SPEAKING FREELY Boom or bust in the Persian
Gulf? By Nader
Habibi
Speaking Freely is an Asia Times
Online feature that allows guest writers to have their
say. Please click hereif you
are interested in contributing.
The
Persian Gulf region is experiencing one of its most
uncertain and volatile times in recent history. Yet
despite all the political turmoil and regional
insecurity, it is also enjoying an unprecedented
economic boom.
Since 2000, the average price of
oil has remained above US$23 per barrel. This has led to
significantly higher oil revenues and faster economic
growth for the oil exporting countries of the Persian
Gulf. In the last five years, Iran and the six Arab
countries of the Gulf Cooperation Council (GCC) -
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates (UAE) - have also enjoyed more
economic stability than in earlier periods. The region
experienced an average economic growth of 4.1 percent
from 2000-03, and at least a 4.3 percent average growth
is expected in 2004. (1)
Aside from faster
economic growth, other indicators also are pointing to
better economic conditions. High oil revenues have
improved these countries' trade and current account
balances, and fiscal deficits have been replaced with
fiscal surpluses. Several countries have set up special
funds to deposit their excess oil revenues. These
revenues, appropriately referred to as oil stabilization
funds, are to be used in future years when the oil
revenues fall below projection. Higher oil revenues also
have been injected into the domestic economy through
increased government spending on development projects.
Iran, for instance, has relied on its large reserves to
stabilize its foreign exchange for the past three years.
Even more noticeable is the continuing investor
optimism in all of these countries. The GCC stock
markets rose by an average of 58 percent in 2003. The
stock market indices of Qatar, Saudi Arabia and the UAE
rose by at least 70 percent. Iran's stock market grew at
even a faster rate. The Tehran stock index rose by more
than 100 percent in the last nine months of 2003 alone.
Even after adjusting for Iran's 17 percent inflation
rate, this is still a very impressive record compared to
other emerging markets. The upward trend in all of these
countries continued in the first quarter of 2004.
Another positive indicator is the rapid rise of
manufacturing and construction activity. Several
megaprojects, such as the Palm Islands Project, are
currently underway in the UAE and other GCC countries.
In Iran, the level of investment in manufacturing and
mining units rose by more than 710 percent during the
1999-2002 period.
The rising purchasing power of
the region has attracted the attention of international
investors as well. In addition to attractive markets,
the GCC countries also have undertaken positive reforms
in their investment and tax codes that have not gone
unnoticed by international corporations. The UAE in
particular is being viewed by many Western firms as the
ideal location for their regional hubs. Even in Iran,
despite the continuing US economic sanctions, European
and Asian firms have established a presence in the oil
and natural gas sector.
These positive economic
developments, however, have occurred amid high risks of
political and regional instability. Saudi Arabia has
suffered several terrorist attacks in the last two years
(the most recent occurred on Saturday when the the Saudi
oil city of Khobar was attacked). Several recent attacks
against nationals of Western nations are of particular
concern. The continuing violence in Iraq and negative
news about the conduct of US troops in that country,
have led to a surge of anti-American sentiments in GCC
countries. This has led to a sharp divide between the
ruling regimes of these countries, who maintain close
political and military ties with the United States, and
the ordinary people who are opposed to US policies in
the Middle East.
The region also has been
affected by sectarian tensions in Iraq. Saudi Arabia,
Kuwait, Oman and Bahrain are home to sizable Shi'ite
populations. The GCC governments are concerned that a
Sunni-Shi'ite conflict in Iraq could result in sectarian
tensions in their countries. Bahrain has already seen
several major anti-American protests by religious
groups. The most recent protest in early May turned
violent and led to the replacement of the country's
interior minister by the ruling Emir. In Kuwait the
heated exchanges between Shi'ite and Sunni clerics
caused such an alarm that high-ranking government
officials had to intervene and silence both sides.
Iran has just emerged from a parliamentary
election that many inside and outside the country
consider unfair because reformist and liberal candidates
were excluded on political grounds. The new parliament
is now controlled by the conservatives, but it enjoys
little legitimacy both at home and abroad. The
reformists are out of parliament, but they have remained
defiant and continue to criticize their conservative
opponents. The risk of urban riots and political
instability remains high. While the recent economic
prosperity has pacified large segments of the
population, demands for political reform are expected to
grow over time.
Iran also faces several external
challenges, the most important among them being US and
European concerns about its nuclear program. Despite
repeated Iranian denials, the United States believes
Iran is secretly developing nuclear weapons, and if
nothing is done, the United States says, Tehran could
achieve its goals within a short period of time. Because
of this perception in Washington, Iran faces a
noticeable risk of military strike by the United States
or Israel against its nuclear facilities in the near
future. Such an operation would be highly destabilizing
for Iran and the entire region. Short of a military
strike, Iran might also face additional international
economic sanctions if it does not meet the demands of
the International Atomic Energy Commission and the
European Union.
The negative impact of the
political risk factors listed above on the region's
economic well being cannot be ignored. The escalation of
political violence in Saudi Arabia and its possible
spread to other GCC countries is bound to have a
negative impact on both domestic and international
investors. Without prospects of long-term political
stability, investors will shy away from long-term
productive projects that are needed for sustainable
economic growth and to reduce these countries'
dependency on oil. The political assassination of
Western experts could also lead to their exodus and
cause a short-term shortage of skilled labor, which will
have an adverse effect on both oil output and the
progress of major industrial projects.
Several
GCC countries have invested heavily in their tourism
sectors over the past three years, and major projects
are currently underway in Bahrain, Qatar, Dubai and
Oman. Yet, security concerns have kept thousands of
tourists away from Dubai and other Gulf region
destinations. This led to a reduction of tourist
arrivals in 2003 and forced many hotels and resorts to
operate with excess capacity.
If the current
political and security threats continue, Iran and the
GCC countries might not be able to translate their high
oil revenues into sustainable economic growth in the
long run, and political factors might even bring the
current economic boom to an end. 1) The 2000-2003
average annual growth rates are: Bahrain 4.8 percent,
Iran 5.2 percent, Kuwait 2.4 percent, Oman 4.3 percent,
Qatar 6.1 percent, Saudi Arabia 3.1 percent and UAE 4.7
percent.
Nader Habibi is a senior
economist with Global Insight Inc, an international
economic consulting firm with many offices worldwide. He
analyzes the economies of Iran and the GCC countries.
Speaking Freely is an Asia Times
Online feature that allows guest writers to have their
say. Please click hereif you
are interested in contributing.
