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Striking a
positive note
The high oil price and expansionary fiscal policy continue to support Bahrain’s economic outlook. Parliament has passed a two-year budget for 2007 and 2008. The budget will again be expansionary in 2007, with spending slated to increase by 19.5% from the previous year’s budget. Total expenditure has been set at USD 9.9bn for the two years (USD 4.9bn in each year). Education will account for 15% of the total state budget, up from 12%. Meanwhile, the allocation for housing projects has increased by 40% and recurring expenditure is planned to increase by 25%.
Economy Growth
Buoyed by the region wide oil boom, real growth will average 6.4% in 2007-08, reflecting both the strength of oil prices and the expansion of regional demand for Bahrain’s financial services. Despite the increased spending in 2006, the budget surplus will strengthen on the back of higher oil and aluminium revenue. Total revenue is forecast to increase by 35.8%, with oil revenue increasing by around 30%.
The total exports of Bahrain in 2006 stood at BD4.35bn and oil exports contributed BD2.93bn of the total exports during the period. The total exports in 2006 were up by 15.3%, on account of higher oil prices in the year 2006. The total non-oil exports stood at BD0.88bn or around 20.3% of the total exports in 2006. The non-oil exports reported an increase of 4.7% in 2006 and hence the contribution to the total exports has been the lowest since 2002. The total imports increased by 12.6% in 2006 to reach BD3.36bn. The total oil imports during 2006 stood at BD1.84bn, witnessing an increase of 17.6%, while non-oil imports witnessed an increase of 7.0% and stood at BD1.52bn as compared to BD1.42bn recorded in 2005
With the fall in oil price from 2007, the budget surplus will deteriorate going forward, although revenue from the government’s diversification projects (such as the port development in Hidd) will increase. The government forecasts a budget deficit of USD 83.7bn for 2007 and 2008; however, the budget is based on a conservative oil price of USD 40 pb.
Focus on Banking Sector
Bahrain’s banking sector has remained to be a cornerstone in growth of the local economy. After the oil and gas sector, the financial institution sector remains the highest contributor to the country’s GDP. Bahrain has introduced the new central bank in the country, with the objective to monitor and enhance the banking sector regulations. In July 2006, the Bahrain Monetary Agency (BMA) announced details of a comprehensive package of regulatory reforms to modernize and strengthen the licensing framework for banks operating in the Kingdom.
A key feature of the revised framework for banks is the simplification of existing categories of onshore and offshore banking licenses, enabling offshore banks to undertake onshore business in a controlled manner. The existing bank license sub-category of ‘Full Commercial Bank’ is replaced by “Retail Bank’. Meanwhile, the two-existing offshore sub-category, Offshore Banking Unit and Investment Banking License are to be merged and replaced with one unified ‘Wholesale Bank’ license sub-category. The Central Bank of Bahrain (CBB) replaced the Bahrain Monetary Agency (BMA) in September 2006. Bahrain has been the hub for foreign banks to operate from to tap the Middle Eastern Markets.
In a further positive development, Bahrain’s Free Trade Agreement (FTA) with the US should have major benefits for the access of Bahraini exports into the US markets.
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SOLID PERFORMANCE
Performance has been solid in recent years due to higher oil and non-oil activities. GDP growth was strong and inflation low. Kuwait recorded large fiscal and external accounts surpluses. The stock price index more than tripled since 2003. This economic success will be maintained in 2007 driven by sustained high oil prices, a slight up tick in oil export volume, and rising FDI associated with oil field expansion plans. The outlook is strong, even if reforms are slow, due to projected strong world oil prices and future plans for the hydrocarbon sector. Kuwait has a US$22bn plan to expand oil capacity to 3mn b/d by 2008 and double the production of petrochemical products. The new legislation passed in 2003 that allows 100% foreign ownership targets boost in FDI in the years ahead.
Economic Growth
Due to the buoyancy of world oil prices and strong non-oil activity, Kuwait’s economy strengthened further since 2004. GDP growth averaged 7.5% a year. GDP per capita jumped to US$ 30,188 in 2006. Current oil production is about 2.6mn b/d. Kuwait’s economy remains heavily dependant on its oil sector. Oil accounts for roughly 60% of GDP and 90-95% of government revenues. Current oil production capacity is estimated at 2.6-2.8mb/d, but plans are in the works to boost capacity to 3mn b/d in 2008
Fiscal policy
Kuwait has enjoyed sizeable budgetary surpluses dating back to 1999. The budgetary surplus jumped to 40% of GDP in 2005 and 43% in 2006. This is remarkable by international standards. This has been due to significantly higher oil prices combined with larger oil output (above quotas) resulting in much larger government revenues. Kuwait has the dilemma of how to “best manage” larger than expected oil windfalls. The surge in oil prices and in liquidity, which combined with speculation, has led to frenzy in the stock market. Profits in companies have been a reflection of capital gains on stock investments. Fortunately, the financial system (strong bank capitalization) is well equipped to withstand a reasonable correction.
