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THE SIX MEMBER states of the Gulf Cooperation Council (GCC), Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, are witnessing breathtaking growth thanks largely to the quadrupling of oil prices since 2002. In cumulative terms, total earnings in the 2002-06

period were estimated by the International Monetary Fund (IMF) at $1.5 trillion, compared with $730bn in 1997-2001. This has lifted the region's economy, creating a deep pool of liquidity, which in turn has stimulated an investment boom, especially in the property market. The National Bank of Kuwait notes: "The current boom is likely to be sustained for at least three more years," meaning that "the expected seven-year run of above average growth will make it the longest expansion in three decades". Robert Eid, managing director of Saudi-based Arab National Bank, agrees: "This is a golden age for the GCC countries."

At around $800bn, the area's nominal output is already comparable to Australia in size. On current expansion, aggregate GDP could surpass the milestone $1 trillion mark by end-2009. GCC economies have grown at an annual average real rate of 7% in the past five years--far above the lacklustre 3% growth seen during 1998-2001, on IMF figures. Encouragingly, the non-petroleum sector (led by construction) is providing the momentum, with several infrastructures, tourism, shopping malls and real estate projects under construction. The sector has had positive 'multiplier-effects' on the non-oil economy, notably financial services and transport. Manufacturing is also supporting regional growth, as energy intensive processing industries such as petrochemicals and metals have received sizeable investments in recent years. This is most evident in hydrocarbon-rich Abu Dhabi, Qatar and Saudi Arabia, but is now also a regional-wide trend.

Despite rising oil prices unleashing strong government capital spending, the prosperity/progress is mainly private sector led. Economic liberalisation, privatisations and greater foreign participation in regional markets are generating new opportunities, particularly in finance, telecoms, transport, tourism and manufacturing. In fact, the non-oil sector's contribution to real GDP growth rose from 49% in 2003 to 84% in 2006, the IMF estimated. The Gulf region is rapidly diversifying and attracting higher levels of foreign direct investment (FDI)--a marked contrast with previous decades. A study by Wall Street bank Goldman Sachs concluded that the GCC bloc was among the best performers in its rankings for enhancing growth conditions, with a vigorous focus on diversification and deregulation. The UAE, which had embarked on large-scale diversification before the oil boom, remains a regional leader.

With the labour force expanding at about 4% per annum, job creation is a challenge across the region. Robust private sector growth has created new employment. However, expatriate workers, reflecting skill mismatches and nationals' higher expectations about pay and conditions, are filling the bulk of positions. Schemes obliging private firms to employ more nationals (mainly in Oman and Saudi Arabia) have had some impact and the authorities are now focusing on education and vocational training to match nationals with the demands of private firms. The IMF advises that more flexible employment procedures and measures facilitating labour mobility, along with human capital development, should help relieve labour supply bottlenecks and create jobs for the young/growing population.

GCC states (with the exception of Kuwait) have received sizeable FDI over the past half-decade, with respective governments opening key sectors to regional and global investors. According to UNCTAD's 2007 World Investment Report, FDI inflows into the GCC rose from a modest $1,517m in 2001 to $14,263m in 2004, $26,348m in 2005 and $32,442m in 2006. Such flows are buoyant in the UAE, Saudi Arabia and Qatar, reflecting the rash of downstream energy and construction projects underway in these countries, as well as improvements to their respective business regulations. Saudi Arabia and the UAE (led by dynamic Dubai) have received $32,332m and $29,290m, respectively, over 2004-07, whilst GCC's inward FDI stock in 2006 totalled $112.6bn--representing nearly half of the Middle East's total ($242.6bn), excluding North Africa.

Public private partnerships with foreign companies are also being encouraged to implement regional infrastructure projects. Dubai-based private equity group, Abraaj Capital, reckons that, over the next decade, the GCC bloc needs $188bn to upgrade transportation, including ports; $155bn for power utilities and $130bn for the water sector. Meanwhile, healthcare and education would require $49bn and $18bn, respectively.

Expanding the role of the private sector in the provision of public services, opening government procurement and domestic sectors to competition, as well as lifting price controls will encourage private funds in basic infrastructure.

Investors have regained their poise following the stock market meltdown of 2006, providing a further boost to consumer/ business spending in 2007. Merrill Lynch predicts the Middle East Gulf markets to outperform other new frontier indices this year. "It is hard to argue against massive oil surpluses, excessive liquidity, easy fiscal and monetary policies and inexpensive stocks. With increasing inflows from international funds, the dramatic re-rating of Gulf markets is set to continue," the investment bank said. True, colossal wealth is rising thanks to the recent equity bull-run and from stronger property prices. McKinsey Global Institute estimates potential Gulf investable capital (institutional funds and private wealth) at a staggering $4.1 trillion--equivalent to 30% of the US's GDP. Hedge Fund Research regards "the Arab world as one of the most valuable sources of investment capital available in the world today".

