A Mideast Shocker: Economies That Still Grow

Young populations, government stimulus, and simple banking practices help, but Dubai debts show that the Middle East might yet face problems

By Stanley Reed

A cliff side overlooking the Dead Sea in Jordan was an appropriate place for the discussion that took place at the World Economic Forum meeting on the Middle East from May 15 to 17. A lot of the chatter, especially from politicians and analysts, was of crisis. Amre Moussa, the fiery General Secretary of the Arab League, was by no means an outlier when he pronounced the region "unstable and dangerous." He was referring to the long running Arab-Israeli conflict. Arab leaders believe that the Obama Administration is about to launch a serious effort to kick-start stalled negotiations between Israelis and Palestinians in the coming weeks—and they warn of a bitter backlash if it doesn't.

But some of the business leaders present seemed to be talking about an almost completely different world. For instance, Mazen Darwazah, vice-chairman of Hikma Pharmaceuticals (HIK.L), a largely regional pharma company, said the Middle East was the only part of the world enjoying double-digit growth in drug sales. And Wael Fakharany, country manager for Google Egypt (GOOG), said the online advertising market in the region was "doubling every year."

What's going on here? While the Middle East has not completely escaped the effects of the financial crisis, it has so far not been hit anywhere near as hard as the West, if reported statistics can be believed. The International Monetary Fund forecasts growth for the Middle East and North Africa to be 2.47% this year. That's more than a 50% drop from last year's robust 5.92%, but still strong enough to be the envy of much of the rest of the world.

Young populations keep up demand

Egypt, the largest Arab country, provides clues to why growth is holding up. The country's economy managed to grow 4.3% in the first quarter, led by steel and construction industries that are on their knees almost everywhere else. Egypt's relatively uncomplicated banking system, which hasn't been caught up in big losses on complex financial instruments, is benefiting from about $3 billion of stimulus pumped in by the government. And unlike the U.S., whose stimulus spending is just starting, Egypt's package is already 75% disbursed into the economy, says Rachid M. Rachid, the country's Trade & Industry Minister.

A key reason growth has continued in a lot of Arab economies and their neighbors is that all have young, fast-growing populations: Youth must be served. Moreover, as Rachid notes, they are "not very far along the development curve." In other words, citizens are hungry for boosts in housing, health care, education, and a lot of other goods and services.

Yet there are more than a few worrying signs. As with everywhere else, credit is tight. Joe Saddi, global chairman and Middle East head of consultants Booz & Co., reported working on a power project that had all the right ingredients, including government guarantees, but still couldn't attract bank lending. Business figures in the region say that hotel occupancy has dropped sharply while demand for some materials also has fallen off.

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