurgence.
Heightened tensions over Iran are already raising bloated defence budgets. Yet Gulf states should refer back to their own history and remind themselves, time and again, of the mess they made in previous financial booms - and of the high price they later paid.
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