Gulf Economies Benefit From Arab Spring

The Arab countries most affected by protests have been those ravaged by months of unrest. The largely economic origins of discontent will be the most difficult to remedy in the short-term, especially given how the protests have served to weaken these countries economically. The devastating irony is that the unrest has exacerbated the poor economic conditions that propelled the protests in the first place.

The protests have damaged physical infrastructure, disrupted the flow of tourists, and have caused "capital flight" — investors have taken their cash and business to more stable economies. Jordanian Finance Minister Mohammed Abu Hammour estimates that unrest has caused large-scale capital flight amassing $500 million a week. According to a recent report by the UN World Tourism Organization, tourist arrivals plummeted 13% and 11% in North Africa and the Middle East respectively, despite an international trend of growing tourism levels. In May, the Institute of International Finance predicted that economies in Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia would shrink by 0.5% this year. Egypt’s economy alone will diminish by 2.5%, while Yemen will see a 4% contraction.

However, these countries' losses have meant big gains in other places, particularly in the Gulf States that have remained stable in the face of widespread unrest. Qatar and the United Arab Emirates have been the big winners as investors, businesses, and wealthy citizens look for economic and political stability in the MENA region. In just a three-month period, near the beginning of 2011, financial observers estimated that deposits and short-term investments, which moved to the Gulf from elsewhere in the Middle East, totaled up to $40 billion.

In Qatar, which is gearing up to host the 2022 World Cup and making a push to host the 2020 Olympics, growth seems limitless. The country's GDP is expected to grow by 20% this year. The monarchy in this oil-rich Gulf state has been highly supportive of the Libyan rebels, while at the same time helping Bahrain crush its uprising.  

The UAE's Minister of Economy, His Excellency Sultan Bin Saeed Al Mansoori, says the UAE has acted as a bastion of economic stability in the region, and he believes that its economy will act as a model for new governments looking to reform their own economies. He conservatively projects 3% to 3.5% economic growth for the UAE in 2011, driven specifically by a 4.9% increase in trade. Dubai's role as a major hub for business and trade made it an attractive go-to option for businesses and investors relocating, especially from Syria or Egypt.

In the short-term, stable Gulf economies will benefit from the turmoil and uncertainty gripping the western Middle East and North Africa. However, these countries must work to remain competitive in the long-term as new governments in Tunisia, Egypt, and Libya work to liberalize and create economic opportunities in their own countries. Investors may find the potential for educated labor, lower wages, and economic incentives especially attractive.

While Qatar and the UAE have recently been popular options for regional investment locations due to tax-free zones and economic stability, laws governing foreign ownership limits and the hiring of nationals are particular areas in which investors might see benefits in relocating business. MSCI Inc.’s recent delay in upgrading both economies to "emerging market status" reflects the extent of these financial drawbacks. Egypt, Tunisia, Libya and other countries looking to implement political and economic reforms are losing in the short-term, but have much to gain in the longer term.

Photo Credit: Lazy Sam