Risks to future growth are inflation and currency instability due to the [fixed] dollar-peg system. Price pressures are growing from a variety of sources--chiefly bottlenecks in property, labour and materials amid robust domestic demand. The sliding dollar is, too, hiking import costs. Inflation is at double digits in Qatar and the UAE and recently hit a 16-year peak of 6.5% in Saudi Arabia. Soaring house rents are the main problem across the region. With a large number of housing units nearing completion, price pressures should subside within two years. But rampant inflation threatens plans for GCC monetary union by 2010. Saudi Arabia's central bank governor believes the target is "extremely difficult", to finish the preparations, the institutional, legal [issues], while the UAE central bank chief favours extending deadline by five years.

The situation is made worse by the dollar-peg, which requires GCC states (except Kuwait) to track US monetary policy. Hence, regional central banks are now slashing interest rates at a time when they should increase them to tame inflation. The US Fed Funds (currently 3%) is likely to drop yet again as the Federal Reserves (central bank) struggles to avoid a nasty recession. Meanwhile, lax monetary policy fuels liquidity growth and increased spending in the region, where consumer debt is already high--estimated last year at 60% of private consumption. The Institute of International Finance (IIF), a Washington-based association of private banks, thinks if the dollar weakness and the Federal Reserve's easing stance are maintained in 2008, then "pressure for revaluation in the GCC could become irresistible". But a revaluation would erode the value of oil-export receipts and foreign assets, the bulk of which are held in dollars. The net offshore wealth of GCC countries had reached about $1.8 trillion by 2007, on IIF figures, more than China's foreign reserves of $1.4 trillion.

The region has weathered the global credit squeeze and is proceeding with mega-projects amidst an unabated petrodollar boom. Sound governance, swelling twin fiscal--and current account--surpluses and Gulf banks' low exposure to esoteric instruments like "Collateralised debt obligations" or "Structured investment vehicles"--which forced Citigroup, Morgan Stanley and UBS, among others, to disclose whopping bad debts in 2007--have contained the impact of the credit crunch. Moody's, the ratings agency, however, believes few Arab-owned institutions have exposure to "asset-backed securities" collateralised by sub-prime loans. It noted: "There are some investment valuation issues with investment banks but these are not material. We are also fairly comfortable with their funding positions, because, if needed, they can turn to their cash-flush public sector shareholders or governments for support." Hichens Harrison, the City of London's oldest stockbroker, concurred: "There is no debt problem. It [Gulf] is not going to get caught in a credit crisis." Aggregate private external debt ($226.3bn) last year comprised only 28% of regional GDP, far below emerging markets' average, and debt servicing is modest. All six states enjoy higher investment-grade status, ranging from [A2] for Bahrain and Oman to [A1] for Saudi Arabia and [AA2] for Kuwait, Qatar and the UAE. This suggests a low or in fact, no risk of default on foreign-currency liabilities.

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The appetite for project finance remains undimmed, but recent events on financial markets have led to higher borrowing costs, especially for private companies. According to IIF, deals on average are being priced at about [10-15] basis points higher than at mid-2007 (before the sub-prime debacle erupted). Interestingly, the credit crunch may prove favourable if it encourages greater due diligence and the reappraisal of those projects, which may lead to overcapacity in some sectors like tourism, hotels and petrochemicals. Moreover, increasing engineering, procurement and construction costs and supply-side constraints are imposing a natural check on more ambitious real estate projects in the planning stages, for example, City of Silk (Kuwait) and Dubai Waterfront, the costs of which are tentatively estimated at $86bn and $40bn, respectively.

The accumulation of foreign assets within sovereign wealth funds and minimal debt give ample scope to maintain spending levels, even if oil prices fall by $10 to $20 a barrel under the impact of a global slowdown in energy demand. The GCC bloc has investment projects worth $800bn over the medium term, with 75% of that amount in the non-hydrocarbon sector. The mega-projects are in the oil/gas industry (funded largely by the national oil companies), infrastructure (mainly under the public private partnership models) and real estate (financed primarily by private funds). Such projects--either underway or in the planning stages--should boost growth potential, create jobs for nationals and allow the regional economy to thrive for the foreseeable future.

The future looks rosy for the Gulf, which stands to earn as much as $5 trillion in potential windfalls over the next 25 years if strong oil prices and demand are sustained. Goldman Sachs projects that the GCC market could be comparable in scale and prosperity to present-day France (the world's fifth-largest economy) by 2050. Given increased economic liberalisation, robust inflows of FDI, massive infrastructure expansion and formidable oil/gas reserves, such optimism could become a reality in the coming decades. The Gulf's profile in the global community is improving as governments and private investors buy into corporate America and Europe, as well as boosting their imports of western goods and advanced technology in support of industrialisation at home.