The current account surplus will remain significant in 2006-07 along side a minimal external debt load. Kuwait also has fairly sizeable external financial assets estimated at US$100bn and providing also decent non-oil income stream. The external current account could move into deficit should oil prices drop below US$18-20/bbl. However, this is not anticipated in the foreseeable future.
Medium- term growth prospects remain linked to international oil prices, which for the moment appear to favor Kuwait. It has managed to maintain price stability. However, buoyant economic conditions have led to higher inflation of 4% in 2005 and 2006 despite subsidies.
Investment Environment:
Kuwait is increasingly adopting a more welcoming attitude towards increasing foreign direct investment. The implementing regulations of Kuwait’s March 2001 Foreign Direct Investment Law was approved by the Kuwaiti cabinet in 2003. The law provides for a range of investment incentives. The Kuwaiti cabinet is also currently discussing a draft law which cuts corporate tax rates from 55% to 15% for foreign entities operating in Kuwait. Given the ongoing struggle between the National Assembly and the government over a number of issues including economic reform, foreign investors should expect more delays in the passage of the long-awaited multi-billion dollar Project Kuwait bill which promises to open up Kuwait’s upstream oil sector to international oil firms.
Progress continues on the structural reform front, albeit at a slow pace. Private sector participation in the sectors previously dominated by the public sector has increased (particularly in telecommunications, airlines, and infrastructure development). However, several draft laws (including the privatization and competition laws) aimed at promoting a more market-friendly business environment are awaiting parliamentary approval.
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A steady progress towards diversification
Lacking the significant hydrocarbons endowment of the other Gulf states, Oman is an active front runner of attracting foreign direct investment, intent on transforming the Oman economy from a purely oil producing and exporting economy to a diversified non-oil based economy.
Economic Growth
At present, Oman’s economy is witnessing accelerated growth. The growth is due to current high oil prices, strong domestic demand arising from increased oil receipts and continuing steady growth of the non-oil sectors of the economy. Oman’s GDP has accelerated to RO 13.3 billion at the end of 2006 from around RO 7.6 billion at the end of 2001, with 83% of the growth occurring in the past two years. The momentous growth has meant that the current account surplus has swelled to RO 2.4 billion in 2006, from RO 1.8 billion in 2005.
Despite the declining oil production, the recent growth is mainly spurred by high oil prices. The contribution from the petroleum sector has increased to 67% in 2006 from 42.6% in 2001. The average oil price realization was US$ 62 per barrel at the end of 2006 compared to US$ 23 per barrel in 2001.
The government is using a mix of prudent fiscal and monetary policies to curb inflationary pressures. The inflation recorded during 2006 was 3.1%. Expenditure is expected to increase due to major investment projects in the oil and gas sector, tourism and higher outlays on priority social sectors.
The diversification of the economic base is one of the successes of the government of Oman. The diversification policy was adopted mainly to sustain development in the long run, with the main objectives aimed at enhancing the contribution to GDP of the non-oil sectors, development of natural gas-based industries, upgrading tourism and promoting non-oil exports.
New Initiatives
Sohar port is a 50:50 joint venture between the Government of Oman and the Port of Rotterdam and is strategically situated close to the energy resources and outside the Strait of Hormuz. The greenfield port is at the core of a US $ 12 billion integrated economic development and will be critical to the success of 3 clusters - petrochemicals, metals and logistics / energy.
The petrochemicals cluster includes the oil based value chain revolving around 116,400 bpd Sohar Refinery Company and the gas based value chain comprising US $ 3 billion Oman Petrochemicals Industries Company (a joint venture between Government of Oman, Oman Oil Company and Dow Chemicals Company). The metals cluster includes the US $ 2.4 billion Sohar Aluminum Company (a joint venture between Oman Oil Company, ADWEA and LG International), US $ 350 million Shadeed Steel Complex and US $ 46 million steel mill of Al Jazeera Tubes. The energy cluster includes the captive 1000 MW power plant for Sohar Aluminium Company and 585 MW / 33 million gallons per day Independent Water and Power Plant (IWPP) at Sohar. Oman Oil Company SAOC has recently registered a new company, Takamul, for co-investing into various downstream industries that could convert the outputs from the various units in the above clusters into further value adding products.
Salalah Free Zone (SFZ) is positioned to take advantage of the tremendous potential offered by the transshipment terminal at Salalah and the current industrial activity at the 150 hectare Raysut Industrial Estate. Salalah port is competing with regional ports including Dubai, Aden, and Colombo, for its share of traffic as a hub for the global equatorial sea routes.
