Construction, telecoms and banking: building on the back of oil.

SUSTAINED HIGH OIL PRICES OVER the past 18 months have fuelled a construction boom in the Gulf Cooperation Council (GCC) states. State owned oil companies and government investment funds have sought a variety of investment targets and much of the excess oil income has been targeted at real estate. Almost all forms of property development have been affected, from residential, tourist and office developments, to road, port and airport projects. As a result, the region's 23 cement producers collectively registered a 109% rise in profits between the first half of 2004 and the same period in 2005.

This has boosted the fortunes of the construction companies that feature in the TME Top 100, such as Southern Province Cement Company of Saudi Arabia and Egypt's Orascom Construction Industries, as well as real estate specialists such as the UAE's Emaar Properties and Makkah Construction and Development Company of Saudi Arabia. Emaar is by far the most successful property developer in the region, with a market capitalisation of $46.3bn.

Two of the biggest airport projects are in Doha and Dubai. A huge 5,500-acre site has been set aside next to the existing Doha airport for the New Doha International Airport (NDIA), including a large area of land reclaimed from the sea. The combined facility will have the capacity to handle 17m passengers a year, up from just 4.5m at present. The new site is being developed to enable the eventual expansion of the project to 50m passengers a year by 2015, making it the biggest airport in the Middle East, at least until the expansion of Dubai International Airport is complete.

Dubai already serves almost 22m passengers a year but capacity will reach 58m passengers a year if the Phase 2 development programme is completed as scheduled by the end of next year. Over $2.5bn is being invested in the construction of a new passenger terminal and a huge new cargo terminal, which is expected to be operational by 2018. While Dubai has made its name as a hub airport for passengers travelling between many different parts of the world, it is hoped that the Cargo Mega Terminal will enable it to assume the same position with regard to the transportation of cargo.

Apart from investment from within the region, some money is entering the property market from further afield as it becomes increasingly easy for non-residents to buy property in many Gulf economies. Some investors have been attracted by the jumbo financial developments that are becoming increasingly popular in the Gulf. The Dubai International Financial Centre (DIFC), the Bahrain Financial Harbour (BFH) and the Qatar Financial Centre (QFC) all offer a mix of hotel and residential facilities to complement their core business functions. At the same time, hotel room occupancy rates are at their highest levels for a decade, so major international chains, such as the Fairmont, Raffles and Ritz-Carlton groups, are all investing in large hotel complexes. In Dubai alone, around $500m is being invested in hotels that should open within the next two years.

Growth in the Middle East's telecoms sector has been strong, if not spectacular. Sector profits with the Gulf Cooperation Council countries increased 16.1% from about $6.08bn in 2003 to $7.06bn in 2004. This is somewhat ahead of the far more modest growth experienced in the mature markets of Europe and North America but not as rapid as that recorded by developing regions such as sub-Saharan Africa.

This is because the Middle Eastern telecoms market taken as a whole lies somewhere between these two extremes: mobile coverage in some countries in the Gulf has almost reached saturation point but there is still plenty of room for expansion in states such as Syria and Jordan. Beyond such markets, most expansion over the next few years will come from the rollout of new services. The penetration rate of mobile technology has improved rapidly over the past five years, but many consumers still opt for basic packages.

Emirates Telecommunications Corporation (Etisalat) in the UAE has a penetration rate of 88%, for example, while Batelco in Bahrain has 500,000 subscribers out of a total population of 700,000. MTC in Kuwait and Qtel in Qatar have proved almost as successful. Such success has enabled telecoms companies to greatly increase their presence in the TME Top 100 Companies. Saudi Telecom Company (STC) is ranked in second place this year, with market capitalisation of $75.6bn and net profits of $2.4bn in 2004. Etisalat is the only other telecoms firm in the TME top 10, with market capitalisation of $28.1bn and net profits of $935m for the same year.

The biggest trend across the region at present is the process of opening up previously restricted markets. Where the mobile subsidiaries of the state owned, monopoly telecoms companies once dominated the market, some states have offered additional licences to domestic and foreign operators, while others plan to do so in the near future. This process has engendered a greater degree of competition, both on price and services offered.

