Golden opportunity

25 April 2008

The Middle East would be growing even more quickly were it not for the risks associated with the Iraq war, Iran’s nuclear ambitions, Israeli-Arab conflicts and the threat of terrorist attacks, which all deter investors and harm Foreign Direct Investment (FDI) flows.

Infrastructure investment dominates the region, accounting for roughly 45% of construction spending. While oil wealth provides the capital, projects are being undertaken to modernise and diversify national economies.

Major investments are being made in electricity generation, roads and telecommunications. Large sums are also being spent on reclamation of land from the sea for construction of residential areas and even the development of new cities.

As the chart (right) indicates, the Middle East is poised for a period of accelerating growth, and infrastructure spending will continue as the leading segment.

Even in a region experiencing strong growth, there can be differential circumstances, and one must evaluate countries individually to determine opportunity. A useful way to evaluate relative potential is to compare historical performance to expected growth.

In the chart (below), the lines correspond to the average historical and forecast growth in the region. Of particular interest are countries that have underperformed historically but which will outperform the region in the future.

Similarly, countries that outperformed the region historically but which are expected to falter going forward also bear watching. Egypt and Oman fall into these segments.

The Egyptian economy will continue to expand on the strength of strong export growth, private investments and healthy revenue flows from both tourism and the Suez Canal. The Egyptian investment environment should benefit from reforms implemented by the new administration, such as cutting income and corporate taxes to promote domestic demand and private investment.

Additionally, the government is launching a privatisation programme designed to attract investment, as well as pushing vital financial sector reform.

The outlook for Oman remains quite good, just diminished from recent activity. The government has undertaken several major infrastructure development projects that will generate thousands of jobs in coming years.

Investment spending in the 2004 fiscal budget grew +48%, and a large share of these investments was devoted to tourism and the natural gas industry. The fiscal budget for 2005 did not include any growth in investment spending.

Thus, declining growth is indicative of an existing high level of activity that is just not being further expanded.

As the chart indicates, growth opportunities remain high in much of the region. Even Israel, Kuwait and Saudi Arabia, the slower growing players, will experience stronger growth over the next five years than they have over the past five.

The need to maintain and expand the region’s energy base, combined with the drive to diversify national economies, guarantee a vital construction market, although one that is not without risk.

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