JEDDAH: Gulf states entered 2011 with a positive outlook amid expectations that high oil prices will support government infrastructure spending plans and a pick up in bank lending will boost private sector activity, but the potential for more debt tremors in the region and uncertain global economic conditions still remain. "It is going to be a very interesting year in 2011 and through 2012. We see lots of infrastructure projects planned and these will boost the debt market and absorb regional and global liquidity," said Andrew Dell, HSBC's head of debt capital markets for the Middle East and North Africa. "The economic fundamentals across the region are very positive," Dell added. Regional economies remain dependent on crude oil exports, which are the main revenue drivers for Saudi Arabia, the Middle East's largest economy, and other Gulf states such as the United Arab Emirates and Kuwait. With crude prices up more than 15 percent last year, trading above $90 a barrel with energy demand buoyant, the region's governments saw their coffers swell with surplus income in 2010. New York Mercantile Exchange crude futures averaged about $80 a barrel this year, according to Zawya Dow Jones calculations, a major comeback from lows of about $35 a barrel at the beginning of 2009, as an Asia-led economic recovery boosted energy demand in 2010. "Oil will be a main driver for growth in Gulf Cooperation Council countries in 2011, oil prices should rise further after the second half 2011," said Kamel Al Harami, a Kuwait-based independent oil analyst. Saudi Arabia is expected to see real gross domestic product accelerate to 4 percent in 2011, from 3 percent in 2010, according to Standard Chartered. The Kingdom continues its public spending drive in a bid to boost economic growth and is eager to keep its $400 billion, five-year infrastructure development program on track. Analysts believe the Saudi budget will record a surplus in any case as oil prices are expected to be at least 35 percent higher than the budgeted level, while Riyadh would likely to exceed planned spending by a maximum 20 percent. Global Investment House said the surplus could be as high as SR350 billion, the second largest positive fiscal balance since recording its highest budget surplus of nearly SR580 billion in 2008, when crude prices peaked at $95. It said surplus is projected under the “best scenario” for the Kingdom's fiscal position in 2011 while a more pragmatic case could involve a surplus of SR234.9 billion based on an oil price of $80. Under the “worst case”, the budget could still record a surplus of around SR75 billion based on an oil price of $70 and production of eight million bpd, it said. Elsewhere in the Gulf, Qatar is expected to see the positive momentum that the economy experienced last year extended into 2011 and beyond. Riding on a wave of enthusiasm since being awarded the right to host the 2022 World Cup in early December, the gas-rich state is expected to see real GDP grow at 5 percent this year, according to Standard Chartered, slower than the 8 percent in 2010, but still the highest rate in the Gulf. Growth in the UAE, the region's second-biggest economy, is seen gaining momentum in 2011 after a year of recovery, Standard Chartered said, with growth accelerating to 4 percent, from 3 percent in 2010."Saudi Arabia and Qatar will benefit from significant expansion in development expenditure while the UAE will be restrained by Dubai as it continues to work through its debts," said Akber Khan, director of asset management at Al Rayan Investment. Investor sentiment surrounding Dubai has markedly improved since government flagship conglomerate Dubai World announced in October that it had sealed a deal with all its creditors to restructure nearly $25 billion worth of debt. But the threat of further debt restructuring hasn't completely disappeared. High debt obligations are still looming over the government and some of its related corporate entities, including Dubai Holding. The UAE central bank's call on local lenders with exposure to troubled conglomerates Saad and Ahmed Hamad Al Gosaibi Brothers (AHAB) to increase their provisions to 80 percent from 50 percent is another indicator that the region's debt woes aren't over. The real estate industry, once the main driver behind the boom in cities like Dubai, may continue to face hard times throughout 2011 as excess capacity and tight financing continue to undermine investor confidence. Dubai's real-estate sector in particular will continue to cast a shadow over the local economy. "The overextended real estate sector in some GCC countries like the UAE will remain in the doldrums," said Eckart Woertz, research fellow at Princeton University. Uncertainty surrounding the real estate industry was reflected in Dubai's stock market performance in 2010, with the emirate's main gauge the worst performing Gulf market, declining by 9.6 percent. Saudi's main index climbed 8.2 percent last year, while Qatar's benchmark index stacked on a whopping 25 percent. In Kuwait, the main index dropped 0.7 percent, while Abu Dhabi's leading gauge of shares inched 0.9 percent lower in 2010. Still, expectations for Gulf stocks in 2011 are mostly upbeat. "We see potential for positive surprises in the UAE and Qatar," regional investment bank EFG-Hermes said in a recent report. "Volatility will likely remain a key theme in 2011." "The principle sources of negative shocks lie outside of the MENA region. They include: further debt crises in the eurozone, rising trade tensions, disappointing growth in developed economies, and rising deflation fears in the US. Each of these could have a short-lived, but severe impact on MENA equity markets," EFG added. The performance of regional stock markets in 2011 could receive a big boost from the prospect of more merger and acquisition activity. As it stands, the UAE's Emirates Telecommunications Corp. is at an advanced stage in its negotiations with local and international banks to provide funding for its planned stake buy in Kuwait's Mobile Telecommunications Co., potentially paving the way for one of the biggest corporate transactions of recent times in the Middle East. The pipeline for initial public offerings in the Middle East region however remains less positive. National Commercial Bank said in a recent report that the GCC issuers during the first nine months of 2010 raised a total of $1.4 billion through IPOs, a figure that still fell short of the $1.9 billion seen in the first nine months of 2009. Saudi Arabia was the most active IPO market, accounting for over half of the total and worth around $900 million in the first nine months of the year, according to NCB. In December, Dubai-based mobile-phone retailer Axiom was forced to dump a much-hyped initial public offering due to concerns about market conditions and liquidity. This came not long after Omani telecoms firm Nawras extended its IPO subscription period by a week to try and attract more retail interest. "Conventional bank financing, bonds and Sukuks are likely to be the preferred mode of raising funds for regional corporations until the profitability of issuers and investor sentiment improve," Phil Gandier, managing partner for transaction advisory services at Ernst & Young MENA, said in the firm's quarterly IPO update in December.
