How rising oil prices should speed up economic recovery in the GCC

Oil prices are at a two-year high and heading back to $100 a barrel rather sooner than most forecasters penned just a couple of weeks ago. For the Gulf States still reeling from the impact of the financial crisis two years ago, which burst a real estate boom and left banks nursing huge debts, this is clearly good news.

However, much depends on how the oil money is spent on whether it actually speeds up recovery at home or even impedes it. For such liquidity will only boost local economies if it is invested locally.

Debt mountain

Standard Chartered Bank estimates loans coming due total a whopping $70 billion this year in the Gulf States, doubtless with the lion’s share in the UAE. The property crash in Dubai two years ago is the main culprit, and the epicentre of the debt mountain.

Money is what is needed to cure the debts. And money is what $100 oil provides. Tonight ArabianMoney will be at the opening of the new Ritz-Carlton hotel in the Dubai International Financial Centre (pictured above) which was bought a couple of months ago by an unnamed Abu Dhabi sheikh for $300 million because the Dubai owners are in need of cash.

That puts a floor under the value of this property which will likely continue to loose money like its counterpart the Ritz-Carlton at Powerscourt outside Dublin which also opened as a financial crisis hit former high rolling clients. But then not all Dubai hotels opened in boom times. The Grand Hyatt opened in 2003 on the week the Gulf War started, and stayed empty for months before becoming a huge success.

Acquiring a prime property such as the DIFC Ritz-Carlton is a sure fire winner as an investment during a slump. For future inflation and a market recovery will drive revenues up while the original cost of buying will never change aside from the initial operating losses.

Oil money is the pixie dust required to magic Gulf economies back to life. If Abu Dhabi sheikhs bought more properties like the Ritz-Carlton then the recovery of the Dubai real estate market would be far faster than the city’s own market forces will allow.

Local stocks

The same could also be said for the city’s bombed out stock market, although any direct investment in Dubai real estate would clearly have a knock-on effect for banking and real estate stocks.

Of course, bargain basement buyers are likely to be more discerning in their choice of investments than the developers of the Dubai boom. And this is a good thing. The best projects will be saved, such as the downtown Ritz-Carlton and the worst will be sunk, like the biggest hotel in the world out in the desert.

This is how a recession should work, sorting the wheat from the chaff, putting money into the schemes with the highest economic return and burying the others.

And Gulf Oil States are lucky to have a prime frontier market to invest in at home. There is no need to go chasing up the price of blue chip stocks on Wall Street. For investment at home in an economic recovery will be partly self-fulfilling. Bring on the higher oil prices!