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Cement mixers rumble on all night in Dubai, a city in a rush: construction never stops. The same drums can be heard rotating across the Arab states of the Gulf, as countries take advantage of an oil price well over $100 a barrel to build everything from roads to bridges and even whole new cities.

A new energy is palpable in the once sleepy but gas-rich Doha, while Abu Dhabi has started shedding its traditional conservatism to transform sandy islands off the coast into high-end tourist resorts. Saudi Arabia too has caught the fever, with investment in infrastructure projects rising rapidly all over the kingdom.

“Dubai is a phenomenal front page to an interesting book but the story is being told in Saudi Arabia, in Doha, in Abu Dhabi,” says George Makhoul, head of Morgan Stanley’s Middle East operations.

But while the Gulf’s economic hyperactivity marks a remarkable contrast to the gloom in western capitals, where bankers and governments have been reeling from the credit crunch and bracing for recession, the oil boom is proving a challenge to manage, its trickle-down effect to the bulk of the population difficult to engineer.

The Gulf is awash with liquidity as oil money accumulates in government coffers. Nominal gross domestic product has doubled to $900bn (€576bn, £454bn) since 2003, according to the Institute of International Finance, and is set to grow by 14 per cent this year. By most accounts, the impact of the turmoil in inter­national financial markets has been limited, with much of the region’s banking industry still generating healthy profits.

But the upbeat mood has been marred by soaring inflation, which independent analysts estimate at 15 per cent in the United Arab Emirates and as much as 20 per cent in Qatar. Across the Gulf, both nationals and expatriates are complaining as rents climb and food prices surge. The pressure comes two years after many Gulf nationals were devastated by the collapse of stock markets, as state attempts to distribute oil wealth through initial public offerings turned sour.

According to a recent poll in Dubai’s Gulf News, 42 per cent of expatriates who have flocked to the UAE in search of a better living are failing to save, 17 per cent are going into debt and 28 per cent have sent their families out of the country because of rent increases.

Nor is it clear that the boom is creating sufficient employment for Gulf nationals, given the construction sector’s near total reliance on cheap foreign labour and the dire state of the region’s education systems. This may be less pressing a concern in countries with small national populations but it is putting governments in populous states such as Saudi Arabia under political pressure. “The corporate sector is making money but the man in the street does not feel better off; maybe some people feel even worse off,” says Anais Faraj, executive director at Nomura Investment Banking in Bahrain.

“The big beneficiaries of this boom are the companies but most employ non-locals, and at a certain level, the low-paid-level people, like secretaries, are hurting a lot,” argues Khalifa Jassim al-Thani, head of the chamber of commerce in Doha. “Over the past four years, prices of real estate have gone up four to five times.”

Companies also are starting to feel the squeeze, as wage bills and raw material costs are pushed up. An HSBC Gulf business confidence survey published this month found that 65 per cent of respondents remained optimistic about growth in their operations. But the proportion of businesses claiming a negative impact from inflation rose from 36 per cent in February 2007 to 61 per cent in the first quarter of this year.

“The wealth is going into the pockets of individuals,” says Keith Bradley, head of commercial banking for HSBC in Dubai. “But individuals are having to spend a lot more. There are winners and losers.”

Yet the finances of the Gulf have been far better handled in this boom than in the previous oil shocks of the 1970s and 1980s. After years of budget deficits, governments greeted the rise in oil prices at the start of the decade with a cautious determination to save and pay down outstanding debts. Net foreign assets are estimated by the IIF to have reached $1,800bn in 2007.

When a higher oil price looked sustainable, policymakers geared up for the spending spree, injecting a good part of the surplus capital accumulated – probably up to 30 per cent of it – into much-needed infrastructure improvements at home. They also sought to diversify the economic base with energy-intensive downstream industries, financial services and tourism.

Encouraged, the private sector weighed in with its own investments and is now an important driver of the boom. Real non-oil GDP has been growing at about 8 per cent a year since 2005.

“There’s never been a period like this in the region – this boom has been much better managed, debts have been paid off, overseas reserves have been built up,” says Monica Malik, director of economics and equity research at EFG-Hermes, the regional investment bank. “This means the boom can be more sustainable and at times of lower oil prices they [governments] can fiscally stimulate the economy.”

Perceptions of the econ­omic surge’s wider impact are harsher than the reality, officials insist. “Did people benefit? Yes, how many have millions in the bank now? Salaries went up by 40 per cent two years ago,” says Yousef Hussein Kamal, Qatar’s finance minister. “But if you have 30 per cent [nominal] growth, you’ll face inflation.”

