Another economic boom for Arabia while the world faces stagflation?

Posted on 10 July 2011 with 4 comments from readers

Sitting back to take the long view this summer Arabian business can sense something is changing. Basically a tsunami of cash from recent high oil prices is beginning to crank up local economies whose real estate booms crashed so badly in the global financial crisis.

The impact is most clear in the largest regional economy, Saudi Arabia, which also experienced the least of the real estate bust. The National Bank of Kuwait forecasts record oil revenues of $267 billion for the kingdom this year and 6.9 per cent GDP growth.

Both oil output and oil prices are up. The Arab uprisings have helped, with the kingdom boosting production to offset the loss of Libyan oil. And Brent crude prices have remained stubbornly north of $100.

Money printing and oil prices

It could be that the world economy drops into a deep double dip recession and the gravy train ends for Arabia. But the Federal Reserve and Chinese authorities (joined by Japan, the UK and eurozone) have shown a willingness to print money and accelerate inflation rather than countenance a downward deflationary spiral like that of the 1930s.

That leaves the world in a similar position to the late 1970s when oil prices boomed and the Middle East and other oil producers experienced high levels of economic growth. The global economy is basically not strong enough to take the anti-inflationary medicine that would depress oil prices and the stimulation required to keep it going will keep oil prices relatively high.

In the 2003-8 Arabian boom the leaders were Dubai, Doha and to a lesser degree Bahrain and Abu Dhabi. This time Saudi Arabia looks likely to be king with King Abdullah’s huge spending programs announced in February and March reckoned to be worth $125 billion for housing, jobs, salary rises and the health sector, or no less than 29 per cent of GDP in 2010.

Importantly the oil surplus will pay for it. The spending this year will be worth around 10 per cent of GDP, and NBK says the country will still have a balance of payments surplus of 13 per cent.

Now of course the authorities have a political motivation to spend. This is the carrot for good behavoir for the Saudi population. They have only to look at the suppression in Bahrain to see what the stick might involve.

Indeed, students of history compare events in Bahrain with the Tiananmen Square protests in China in 1989. At that juncture it was not clear whether China would follow Eastern Europe into a democratic future. After Tiananmen China followed the path of high economic growth and protests vanished along with the reform movement.

Is something similar about to happen in the Middle East with a sharp divergence in politics and economics between the oil producers and the non-oil nations? It not only seems possible, this is being borne out by events and decisions that have already passed.

Winners this time

The winners this time look to be building projects in the main Saudi cities and Qatar where the boom never stopped. However, Dubai is the commercial capital of Arabia and will clearly also be a major beneficiary, and Abu Dhabi will score big time from high energy prices.

Kuwait, Bahrain and Oman will lag behind. Bahrain has almost no oil to add to its other problems. Kuwait is still unravelling the excessses of its last highly speculative investment boom while Oman is always something of a backwater.

But another oil boom is in the making for Arabia while the rest of the world faces a tough slog through stagflation until it can take the final therapy of high interest rates to defeat inflation. Welcome to the summer of 2011.

Investors are lucky because Arabian stock markets are still flat on their back and offer considerable opportunity. The July issue of the ArabianMoney newsletter is proposing several ideas to implement now to profit from this economic renaissance (sign-up here).

ArabianMoney editor Peter Cooper is also on the way to Vancouver in Canada to deliver this message to North American investors at the annual Agora Financial conference.