Stability bodes well for Gulf States

Growing populations and infrastructure spending could allow the Gulf States to take full advantage of the oil boom to boost the long-term prospects of their economies.


Growing populations and infrastructure spending could allow the Gulf States to take full advantage of the oil boom to boost the long-term prospects of their economies.

Unlike the earlier boom and bust model associated with oil price spikes there are signs that governments in the Gulf region were more prudent and have positioned their countries to better weather an oil shock.

“In the first oil boom [the Gulf States] needed to spend money to build the basics like schools and hospitals,” said Mina Toksoz, the head of country risk at Standard Bank.

Speaking at Fund Strategy’s Investment Summit in Dubai, she said: “This time the governments have had more prudent fiscal policies saving 50% of oil wealth. This can be used to cushion against an oil shock.”

Toksoz (pictured, top) said this money is important because of the failure of the oil producing states to wean themselves off the commodity. Despite efforts to diversify their economies progress has been slow. Intra-GCC (Gulf Cooperation Council) trade remains only 5-6% of GDP excluding oil because, unlike Asian countries like Hong Kong, the trade hinterland has been mired in instability with Palestine, Iraq and Iran.

The region will also face stiff competition from Asia where even greater capacity is coming on-stream in 2009.

In addition the region has experienced a fall-off in fertility rates in the oil-rich countries. Despite the heavy reliance on the export industry the trade balance in these countries is in a net deficit so the economic growth was based on consumer spending by a wealthy and growing population.

However, comparing the resource-rich countries in the Gulf with those which are commodity-starved, illustrates the effects of rising oil wealth on population demographics.

“In monetary terms the average Saudi is 15 times richer than the average Yemeni,” said Dilip Hiro, author of Blood of the Earth. “However, the fertility rate has fallen in Saudi Arabia more sharply than in Yemen as greater wealth has led to family planning.”

Hiro (pictured) predicted the GCC countries will reach a fertility rate of 2.0 per child-bearing woman by 2050. This will put pressure on governments to encourage immigration of foreign workers and introduce measures to retain these workers through extending citizenship.