Jazeera Airways Airbus A320-214

As Oil Price Slides, Gulf’s Private Business May Benefit

Jazeera Airways Airbus A320-214

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, fueled 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 percent strategic stake in loss-making Kuwait Airways. Parliament originally approved the airline’s privatization in 2008 but the project was delayed; it now appears to be moving ahead again.

“We believe in privatization 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 percent, the lowest rate in a year, because of a slowing oil sector. But growth in the non-oil private sector accelerated, to 4.7 percent.

One of the biggest shifts in the Saudi economy for years is due to labor 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 criticized 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.

More… http://www.reuters.com/article/2014/10/26/us-mideast-investment-gulf-idUSKBN0IF0CM20141026

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