As Oil Price Slides, Private Businesses In The GCC May Benefit

Kuwait’s privately owned Jazeera Airways is preparing to bid for a big stake in state-run flag carrier Kuwait Airways, Jazeera’s chairman told Reuters. If the deal goes through, it will be a sign that the business scene is changing in the Gulf.

For several decades, Gulf Arab economies have been dominated by the heavy hand of the state. Governments’ huge oil revenues have eclipsed private sector activity. Benefiting from these revenues, state-owned firms have prospered while many private companies have struggled to raise financing and become ensnared in official red tape.

But pressures are growing for a new model. North Africa’s Arab Spring uprisings of 2011, fuelled by high unemployment, underlined to Gulf governments the need to create jobs for their citizens – and to enlist the private sector in that effort.

Meanwhile this year’s plunge of global oil prices, to below levels which some governments need to balance their budgets, has exposed the risks of relying entirely on oil for growth and revenues in the long term.

The result is a string of economic reforms and steps to open up financial markets that may create more opportunities for private firms – foreign as well as domestic – in coming years, company executives from around the Gulf told the Reuters Middle East Investment Summit.

The oil price slide is not causing panic in the Gulf but it is “getting people to think in the right direction”, said Tarek Sultan, chief executive of Kuwait-listed logistics giant Agility, which is majority privately owned.

Sultan noted that the region had a history of entrepreneurship – before the discovery of oil, economies were supported by small, flexible trading and transport businesses, many using the wooden sailing ships known as dhows.

“People have to think, how can we do without” the oil revenues that have sustained the region for the last few decades, he said.

REFORMS

Jazeera Airways may be a step towards that change. Set up in April 2004, it is one of a handful of privately owned airlines in the Gulf and now operates a fleet of 15 Airbus A320s.

Chairman Marwan Boodai told the Summit that his company was preparing to enter a bidding process for a 35 per cent strategic stake in loss-making Kuwait Airways. Parliament originally approved the airline’s privatisation in 2008 but the project was delayed; it now appears to be moving ahead again.

“We believe in privatisation and think governments should focus on political administration, and not on managing airline companies or transportation or other firms,” Boodai said.

Executives at the Summit also cited a range of other efforts to stimulate private business across the Gulf, including partial deregulation of areas such as telecommunications and aviation in Saudi Arabia, and a drive by the United Arab Emirates to make it easier for smaller companies to borrow money from banks.

These steps will not by themselves reduce governments’ economic dominance in the region, but there are signs that they are boosting private sector activity enough to at least partially offset a slowdown in the region’s oil industries.

For example, Saudi Arabia’s economic growth in the second quarter of 2014 fell to an annual 3.8 per cent, the lowest rate in a year, because of a slowing oil sector. But growth in the non-oil private sector accelerated, to 4.7 per cent.

One of the biggest shifts in the Saudi economy for years is due to labour reforms, which are using quotas and fees to push hundreds of thousands of foreign workers out of the country and replace them with Saudi citizens.

The reforms have been criticised for raising companies’ costs, disrupting industries such as construction, and putting unqualified, unproductive employees into some posts. Some firms have been hiring Saudis for the sole purpose of meeting quotas.

But the reforms are clearly having some success in pulling Saudis into the private sector. The number of local citizens working at private firms jumped to 1.5 million by the end of 2013 from 681,481 in 2009, according to labour ministry data.

Muhammad al-Agil, chairman of Saudi retailer Jarir Marketing, said this trend was lifting Saudis’ disposable incomes and spending. Partly as a result, Jarir plans to invest SAR1.1 billion ($293 million) over five years to roughly double the number of its stores in Saudi Arabia and the Gulf.

“We are not employing Saudis only because of the rules but because we think it is good for business,” Agil told the Summit.

Oman is taking a different tack in trying to diversify its economy beyond oil. It wants to develop its Sohar Port and Freezone, on its coast about 200 kilometres (125 miles) to the southeast of Dubai, into a gateway for imports to the Gulf.

The company launched an industrial zone at the port in 2010, offering tax and other incentives to attract private companies’ logistics and manufacturing operations.

Current operations include auto parts storage and distribution, and a chrome smelter; British-based Tri-Star Resources plans to build a $60 million plant supplying about 12 per cent of current global production of antimony, Edwin Lammers, Sohar’s executive commercial manager, told the Summit.

MARKETS

In the long run, the most far-reaching boost to private sectors in the Gulf may come from the expansion of stock markets and efforts to draw more foreign investors into them.

Governments want foreign participation in local markets not because they need the money, but because they think activist foreign funds will help to impose market discipline on listed companies and promote international management practices.

In May, the UAE and Qatari stock markets won upgrades to emerging market status in the classification of international index compiler MSCI. In July, Saudi Arabia announced it would open its bourse to direct foreign investment in early 2015.

“The upgrade to emerging market status has been an important marker,” said Haithem Katerji, chief investment officer at Al Rayan Investment, a subsidiary of Masraf Al Rayan, Qatar’s largest Islamic bank by market value.

“The expected opening of Saudi Arabia will be even more significant given the size of the Saudi economy and stock market. In the coming years the region is likely to become a more mainstream investment destination for global investors.”

After several years of inactivity in the wake of the global financial crisis, most of the governments of the six-nation Gulf Cooperation Council are now promoting public offers of shares in state-linked companies, billing the sales as a way to share the country’s corporate wealth with their citizens.

Kuwait’s sovereign wealth fund announced last week that it would resume selling stakes in local companies to the public, planning to offer its majority stake in Kuwait Investment Co in the first half of 2015.

Saudi Arabia’s state-owned National Commercial Bank is in the process of conducting a $6 billion IPO, the largest ever launched in the Arab world.

“The reopening of the IPO market in the region will attract more interest to our markets and encourage other companies to go public,” said Katerji. “This will help private equity and M&A activity in our markets as IPOs.”

Yasir al-Rumayyan, chief executive of the investment banking arm of Banque Saudi Fransi, Saudi Arabia’s fourth-largest listed lender, said Saudi companies were becoming more interested in listing with the encouragement of regulators.

“We have an excellent deals pipeline…We think we will see one IPO every quarter from Saudi Fransi Capital for the coming five quarters,” he told the Summit.