Omar bin Sulaiman, governor of the Dubai International Financial Centre, says inflation should be kept in perspective. “The growth that has taken place here is unprecedented anywhere – and it’s across all levels of industries,” he says. “So when people talk about inflation, yes it’s there. But when you measure the real inflation and the net of it – let’s take salaries – the increase in salaries is sometimes 40-50 per cent and the inflation you’re talking about is 11 per cent, 12 per cent in certain areas. The net of that is not bad.”

Mr Bradley of HSBC says consumer spending in the region has started growing faster than inflation, evidence that the benefits are being spread around. His bank also estimates that there were 15,000-18,000 businesses created in the UAE last year, in construction-related sectors, services and healthcare.

But the extent to which this is creating new employment for the middle class of nationals and expatriates is difficult to gauge, given the lack of accurate official statistics. There are indications that in Saudi Arabia, where the jobless rate is estimated at about 12 per cent, unemployment may be rising.

“There is trickle-down effect but a good question is whether it is happening at the rate, or in a fashion, that is satisfactory,” says Abdulmohsin bin Abdulaziz al-Akkas, Saudi minister of social affairs.

Whether in Saudi Arabia or elsewhere in the Gulf, the distortions in the job market will take a generation to fix. As governments try to shrink their public sectors, they have yet to reform their education systems to produce graduates suited for the private sector.

“Unemployment has a lot to do with the skills mismatch as well and everyone recognises that,” says Mohsin Khan, head of Middle East at the International Monetary Fund. “The nationals of these countries will never be doing the jobs of the unskilled workers they have to import from South Asia. What you need is to upgrade the skills of the Saudis and Emiratis in order to have them compete with the professional foreign expatriate.”

Hussain al-Nowais, member of the Abu Dhabi Economic Council, says much of the government effort is now geared towards creating employment. While the state is kick-starting big industrial enterprises, a new fund in the UAE capital has been set up to help create small and medium-sized companies, assisting them with free loans and ideas. “We are doing everything with that [trickle-down] in mind,” he says.

When it comes to fighting inflation, however, governments find themselves constrained. With their currencies pegged to the dollar, they are obliged to follow the US Federal Reserve’s interest rate cuts, at a time when their overheating economies require moves in the opposite direction.

Insisting that the benefits of maintaining the dollar peg outweigh the costs, given that inflation is driven by domestic bottlenecks, governments have sought to keep a lid on popular frustrations through mostly temporary measures, including rent caps, subsidies and attempts to restrain the flow of credit.

Among the main victims of the monetary policy, however, have been Asian construction workers whose home currencies have been appreciating against the dollar.

“The cost of living increased here, so people have less savings and, with the decline of the dollar, they have to spend more money to remit money to India. And in India, there is more demand for more money, because of the increase in cost of living there,” says K.V. Shamsudheen, the UAE-based chairman of Pravasi Bandhu Welfare Trust, which looks after Indian expatriates.

In countries beleaguered by social problems, such as Saudi Arabia and Bahrain, a widening of the gap between rich and poor could breed more resentment of the regimes, particularly when perceptions abound that the politically connected are gaining the biggest contracts. “The top 5 per cent of society is gaining more and more and the others are getting nothing at all,” says Mohammad Fahad al-Qahtani, an assistant professor of economics at the Institute of diplomatic studies in Riyadh.

In smaller states with predominantly expatriate populations – the UAE and Qatar, for example – the risk is different. Experts say that unless governments devise a comprehensive econ­omic and monetary policy, inflation could become a real threat to the economic expansion.

“I suggest someone comes up with a well-thought-out monetary and economic policy that is not reactive,” says Mr Makhoul of Morgan Stanley. If inflation keeps rising, he adds, “the accountants, the human resources people, the receptionists, those who work in shops may find it better to go home ... If you start alienating people like that, you can’t have a growing economy.”

‘For me, I do not need money, I need a future’

By Andrew England

Dressed in a short-sleeved blue shirt and matching tie, both of which are emblazoned with the yellow McDonald’s logo, Ali Mohamed al-Ali could be an employee of the US fast food chain at pretty much any of its outlets in the world.

But in Riyadh he stands out as something of an oddity: he is one of a minority of Saudi nationals – much smaller than in other countries – who earn a living by serving food to others.

Yet if the oil-rich kingdom is to deal with high levels of joblessness, particularly as about 60 per cent of the Saudi population is aged under 25, more young people will have to follow in Mr Ali’s footsteps.

