Hydrocarbons, Industrial Diversification and Youth Create Strong Growth Mix in Changing Middle East

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--There are two major elements feeding development and investment in the Middle East: The traditional source of hydrocarbon-based projects for fuel, petrochemical and energy production, and the push for projects that diversify national economies in the region away from over-dependence on hydrocarbons. This latter is also about satisfying an increasingly youthful population that is seeking career skills and a satisfying lifestyle. Both of these project sources have committed capital and combine sources of income with a direction for the future, which is a potent combination to keep things moving in uncertain times.

This drive is reflected in the World Bank's (WB) upward revision of the Middle East's GDP growth rate by half a percentage point since May, with the forecast now at 4.1% for 2011 and 3.8% for 2012.

In the Gulf Cooperation Council (GCC) states, 33% to 50% of the population is under 25. In Oman, people under 25 represent 51.5% of the population; in Saudi Arabia, 50.8%; Bahrain, 43.9%; Kuwait, 37.7%; Qatar, 33.8% and in the United Arab Emirates (UAE), 31%.

The latest WB report said that the upgrade in the regional outlook was due to more expansionary fiscal policies in the region; expanded production; better-than-expected growth in Iran; and a quicker-than-anticipated pickup in industrial production in Egypt. The report said that in 2012, the forecast comes down by half a percentage point, based on the expectation of lower oil prices and slower global economic growth.

Investment in the Middle East and North Africa (MENA) region has been strong over the last two decades when compared with Latin America and Eastern Europe. This investment in oil-exporting countries, such as Algeria and Oman, has primarily been supported by major and expanding public investment, whereas oil importers such as Egypt and Morocco have shown more strength in private investment, which has increased in recent years.

Caroline Freund, the chief economist for MENA at the WB, said that to revive investment above and beyond pre-Arab Spring levels, a move to transparency and accountability was urgent. With contracting global demand, lower oil prices would put further pressure on fiscal balances in many developing, oil-exporting countries, especially in a period of expanded government spending, she reported.

While growth in the region continues to be generally strong, investors should not miss out on the opportunity to invest in steel companies and plants, according to Dr. Hilkal Al Tuwairqi, the chairman of the Arab Iron and Steel Union (AISU), who criticized investment companies favoring other global regions when the Middle East has so many advantages.

"Saudi Arabia is expanding, Qatar is expanding, and Bahrain is proceeding," Al Tuwairqi said. "This is your golden opportunity to join hands and build steel factories all over the MENA region. It is cheaper, the electricity is cheaper, the manpower is cheaper, and the location is excellent."

The problem with potential investors lies with their mindset, and this dislocation between the Middle East and the rest of the world has wider social implications, he said.

"You want us to remain traders and import everything from your countries and not manufacture anything," he said emotionally."That is worse than the atom bomb, the nuclear bomb. If we continue to send our youth to your countries to become educated and to see how you are living, when they come back and don't find jobs, their reaction is big."

Regional companies would have a priority to supply steel to rebuild Yemen, and Iraq and would have access to local lines of credit. Local governments would get up to 70% of their project funding from soft loans that will be repayable over 15 years. Steel plants are developing at a fast pace in Saudi Arabia, UAE and Qatar, as demonstrated by the aggressive expansion plans of companies such as Saudi Arabia's Zamil Steel and UAE Emirates Steel, said the AISU chairman.

Middle Eastern companies also are looking outward with their investment strategies, as with the $20 billion invested in oil and petrochemical projects in Asia and Africa by the Qatar International Petroleum Marketing Company (Tasweeq). The state's Ministry of Energy and Industry also received $30 billion in support for the development of the petrochemical industry to meet international requirements. Expansions at Qatar Fertilizer Company (Qafco-6) will enable production of 15% of the world's urea requirements.

Qatar's GDP growth was 16% in 2010-11, and it is forecast to hit 21% in 2011-12. The IMF reports that Qatar has replaced Luxembourg as the world's richest country in terms of the highest purchasing power parity per capita GDP, at $81,466. The U.S. ranked seventh at $46,860, Japan 24th at $33,885, and China 94th at $7,544.

The UAE is pursuing a strategy to develop the performance of the industrial sector to increase its contribution to 25% of GDP. In the first half of 2011, the Ministry of Economy's Industrial Licenses Department renewed 225 licenses, and issued 1,375 industrial licenses and 3,000 customs exemptions. There were about 4,960 industrial establishments operating in the UAE at the end of 2010 with an investment volume of $27.55 billion. The industrial sector increased by $7.9 billion at a rate of 35.76% in 2010.

Other snapshots of major project investment trends in the Middle East include Jordan's plan to begin producing uranium from its 65,000 tons of domestic deposits by 2013 and have its first nuclear power station in operation by 2019. Bahrain plans to invest more than $20 billion in the energy sector through 2030 and has a $13.2 billion refinery project under way. Iran's steel output increased 11.7% in the first eight months of 2011 to 8.77 million tons in the period, and is the country is targeting an annual production of 42 million tons by March 2016. Iran has 106 industrial and mineral projects worth $29 billion that will be through the project pipeline by 2016. Saudi Arabia's construction investment is forecast to reach $420 billion over the next three years.

The prospects for the countries that have undergone the convulsions of the Arab Spring appear to be better than might have been thought when the violence was at its height. The ability to develop civil societies that can manage and sustain economic development fits with the positive attitude of the neighboring countries already mentioned.

Egypt, the anchor state for the Middle East, and MENA as a whole is forecast to have a GDP growth rate of 3.5% in 2012. Turkey, the anchor in the north, is looking at 5.3% growth. If the dialogue between these two states can be further developed, it will augur well for regional development and investment.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.