REUTERS SUMMIT-Gulf's private sector boom still vulnerable

(For other news from Reuters Middle East Investment Summit,

click on http://www.reuters.com/summit/MiddleEastInvestment12)

* Saudi, Qatar, Oman private sector loan growth in double

digits

* Signs of strong rise in private sector jobs

* Firms still vulnerable to lower oil prices, state spending

* Smaller companies viewed as "toxic assets" by banks

* Unpredictable, opaque regulation a big obstacle

ABU DHABI, Nov 21 (Reuters) - Four years after a collapse of

oil prices savaged Gulf Arab economies, private business

activity in most of the region is thriving again. Yet problems

with financing and regulation could cut short the boom.

Corporate executives and economists at the Reuters Middle

East Investment Summit this week said the private sector's gains

were vulnerable, warning growth could quickly slow if oil prices

retreat or governments slow spending in order to conserve their

financial reserves.

"The current good growth we are seeing is cyclical and has

its roots in government spending, but there are structural

impediments to longer term private sector growth," said Liz

Martins, senior regional economist at HSBC.

The oil market slide of 2008, in which prices slumped by as

much as three-quarters in the space of six months, revealed the

vulnerability of the Gulf countries and their big state-owned

oil sectors; Saudi Arabia only barely escaped recession in 2009.

Now high oil prices have ignited a consumer spending spree

that is buoying private firms across the Gulf Cooperation

Council (GCC), which comprises Saudi Arabia, the United Arab

Emirates, Kuwait, Qatar, Bahrain and Oman.

Middle East oil exporters will enjoy a near-record surplus

in trade of goods and services worth about $400 billion this

year, the International Monetary Fund estimates. Governments in

the Gulf are channelling much of those oil earnings into social

welfare and infrastructure projects.

This is helping private companies in two ways: directly,

through contracts awarded by Gulf governments, and indirectly,

by fattening the wallets of consumers who work for the

government or receive welfare benefits.

"Stable growth we have seen across the GCC over the last six

to eight quarters comes ... from the public sector boost, which

has stimulated the private sector as well," said Fabio

Scacciavillani, chief economist at Oman Investment Fund.

POLICY GOAL

For Gulf governments, developing the private sector has been

a top policy goal since the 2008 crash as they seek to diversify

their economies away from oil to reduce the risk of a similar

setback in future.

Fostering small private companies has become even more

important since last year's Arab Spring uprisings, because such

firms tend to create most jobs. Although Gulf governments

largely escaped the unrest, they are keen to cut unemployment to

remove a potential political threat.

Trends over the last year suggest they are having some

success. Bank lending growth to the private sector in Saudi

Arabia, Qatar and Oman has climbed into double digits and the

annual rate hit 14.8 percent in Saudi Arabia during September,

the fastest pace since March 2009.

The Saudi Ministry of Labour said in September that 380,000

jobs had been created in the past 10 months. Oman says it added

155,000 new private sector jobs in January-September.

The private sector boom is typified by companies such as

Saudi Arabia's Jarir Marketing Co, a retailer of

books, office supplies and electronics, which plans to boost the

number of its stores by at least 70 percent in the next five

years and expand into other GCC countries.

"We are growing in Saudi and in the Gulf, and we want to see

that we populate the GCC," Jarir Chairman Muhammad al-Agil, who

co-founded the chain with his family in 1979, told the Summit,

taking place at Reuters offices in the region.

In the United Arab Emirates, one of the most diversified

economies in the Gulf with the non-oil sector accounting for 62

percent of output, bank lending growth has been slower as the

country grapples with the aftermath of a real estate crash.

But the hospitality sector, a focus of private sector firms,

is booming; tourist arrivals grew 10 percent and hotel revenue

19 percent in the first half of 2012.

ACCESS TO FUNDS

Yet private business in the Gulf remains far from being able

to fuel its own growth, withstanding fluctuations in oil prices

and state spending. One problem is its access to financing.

Debt and equity capital markets are small so it's difficult

for small and medium-sized enterprises (SMEs) to use them to

raise money, said Martins at HSBC. That leaves bank loans, but

many banks in the Gulf are traditionally unwilling to lend to

small, little-known firms, preferring the security and

predictability of lending to big companies, preferably those

with state connections.

"Financial institutions look at them (SMEs) as toxic

assets," said Abdullah al-Darmaki, chief executive of the

Khalifa Fund for Enterprise Development, the Abu Dhabi

government's SME development agency.

Rick Pudner, chief executive of Dubai's biggest bank,

Emirates NBD, told the Reuters Summit that,

historically, "you have to have a three-year track record before

you can come to the table and ask for some money."

Pudner said that partly because of government efforts, the

access of SMEs to bank loans would improve: "You'll see it

probably getting a lot easier to access finance from banks,

maybe supported by some quasi-element of government support."

But even then, private companies may face another major

obstacle: regulation.

The risks of intrusive rule-setting were underlined last

week when Saudi Arabia said it would fine private sector firms

that employed more foreign workers than Saudis - a stance that

could have a big impact given that roughly nine in 10 employees

of private companies in Saudi Arabia are expatriates, according

to official estimates.

In other cases, opaque and complex regulation, or the lack

of any rules at all, is holding up private companies.

"One major area is bankruptcy law - also labour laws and

labour protection are skewed towards national citizens and lag

for foreigners. The other area is in terms of investor

protection," Scacciavillani said of the GCC.

"Awareness is there but in terms of delivery, little has

been done."

Follow Reuters Summits on Twitter @Reuters_Summits

(Additional reporting by Stanley Carvalho, David French and

Mirna Sleiman; Editing by Andrew and David Holmes)

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