In spite of being the world’s number one oil producer – and partly because of that fact – Saudi Arabia’s unemployment rate is estimated to be about 12 per cent and rising. This is in part the result of failings in the education system, with complaints that young Saudis lack the skills the private sector requires.

But blame is also directed at Saudis themselves, with criticism that traditionally they have refused to accept work deemed menial, have been dismissive of lower-paid employment and have displayed a questionable work ethic.

On top of that, Saudi companies have benefited from the arrival of some 7m expatriate workers – including 1.2m last year. Many of them are from Asia or poorer Arab countries and will work longer hours and accept less pay than their Saudi counterparts.

Mr Ali and others say that is beginning to change, with increasing numbers of Saudis working in restaurants and hotels, as taxi drivers or as tellers in supermarkets (some 30 per cent of McDonald’s employees in the kingdom are now nationals, according to the company). But all emphasise the gradual pace of change.

When Mr Ali, aged 22, began working for McDonald’s 16 months ago, three friends also started. They lasted only a few months. “The Saudi does not like work in restaurants or taxis: he thinks it’s a bad job because Saudis like working in a big company, to sit in an office with a big salary,” he says.

He sees his own job differently. In his short time with the company he has been promoted to a manager’s position and is earning SR4,000 ($1,070, £540, €685) to SR5,000 a month. Some Saudi businessmen have tried to entice him away, he says.

But he believes he is on to a good thing: given that there are so few Saudis working for McDonald’s, the chances of promotion are much better, he says. Also, he enjoys the work, the interaction with customers, the hustle and bustle of the fast food business. He points out the benefit of in-house training programmes, while saying his English is also improving as he works with Filipino and Sri Lankan colleagues.

“For me, I do not need money, I need a future,” Mr Ali says. “Other people only dream of money, not their future, not a job. ‘Give me 10,000 riyals and I will work’ – this is the problem.”

But economic changes are pushing Saudis into new areas of employment. The kingdom has a sizeable population of middle- and lower-income families who are increasingly feeling the pinch from the soaring inflation that is accompanying the oil-fuelled boom.

This is occurring amid concerns that the boom is not yet creating enough jobs for Saudis, with many of the large-scale projects in the capital-intensive oil industry and construction, a sector dominated by cheap foreign labour. The petroleum industry represents 38 per cent of gross domestic product in value added terms but its contribution to employment is a measly 3 per cent, according to SABB Bank.

The service sector will be crucial to future employment. “It is alarming in a country like Saudi Arabia to have something like 9 per cent unemployment, [the rate for male unemployment],” says Abdulmohsin bin Abdulaziz al-Akkas, the minister of social affairs. “Some of it is selective unemployment, because there are some people who don’t want the jobs they are offered. We wanted limousine companies to hire Saudis. It didn’t work as well as we expected.”

petrol middle east

Mr Akkas says Saudis, “like everybody, are easily adjusted upward but they have difficulty adjusting down” – a reference to the cycle of oil booms that significantly increased the nation’s wealth, followed by the economic stagnation that had characterised the kingdom since the early 1980s.

He remembers a time when “Saudis worked everywhere: in fact, I personally worked as unskilled labour and it was normal.

“But then we had an unprecedented boom in the mid-1970s and money was going everywhere. Saudis were able to choose jobs anywhere they wanted and the jobs were more lucrative. We got used to maids, private drivers, which we didn’t know before,” he says.

“But then the economy changed and the jobs that were being offered were not the kind of jobs the applicants were seeking or in locations they had in mind. In the beginning they resisted that – especially those cushioned by family support – but then reality set in.”

Moussa al-Muteri, a 34-year-old father of two, is one of a generation of young Saudis who have no illusions about the need to work. After finishing school and spending four years in the military, he entered private sector employment as a security guard, with take-home pay of SR2,000 a month. But with inflation high, that was not enough, so he invested in a second-hand taxi as a means of making extra cash.

He has spent the past few months driving on a part-time basis, one of a growing number of Saudi taxi drivers – an occupation traditionally dominated by foreign workers throughout the Gulf.

He says he enjoys the work, adding that he now makes better use of his time providing for his children rather than sitting idly in restaurants with his friends. But he is also aware of the perception that lingers among many Saudis.

“A lot of Saudis are proud and think they should not be working in a taxi ... Emiratis do not work in taxis, they work in high places and we should be like them’,” he says in characterising Saudi attitudes that take their cue from citizens of the United Arab Emirates, where per capita income is far higher.

Copyright The Financial Times Limited 2017. All rights reserved.
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