Trouble And Strife Threaten Gulf Stability

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Recent upheavals in the Middle East have led to a perception that the entire region is going up in flames. Wars and civil wars in Syria, Iraq, Yemen, Libya and elsewhere regularly reinforce this misperception, and the continuing battles by coalition forces working to topple the Islamic State at Mosul in Iraq and Raqqa in Syria contribute to this narrative.

The entire region is certainly not burning. Largely—but not entirely—free from violent turmoil, countries belonging to the Gulf Cooperation Council enjoy a reputation as a regional haven. The GCC has the four conditions necessary for safety in any regime, explains Lebanese-born Atif Kubursi, economics professor emeritus at McMaster University and former acting executive secretary of the United Nations Economic and Social Commission.

These include, first, stability. Gulf nations have relatively good internal political and economic stability, and the Gulf region has similar stability. The second condition is a genuine government regime able to do business and attract foreign investment. Third is a large fund of foreign reserves, which Gulf countries—except Oman—have. Strong security completes the list. The deployment of well-trained security forces with American support ensures the safe-haven status. Economic well-being and peace go hand in hand. The upcoming Dubai Expo 2020 represents a promise of financial rewards and, therefore, stability. The connection works both ways, as Dubai’s reputation contributed to its success in winning the competition to host Expo.

The GCC continues to have a favorable foreign direct investment (FDI) environment, according to Allison Wood, Middle East and North Africa analyst at the Dubai office of Control Risks Group: “The Gulf countries have elements that prove sound to investors. They have made efforts to make the GCC states an attractive investment environment.”

Although businesses still face challenges with bureaucracy and regulations, GCC governments have amended their legal frameworks to make them more business friendly. However, many aspects of the FDI environment aren’t consistent across the board. While Dubai has made a serious effort to simplify its regulations, the rules in Saudi Arabia are still opaque. Further confusing the process, Saudi Arabia only publishes regulations in Arabic. “That is something that presents a challenge for a lot of multinational businesses, and particularly the smaller ones that may be looking to set up business,” Wood explains.

Other aspects of the FDI environment also vary among GCC states. Most of them have made it a priority to attract and develop tourism. Saudi Arabia targets people from other Muslim states looking for a conservative environment. By comparison, Dubai has a well-developed tourism sector that caters to international tourists and promotes various clubs that serve alcohol.

Saudi Arabia needs investment in its mining sector, petrochemicals and manufacturing, including the auto sector.  In the UAE, healthcare and technology start-ups are investment priorities. Both sectors place a priority on defense-sector manufacturing and renewable energy.

Gulf countries also differ in the availability of investment incentives to foreign investors. While Kuwait offers a range of incentives, including tax benefits and customs duties relief, Bahrain does not offer specific tax breaks; but the Bahrain Economic Development Board focuses on streamlining the FDI process. Oman offers a five-year renewable tax holiday, subsidized plant facilities and varying customs duties relief measures.

Gulf countries also differ in other areas, including the obligation to purchase from local sources. Saudi Arabia has no firm stipulations in this area, while Kuwait requires a 10% allocation for domestic products. Oman doesn’t stipulate a stated percentage but reportedly favors tender proposals that include domestic goods and services, especially for public projects.

They also differ greatly in their scores on the World Bank’s Ease of Doing Business Index, which measures factors such as ease of starting a business, getting construction permits and obtaining electricity. The UAE ranks best among the Gulf countries, at 26th place, while Bahrain, Oman and Saudi Arabia occupy 63rd place, 66th place and 94th place, respectively.

The plunge in oil prices, combined with the plunge in revenue inflows, has increased the need for FDI, according to material provided to Global Finance by Mathias Angonin, Dubai-based lead analyst in the Sovereign Risk Group at Moody’s Investors Service. The drop led to weakened current account balances; and to the extent that FDI shores up the balance of payments, it balances this weakness. For that reason, FDI inflows are particularly important for the countries with the largest current account deficits: Oman, Bahrain and Saudi Arabia.

Still, this optimistic picture veils several risks overhanging the region with unknown consequences, many related to the unpredictability of the US under a Trump administration—such as its move to create a Sunni coalition with Israel against Iran, exacerbating regional tensions. More recently, three GCC states—Saudi Arabia, Bahrain and the UAE—along with Egypt abruptly cut ties with Qatar on June 5. “Tensions had been [there] for quite some time, but nothing was in the open,” says a Gulf-based economist who requested anonymity due to the extreme sensitivity of this topic. “There are long-standing tensions over independence of foreign policy on areas of interest, whether it be Libya or Syria.”

For Qatar, the day-to-day concerns were easily resolved. Still, the rivalry between Iran and Saudi Arabia puts Qatar, which shares a large natural gas field with Iran, in a bind. “[Qataris] don’t want to be in a position where they are in conflict with Iran,” Kubursi says. “[Yet] Saudi Arabia and the Emiratis have defined their conflict with Iran to be a primary consideration.”

In the near term, the dispute appears unlikely to have any impact on FDI inflows to the UAE, Saudi Arabia or Bahrain, according to Moody’s Investors Service’s Angonin. However, it weakens the GCC’s credibility as a viable customs union.