Swann Newsletter - Volume 2, May 2009

Middle East Regional Business Profile

Understanding the economic make up of individual states and regional groupings is essential when examining the Middle East as a potential business hub or destination for investment. For the purpose of this article I will discuss the Gulf States as they are the most economically and politically stable the Middle East.

In the current financial climate, two factors indicate obvious potential for business development and Investment. The first is export products that are marketable during a global recession. The production cycles of these products must be mature and they must be saleable despite decreasing demand globally. These products must also be profitable at the lower margins that flow on from decreasing demand.  For the Middle East this means that states with mature and efficient oil and gas industries find themselves in an enviable position. The clearest examples of this are among the politically stable and economically forward thinking Gulf States. Abu Dhabi in the UAE, Bahrain and Saudi Arabia continue to demonstrate strong growth driven by sophisticated oil production industries. Qatar is similarly placed although their economic development stems from vast gas fields. Dubai, by way of comparison, sits next to Abu Dhabi within the UAE and until recently was at the heart of business affairs in the Gulf States. Dubai currently faces significant economic contraction because it does not have a product that is marketable in the down turn that compares to the oil and gas resources of its neighbours. As the real estate, construction and financial markets, which drove growth in Dubai, have foundered with the contraction of credit globally, economic growth in the Emirates has been stopped in its tracks.

The second factor is sovereign wealth. Countries that seconded money from the economy in the boom years through sovereign wealth funds are now able to spend on development with little regard for the tightening of credit globally. They are also able to take advantage of discounted stock, commodity and labour costs that reflect falling demand across the global market. For example, states that are able to afford infrastructure spending at the present time are able to purchase materials for less than they have cost in a decade. It is also possible to buy up financial assets at prices that were unimaginable six months ago. Put simply, as access to credit tightens globally, the liquidity of sovereign wealth funds has become both a buffer for countries that had the ability and foresight to build them. Again the gulf states of Abu Dhabi, Saudi Arabia, Qatar and Bahrain are well placed in this arena. Fiscally conservative leadership in these states during the recent boom years created sovereign funds that are being deployed and will likely ensure positive economic growth while most of the world sinks into recession.

This is not to say that these four states represent easy money or are the only states with business or investment potential. Competition is high for government contracts and sensible private entities – that is, those that are likely to survive in the current economic environment - are monitoring their cash as closely as any of their counterparts in any other corner of the globe. Local markets and business owners in the Middle East have become more discerning and more sophisticated in recent years through experience and exposure to Western and East Asian business practices. Just as importantly, the personal aspects of doing business in the Middle East are integral when dealing with local business and stakeholders. Even for established or prestige brands, the company will be largely judged by the client-facing employees who deal with local partners on a daily basis.

For those willing to risk moving into less developed markets, countries like Oman provide interesting options. As Oman is less globalised it has been less traumatised by the current economic crisis. Long-term stable government and a desire for development across the financial, real estate and commodities sectors presents opportunities for companies with the time and inclination to move into a new market.

What does this mean for the region generally? Barring unforeseen political upheaval or serious deterioration in Oil and Gas prices, the Gulf States may present opportunities for discerning investors and companies that are able to establish them selves in the region. In the long term it also means that companies that gain a footing states like Dubai and Oman while costs remain low may also be in strong positions to take advantage of a future up turn.

David Tynan - General Manager, Gulf States