The Future of the Gulf: A Happy Story with Scary Risks

The Persian Gulf is booming. This time around the success in growing the economy has not come as a result of government spending. It has come about because of a healthy partnership between the private sector and the public sector. What is even more encouraging is that it has led to a series of actions that has put the region on a virtuous cycle of private-sector investment and public-sector deepening of the regulatory framework.

Many Gulf governments had started to make structural changes in the mid-1990s. However, they had expected that would lead investment by multinational corporations. They were sorely disappointed by the lack of foreign direct investment by foreign companies. But after 2000, for a host of reasons, local investors started to repatriate funds and the current boom took off. But as much as there was a quantitative change in private sector investment, there was a qualitative change. A new generation with new ideas – Islamic banking, for example has been a major regional innovation – and new skills greatly contributed to economic deepening. The public sector complimented these moves by creating a more sophisticated regulatory environment and upgraded its own skill base to cope with a more complex economy. In the area of Islamic banking, for example, new supervisory rules, accounting standards and rating practices created an entire new industry rather than just a collection of banks. These innovations are part of the reason the boom is likely to be sustained for a while.

The economic growth in the Gulf is infectious. It has become a model for Arab countries beyond the Gulf. Egypt, Tunisia, Morocco, and even Lebanon and Syria are all jumping on the bandwagon—they are trying to entice the region’s private sector to invest, something that governments recognize will require appropriate policies. Moreover, greater financial capacity in the Gulf along with a positive development model, is creating the possibility for the reconstruction of Iraq and Iran in the long run.

However, there are serious threats to the current positive growth and development in the region. A spill-over from the war in Iraq or a US attack on Iran would severely change the investment environment and once again lead to capital flight.

The Markets and Country Strategies Group has been widely recognized as the leader in tracking Middle East issues since the late 1980s. The department has provided clients with a unique perspective on Gulf economies, US foreign policy and the Iraq War. During the US-led Coalition Government in Iraq, PFC Energy seconded Raad Alkadiri, Senior Director and Head of PFC Energy’s Middle East and Africa practice, to the UK Foreign Office as Sir Jeremy Greenstock’s political advisor. He was awarded the Order of the British Empire for his efforts. Since then, Raad has continued to visit Iraq regularly.

The department also uses its presence and connections in Washington to track the US/European efforts to contain Iran’s nuclear efforts. The traditional strength of covering the Middle East, combined with PFC Energy’s Washington presence, has helped the Markets and Country Strategies Group develop an unparalleled record in advising clients on the Middle East.

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Raad Alkadiri is a Senior Director in the Markets and Country Strategies practice, which houses PFC Energy's expertise in country risk and petroleum sector policy. For further information on this article contact Enews_ralkadiri@pfcenergy.com.