Gulf Oil-Backed Economies Have Edge, but Region's Non-Oil Sector Shows Growth

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--Business activity in the United Arab Emirates' (UAE) non-oil-based private sector reached a 10-month high in April, according to a survey of purchasing managers. But at the same time, a Standard & Poor's (S&P) report said that oil-rich economies in the Gulf are increasingly pulling ahead of the Middle East region's other economies, driven by sustained high oil prices.

The high prices were supporting oil and gas upstream and downstream, as well as sectors relying indirectly on commodity-led growth, such as trade.

In the non-oil supported sector, tourism and trade volumes have increased in the UAE, according to government data, benefiting from the slackness in commercial and tourism hubs such as Bahrain and Egypt, where the "Arab Spring" protests have taken their political and economic toll.

The region continues to progress in the restructuring of companies, predominantly government-related entities (GREs), that piled up heavy debt to make foreign investments during the boom years.

Regarding Dubai-based issuers that S&P considers to be GREs, the government has a clearer strategy and greater confidence on which GREs it should support with public funds, said Tommy Trask, S&P's credit analyst.

"Although the region's banks may be less inclined to grow their balance sheets, we think government-related entities continue to have good access to bank funding," said S&P's Karim Nassif. "Infrastructure entities such as Taqa Dhabi (Abu Dhabi National Energy Company) and Saudi Electric Company (Riyadh) have successfully raised Islamic financing internationally, which has supported capital spending and debt-refinancing efforts."

Contrary to market expectations, the Gulf Cooperation Council (GCC) countries generally were able to issue substantial amounts of long-term bonds in the first quarter of 2012. Some banks are now less inclined to grow their balance sheets, given some uncertainty about access to wholesale funding and the potential direction of nonperforming loans and loan provisioning, said the report.

The report concluded that regional markets also have recovered some ground over the past six months, following trends in global markets, which is positive news for investment companies.

The HSBC UAE Purchasing Managers' Index, which measures the performance of the manufacturing and service sectors, increased to 53.5 points in April, which is up from 52.3 in March. The

adjusted index remains above the 50-point mark, which separates growth from contraction, the survey of 400 private-sector firms showed.

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