AGGREGATE ECONOMIC INDICATORS ON THE GCC ECONOMY

                                    2005     2006     2007     2005

Nominal Gross Domestic Product
($bn)                              612.3    717.9    799.7    912.1

Nominal GDP growth (annual %
chg)                                26.8     17.2     11.4     14.0

GDP per capita ($000s)            17,500   19,800   21,300   23,400

Consumer price inflation
(average) %                          4.1      5.3      6.7      7.0

Real GDP growth (annual % chg)       6.8      6.1      5.2      7.8

Hydrocarbons GDP %                   3.2      2.7      1.4      6.4

Oil price, Brent ($/barrel)         54.4     65.4     72.7     79.6

Non-oil GDP %                        8.5      8.9      8.0      8.1

Stock market capitalisation
($bn)                              1,137      732    1,062

Number of listed companies           579      508      556

Central government. Fiscal
balance % of GDP                    20.3     22.8     18.8     21.5

Total gross public debt % of
GDP                                 27.9     22.3     16.9     12.6

Current-account balance ($bn)      166.7    196.7    214.9    252.9

Total external debt ($bn)          117.4    189.9    226.3    260.4

Sources: National authorities, IIF, and Global Investment House.

CROSS-COUNTRY MACROECONOMIC INDICATORS 2007

                 Nominal
                     GDP    Per capita   Population     Real GDP
                   ($bn)    income ($)     millions     growth %

Saudi Arabia        376.8       14,900         25.3          3.5
UAE                 188.8       42,100          4.5          7.5
Kuwait              114.8       33,700          3.4          5.1
Qatar                63.6       67,700          0.9          8.3
Oman                 39.0       14,400          2.7          6.5
Bahrain              16.7       21,900          0.8          6.3
GCC TOTAL           799.7       32,450 **      37.6          6.2 **

                                             Fiscal     National
                  Non-oil      Jobless      balance         debt
                 growth %       rate %        % GDP        % GDP

Saudi Arabia          4.6         14.0         12.7         18.9
UAE                  10.5          2.8         26.3         21.1
Kuwait                6.5          4.5         35.8          9.8
Qatar                 7.0          2.8          8.3         12.6
Oman                  9.0         16.0         12.6          7.5
Bahrain               7.0         17.0          2.5         12.3
GCC TOTAL             7.4 **       9.5 **      16.3 **      13.7 **

                  CPI * %     % chg in     Credit-
                                market      rating
                               indices     Moody's

Saudi Arabia          3.8         26.4          A1
UAE                   9.8            #         AA2
Kuwait                4.5         20.3         AA2
Qatar                13.9         19.5         AA2
Oman                  4.8         61.2          A2
Bahrain               3.3         18.1          A2
GCC TOTAL             6.7 **      33.1 **

* Consumer price inflation; # Abu Dhabi (50.3) and Dubai (36.3);

** Weighted average. Sources: National authorities, IIF estimates
and Bloomberg.

THE GCC'S HYDROCARBONS DATA (2006)

                                 Saudi    Kuwait     UAE    Qatar

Proved oil reserves (bn of
barrels)                         264.3    101.5     97.8     15.2

Oil production (000' bpd) *     10,859    2,704    2,969    1,133

Proved gas reserves (trillion
cubic feet)                      249.7     62.8    213.9    895.2

Natural gas output (bn cubic
metres)                           73.7     12.9     47.4     49.5

                                  Oman    Bahrain  Total    GCC %
                                                               of
                                                            World
                                                            total

Proved oil reserves (bn of
barrels)                           5.6     0.12   484.41     40.1

Oil production (000' bpd) *        743      200   18,608     23.0

Proved gas reserves (trillion
cubic feet)                       34.6      3.2   1459.4     22.7

Natural gas output (bn cubic
metres)                           25.1     11.1    219.7      7.6

* Includes crude oil, condensates and natural gas liquids (NGLs).
Source: BP Statistical Review of World Energy, June 2007.

EXTERNAL ACCOUNT, OFFICIAL ASSETS, DEBT & FOREIGN DIRECT INVESTMENT,
2007 ($bn)

                Exports      Crude    Imports      Trade   Current-
                               oil               balance    account
                          revenues                          surplus

Saudi Arabia      228.4      204.7       72.8      155.6       95.2
UAE               159.3       68.2       95.7       63.6       39.3
Kuwait             66.1       62.8       15.2       50.9       60.9
Qatar              38.5       19.7       16.6       21.9       12.7
Oman               23.6       15.6       11.1       12.5        4.6
Bahrain            13.1       10.2        9.7        3.4        2.2
GCC TOTAL         529.0      381.2      221.1      307.9      214.9

               External        Net   Deposits   2006 FDI
                   debt    foreign    in OECD    inflows
                            assets    banks *        $ m

Saudi Arabia       54.2      540.0      118.4     18,293
UAE               105.9      850.0       88.1      8,386
Kuwait             31.0      280.0       50.0        110
Qatar              25.0       85.0       11.5      1,786
Oman               10.2       15.0       12.2        952
Bahrain             N.A       25.0        N.A      2,915
GCC TOTAL         226.3      1,795      280.2     32,442

* Banks reporting to the Bank for International Settlements (BIS);
// Total (excluding Bahrain). N.A--not available. Sources: IIF, BIS
and UNCTAD World Investment