Economic Growth Remains Strong: Geopolitical Rather Than Economic News about the Middle East Dominated Headlines in the International Media over the Past Year. but on the Economic Front, Overall Developments Were Quite Encouraging in the Face of Continuing Sluggish Growth in the Organisation for Economic and Development (OECD) Countries

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Increased concern following terrorist attacks in Casablanca, Riyadh and Istanbul, together with the spillover effects of the invasion of Iraq and the protracted Israeli-Palestinian conflict continue to case a shadow over the Middle East and North Africa (MENA) region. Yet, despite the unfavourable geopolitical environment, there were bright spots across the oil/gas rich region, especially in commercial and energy sectors.

For 2003, the International Monetary Fund (IMF) puts regional real gross domestic product (GDP) at 5.1%, the highest since 2000. The bulk of this increase was fuelled by the strong expansion in oil-exporting economies comprising about two-thirds of the region's total output ($800bn).

Oil producers--led by Saudi Arabia, the UAE, Iran and Kuwait--recorded robust 6% GDP growth, thanks to increased oil production averaging 23.59m b/d, an 8% hike over 2002, coupled with expansionary fiscal and lax monetary policies, especially in the six member Gulf Cooperation Council (GCC) countries.

Interest rates in the GCC bloc--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE--are linked to trends in America, where the Fed Funds rate is currently at a 45-year low of 1%.

In recent months, the "feel good" factor has returned to the Gulf, as reflected in improved business confidence and increased government spending, as well as new business investment. Evidence suggests that since the events of 9/11, Gulf residents are travelling abroad less and Boosting domestic consumption at home.

In 2003, regional stock markets were among the world's "top performers"--measured by annualised capital gains. The Iranian bourse rose by a staggering 114%, Kuwaiti +102%, Qatari +74%, Saudi Arabian +73%, Omani +42%, Emirates +31%, Bahraini +28% and Egyptian +24%. By contrast, the Dow Jones Industrial Average (representing 30 finest US blue chips) and Britain's FTSE 100 index rose by a modest 24% and 13%, respectively.

During the first quarter regional bourses appeared to enter a consolidation phase. Buoyant stock markers were primarily driven by high profits in the oil and services sectors (notably banking and telecommunications). Prime banking stocks offered lucrative returns, reflecting expectations of strong credit growth and healthy deposit/loan margins pinned by low interest rates.

Construction-related stocks were, also, in growing demand since most firms stand to benefit from Iraq's sub-contracting work associated with the reconstruction of the depleted infrastructure. This is contingent, however, on vastly improved security across the country.

Meanwhile, strong oil prices during the past four years--averaging $26.6 per barrel--have put state finances in sound shape and helped keep the balance of payments in surplus. According to the IMF, oil exporters recorded a hefty current account surplus averaging 10% of GDP between 2000 and 2003. Also, external debt and debt-service obligations of the GCC countries are exceptionally low by global standards.

Saudi Arabia recorded a 45bn riyals ($12bn) budget surplus in 2003 only the second time in 20 years and managed to reduce public debt to more manageable levels.

Despite large "oil windfalls" the Saudi exchequer implemented spending reductions, equivalent to 4% of GDP. The kingdom has introduced landmark reforms that focus on capital markers, the deregulation of power-generation, water, telecoms and financial services, aimed at attracting private external investment. These market-oriented reforms should facilitate Saudi Arabia's entry into the World Trade Organisation (WTO) by end-2004.

In Iran, positive spillovers from recent reforms--notably trade liberalisation has helped the non oil industrial and manufacturing sectors to expand production. Domestic demand and rising government spending of oil revenues have fuelled robust growth of 6% a year since 2000. Fiscal deficit was estimated at 2. …