Oman’s tourism strategy focuses on marketing its ecological and geographical diversity and developing a world class social infrastructure to high quality / networth tourists. In quantitative terms, tourism is expected to increase it share of contribution to GDP to 3%.
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STRONG FOOTING
Qatar’s economic performance remains stellar, supported by strong hydrocarbon prices and prudent government policies. After strong growth over the last few years, the economic expansion remains buoyant. Recently released official data indicates that nominal GDP growth expanded by 33.8% in 2005. The phenomenal nominal growth rate reflects the continued increases in hydrocarbon revenues, especially with regards to increasing prices. Importantly, the non-hydrocarbon sector’s growth also remained strong at 18.8%, although this was a marked slowdown from the previous year due to the high base effect.
Economical Growth
With regards to real GDP, the growth rate slowed, albeit still remaining very respectable at 6.1% in 2005. This was a result of a slowdown in the rate of increase in hydrocarbon output and the high GDP deflator partly due to the increasing oil prices. In 2005, Qatar’s crude oil production increased by 2.6%, compared to a 46.9% increase in the price of Qatari crude. Indeed, the oil deflator jumped from 131.7 in 2004 to 191.7 in 2005 due to the sustained rise in the price of oil.
Nominal GDP growth expanded by 31.0% y/y in Q2, with the average price of Qatar’s crude increased by 29.1% to USD 63.0p/b in H1 2006. Although, the oil price increase will again be removed from the real GDP growth forecast, increased production of gas, and to a lesser degree oil, will result in a strong real growth rate. Liquefied natural gas (LNG) exports are forecast to reach 25.0m tonnes in 2006, compared with 22.9m in the previous year.
Moreover, non-oil sector growth accelerated in 2006, driven by higher government expenditure and investment, driving demand in the economy. Government spending is slated to increase in 2007. Meanwhile, public project and infrastructure spending will increase by 70.5% to QAR 20bn.
After huge investments, many projects are entering the execution phase. Earlier in 2006, Qatar became the global largest exporter of LNG, surpassing Indonesia. Going forward, there will particularly be large increased in LNG production in 2007, with the completion of the 5th train of RasGas II, followed by the commissioning of the 1st train of Qatargas II at the end of the year. Owing to the higher gas production in 2007, real GDP is forecast to accelerate to 8.3%.
Qatar has been looking to invest its surpluses into overseas companies (in both Europe and Asia). Investments overseas have been an area that Qatar has traditionally been behind the other Gulf States, given the emphasis on internal development. Widening the investment base will add greater robustness to the economy and investment income, as they provide an extra level of diversification into economies with different drivers to growth and cycles. Furthermore, it is a tool to tap into strong economic performances in other regions and important as they help to support the government’s fiscal position, expenditure and consequently GDP growth at times of lower oil prices.
Meanwhile, the central bank is also looking to diversify its reserves. This is aimed to limit the impact of the weakening of the US dollar against other major currencies on the value of its reserves.
There have been some growing pains linked with the strong performance of the economy. The large influx of expatriates has resulted in a shortage of housing and increased rental costs. Furthermore, the costs of building materials have also been increasing with the strong demand and shortages in products such as cement. As a result, inflationary pressure has been rising, increasing the cost of projects. However, increasing export volumes mentioned above and continued investment will result in Qatar being the region’s fastest growing and richest economy.
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IMPRESSIVE TRENDS
Saudi Arabia’s economic performance has been impressive as a result of record high oil prices, increased oil production, sustained structural reforms, and continued macroeconomic stability. Real GDP growth in 2005 was strong (6.6 percent) with oil and non-oil GDP growing at 5.9 percent and 6.8 percent, respectively. Inflation remained very low at 0.7 percent, reflecting mainly the very open and flexible labor market and the open trade system.
Economic Growth
External and fiscal developments were dominated by the high world market oil prices. The external current account surplus increased by 8.6 percentage points to reach 29.3 percent of GDP in 2005. The central government overall surplus almost doubled to 18.4 percent of GDP, despite a sharp increase in expenditures. A part of the surplus was used to reduce central government debt by 25 percentage point to 39.6 percent of GDP. The Saudi Arabian Monetary Agency’s (SAMA) net foreign assets increased by $66 billion to $150.5 billion, an equivalent of around 16 months of imports of goods and services.
Strong economic fundamentals, high investor optimism, and a rapid expansion of credit to the private sector (39 percent) helped sustain the stock market boom in 2005. The Tadawul All Share Index increased by 104 percent in 2005, and further by 24 percent to reach its peak on February 25, 2006. Thereafter, the index declined by about 45 percent through end-May 2006 (33 percent below the beginning of the year level), but still remained at 3½ times above its end-2002 level. The banking sector performance strengthened further in 2005, partly due to income from stock market-related activity. SAMA introduced measures to limit bank credit exposure to the equity market and strengthened oversight. Despite increases in international interest rates, SAMA did not revise the benchmark interest rates from February to June 2006, but increased the repo and reverse repo rates by 20 basis points on June 29, 2006, broadly in line with the latest increase in the Fed funds rate. The Saudi riyal appreciated by 3.4 percent in real effective terms during the 12-month period through March 2006, reflecting the movement of the U.S. dollar against other major currencies.