The Saudi Arabian market is still the biggest in the region, with 8m mobile subscribers and 4m landline customers, but with a penetration rate just touching 42% there is plenty of room for expansion. STC has faced competition in the mobile sector since May this year, when Ettihad Etisalat launched its Mobily offshoot with lower tariffs for basic packages. While the impact of the new competition has yet to be fully assessed, the government has announced plans to offer a third mobile licence, as well as a second landline licence before the end of next year. STC looks set to face a stiff test on both telecoms fronts over the next two or three years.

Jordan has a penetration rate of about 30% but has adopted the most liberal investment environment in the entire region. There are already four telecoms operators but the government has now decided that all operators will also be able to offer landline services to subscribers. This should not only result in lowering the landline charges currently levied by Jordan Telecom but should also help the government in its plan to greatly increase Internet access across the country. The level of competition has already had an impact on technological investment and the country's third GSM operator, Umniah Mobile Company, was launched in July. The Jordanian success story demonstrates that it is not just the size of a country's economy that determines the success of its telecoms sector.

According to figures from Global Investment House, the banking sector in Gulf Cooperation Council (GCC) states has registered a 66% rise in profits over the past year. This is a remarkable figure, but almost exactly in line with the rise in the stock market value of the largest 30 listed companies in the region. The financial sector dominates the TME Top 100 and banks from the UAE and Saudi Arabia pack the upper reaches of the ranking. Growth areas include project finance, Islamic banking and consumer mortgages, but commercial lending continues to lead the way.

As in the construction sector, the banking boom has been fuelled by high oil prices. Money has flooded into the Gulf providing vast surplus liquidity over the past few years. And the region as a whole has benefited as a result of changes in the investment environment in many countries. The combined market capitalisation of the GCC-listed companies increased from $120bn in 2000 to $522bn last year, a massive rise by any measure. The oil boom has added yet another element to the mix and, if sustained, could change the face of the banking and financial sector for a long time to come.

The combined capitalisation of all banks in the Middle East and North Africa region reached $70.64bn in 2004, up 38% on the 2002 figure, while their total consolidated assets increased 29% over the two years to reach $790bn. Profits have increased even more rapidly and several banks, including Qatar National Bank, Emirates Bank International and National Bank of Abu Dhabi recorded profit increases in excess of 70% for the first six months of this year. However, as a result of being heavily capitalised, the current boom in banking does not seem to have resulted in unsustainable growth and the region's banks do not appear to have overreached themselves.

Apart from boosting the economic fortunes of the banking sector itself, the level of surplus liquidity has enabled the region's banks to greatly increase their lending. Where unbudgeted for oil income was once invested in London and New York, a far larger proportion now remains within the oil producing states or is invested elsewhere in the region, in North Africa and the Levant. The economies of the GCC states are expected to grow by an average of 25% this year, largely on the back of high oil production and prices, in addition to the banking sector's ability to help use much of the money in investing in other sectors.

Snapshot of GCC Telecom Operators--1H 2005

Country             Bahrain       Kuwait        Oman     Qatar

                    Batelco   MTC       NMTC   Omantel    Qtel

Population (m)          0.7      2.8               2.4     0.7
Penetration Rate        78%      77%               34%    0.62
Subscribers             0.5   10.6 *   3.9 *       0.8     0.5
Total Revenue         279.1    776.5   534.8     331.2   371.6
  1H 2005 (US$m)
Net Profit (US$m)     113.4      308    87.2     102.2   159.3
Market Cap                2      9.3     3.2       4.5       7
P/E ratio              13.9     17.6    19.7      21.4    22.4

Country              Saudia Arabia             UAE

                    Etihad Etisalat    STC   Etisalat

Population (m)                 22.7               4.3
Penetration Rate                42%               88%
Subscribers                     n/a     13        4.1
Total Revenue                  15.5   4254       1688
  1H 2005 (US$m)
Net Profit (US$m)              -222   1576        574
Market Cap                     17.4   77.8       31.7
P/E ratio                       n/a   23.4       28.3

Source: Company reports, Global Research. * Includes subscribers in
other countries where they operate