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Eastern promise? Inward investment and the Middle East

Scott McCulloch is Editor of Families in Business magazine.

Family businesses in the Middle East generate billions of dollars in revenue. But times are changing and the political and economic outlook is a mixed bag for some 20
countries associated with the region. Membership in the World Trade Organisation, say commentators, will have a profound affect on family businesses.

In the US the Bush administration is working on an initiative to promote democracy in the "greater Middle East" modelled on a pact used for the former Soviet Union in 1975. The initiative, still being crafted, would call for Arab governments to introduce major political and economic reforms. As incentives for the targeted countries to co-operate, Western nations would offer to expand political engagement, increase aid, and facilitate membership of the World Trade Organisation (WTO).

In February 2004 Iraq's US-appointed interim administration was granted observer status in the WTO, marking the first step on the lengthy road to full membership. Additionally, several WTO members, including the EU, India, Malaysia and Indonesia, hope Washington will lift its veto on the Iranian bid at the next general council meeting in May.

The US has also prevented any WTO discussion of membership applications dating from 2001 by Syria and Libya, though the recent thawing of US relations with Libya may prompt Washington to reconsider. The US accuses Syria, like Iran, of supporting terrorism but the main obstacle appears to be Syria's backing for the Arab League trade boycott of Israel.

Meanwhile, Saudi Arabia, the sole Gulf Co-operation Council member to remain outside the WTO, is currently negotiating to join, alongside Lebanon and Yemen.

Politics aside, the problem with WTO membership is that family businesses need to be larger and richer, says KPMG analyst Manees Ajmani. One way of raising capital and increasing their wealth is to become a listed company.

Indeed, Khaled Olayan, Chairman of the Saudi Arabia's diversified Olayan Group told Agence France Presse in December that his group was restructuring to "go with the tide of the WTO" and that he had seen a number of family businesses go public.

Olayan's point of view is echoed in other quarters where business concerns centre squarely on the family. "We have been entertaining the idea of a global depository receipt or IPO or going pubic some years now," says Ghassan Nuqul, Vice Chairman of the Jordanian conglomerate Nuqul Group. But Nuqul is keen to stress that the motive is not to raise cash but to move towards greater transparency in line with a more corporate style of management. But the real reason may be to protect the long-term future of the family business. "[It is] basically to provide the third generation with future instructions," he says. "We are concerned with the alarming statistics that only 3% of family businesses survive into a fourth generation."

There are other issues at play. Unrest in Iraq and the Israel-Palestine conflict notwithstanding, a key concern among the Middle East's tightly-knit merchant businesses is their ability to expand, attract foreign investment and tap new markets.

Families and business go hand in hand in the Middle East – around 95% of businesses in the Middle East are family run, according to Amin Nasser, a partner at PricewaterhouseCoopers.The private sector – arguably the backbone of non-oil producing countries and increasingly the alternative to oil dependence in the Gulf – is the key to unlocking the potential of the Middle East, say experts familiar with the region.

Some commentators believe as much as US$50 billion could flow into the Saudi Arabian stock market if the country's top ten family business went public. The problem is that few stock markets in the region attract high rollers and critics long for a united stock exchange in the Gulf. Their wish may or may not come true but in a post-WTO world it will only be a matter of time before the region's family businesses require additional capital and go public.

The economic outlook? The World Bank predicts GDP growth in the Middle East will come in at 5.1% for 2003, up 1.2 points on 2002. It believes the bulk of the increase will emerge on the back of stronger growth in oil exporting countries, reflecting primarily higher OPEC oil quotas and oil production before the war (particularly in Saudi Arabia and other countries of the Gulf Cooperation Council such as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), higher than average oil prices, and – the notably in Iran – the continuing positive impact of recent economic reforms.

The early end to major hostilities in Iraq is also a positive factor, although the fragile security situation continues to weigh on activity across the region. In contrast, GDP growth in what the bank terms 'Mashreq' states (Egypt, Jordan, Lebanon and Syria) is expected to pick up more moderately, in part reflecting the relatively close economic links of a number of countries with Iraq (Jordan, Syria) and the adverse effects of the regional security situation on tourism (Egypt, Jordan).

Turning to 2004, GDP growth in the region is expected to fall, although once again there are significant differences between the oil and non-oil producing countries. GDP growth in the Mashreq countries is expected to rise albeit modestly, aided by the upturn in the global economy and reduced political uncertainties.

GDP growth in oil producer countries is expected to decrease owing to falling oil prices and production. While GDP growth in the region is expected to remain high by historical standards – the rebuilding of Iraq should be a positive factor. 

The bank believes a number of risks remain. In particular, beyond the fragile security situation, the outlook for the oil market remains subject to considerable uncertainty, and many oil market analysts see downside risks to prices over the medium term. This would clearly have significant implications for oil producers in the region. Public debt burdens across the region are high, most notably in Mashreq states but also in some oil exporters. The situation would be exacerbated by further falls in oil prices, especially given relatively high levels of public expenditure.

Many countries in the Middle East have taken important steps. Saudi Arabia targeted a balanced budget for 2003, which involved expenditure reductions of more than 4% of GDP despite higher oil revenue. In Jordan, a package of revenue measures yielding about 2% of GDP – including increased petroleum product prices – was implemented to secure the authorities' lower deficit target for 2003.

However, many economic commentators believe these efforts will need to be sustained and, in some cases, strengthened over the medium term.

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