The Future
Prospects are very favorable in light of the expected sustained increase in global demand for oil. Real GDP growth is expected to remain robust at almost 6 percent despite lower oil sector growth (1.6 percent). Inflation in the first quarter of 2006 was about 2 percent (on an annual basis). Both the external current account and the central government overall fiscal balances are expected to register substantial surpluses of 31.1 percent of GDP and 17.2 percent of GDP, respectively. Reflecting the government policy to use a part of the fiscal surplus to reduce public debt, central government debt is projected to decline by around 23 percentage points to 17 percent to GDP. SAMA’s net foreign assets are projected to increase further to $167 billion, equivalent to 15 months of imports of goods and services.
Steady implementation of structural reforms has improved the investment climate and paved the way for Saudi Arabia’s accession to the WTO in December 2005. In order to sustain the momentum, privatization of government activities is being advanced steadily and a large number of mega projects in the non-oil sector are being implemented through public-private partnerships. The Saudiization policy, aimed at creating private sector employment for Saudi nationals, continued to be applied in a flexible manner, thus contributing to wage and price stability in an environment of accelerating economic growth.
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SETTING POSITIVE TRENDS FOR THE REGION
An outward-oriented development strategy and prudent financial policies have resulted in impressive economic growth over the years and have led to a large accumulation of external financial assets. This success has been underpinned by Abu Dhabi’s prudent management of its oil wealth and Dubai’s strong push for economic diversification. All indications are that the liberal economic policies followed thus far will be broadened and accelerated in the period ahead.
Economic Growth
Economic growth has been impressive, reflecting sharply higher oil prices, increased oil production, strong investor confidence, and a significant increase in foreign direct investment. Preliminary data for 2005 indicate that real nonhydrocarbon GDP grew at 11 percent, while the hydrocarbon sector registered a growth rate of 2.1 percent. Growth was broad-based with most sub-sectors growing at historically high rates, especially in manufacturing, real estate and construction, and trade. However, inflation has been on the rise, driven by the strength of domestic demand, a hike in gasoline prices and a significant increase in the prices of non-tradables such as rents and services. Both the external current account and overall consolidated fiscal balances are estimated to have recorded large surpluses in 2005 (14.7 percent and 26.9 percent of GDP, respectively). The nonhydrocarbon deficit (excluding investment income) narrowed by 1.7 percentage points of GDP, to 17.3 percent. The broad money stock rose by 34 percent, mainly on account of a rapid increase in private sector credit.
In 2005, Abu Dhabi’s budget improved markedly owing to high oil prices and moderate expenditure increases. The two other key emirates, Dubai and Sharjah, maintained their policy of executing budgets that are largely in balance.
The equity markets, after having risen significantly since 2004, have had a sharp correction since their peaks in November 2005. The sharp corrections in the U.A.E. bourses were due to market overvaluation and the liquidation of existing positions to fund subscriptions for Initial Public Offerings (IPOs). The high demand for IPOs was in turn the result of a policy of underpricing them.
The banking sector in the U.A.E. remains strong, bolstered by effective supervision, but the fast growing capital markets and nonbank financial institutions pose new regulatory challenges.
The U.A.E. authorities, are taking steps to continue to strengthen supervision of capital markets and nonbank financial institutions. Also, considerable progress has been made with respect to the regulatory framework governing the Dubai International Financial Center and an extensive set of laws have been enacted, benchmarked to best international practices.
The major emirates (Abu Dhabi, Dubai, and Sharjah) are capitalizing on the favorable economic environment to carry out reforms that will foster more private sector participation and further diversify the economy. Dubai passed a property law which allows 100 percent foreign ownership of properties in pre-designated areas, while working with the private sector to provide infrastructure and other services that are traditionally provided and financed by the public sector. Sharjah established a number of industrial free zones and also benefited from attracting new small and medium-sized enterprises that are rapidly expanding. Abu Dhabi has embraced utility privatization and rationalized its fiscal policy through outsourcing of public expenditure.
Key government entities (such as the Abu Dhabi National Oil Company, Dubai Ports Authority, and Dubai Aluminum Company) have massive investment plans to further increase the capacity of upstream activities in the petrochemicals sector, infrastructure in airports and ports, and new manufacturing plants in the metals sector.
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DIRECTORY
OF ARAB BANKS & FINANCIAL INSTITUTIONS |
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