Gulf firms have the freedom to fail

It has been a bittersweet week for gulf economies: first the news that the GCC states have ranked higher than ever before in a survey measuring economic freedom; then further confirmation that average company earnings growth is in free fall.

Bahrain is ranked as the 16th most ‘free' economy in the world - and best in the Middle East and North Africa region - in the latest annual Index of Economic Freedom, published by the Heritage Foundation and Wall Street Journal. Not to be left behind, Oman stands at 43, Qatar at 48, Kuwait at 50, the UAE at 54 and Saudi Arabia at 59.

The index ranked 179 countries across 10 areas of economic freedom - business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labour freedom. An overall average was then calculated from these scores.

At the same time, average company earnings growth across the GCC is expected to be flat in 2009, with "severe stress" on banks, real estate companies and investment services, the Kuwait Financial Centre (Markaz) said in a study published last week.

The countries likely to witness significant negative earnings growth rates are Bahrain, Kuwait and the UAE, with predicted rates of -11 percent, -6 percent, and -5 percent, respectively, it warned.

"The slowdown in earnings growth across GCC started from the third quarter of 2008, coinciding with declines in commodity prices, freezing in the credit markets and a downturn across stock markets," Markaz said, adding that GCC earnings growth for 2008 is expected to fall into negative territory at -8 percent, down from the 30 percent growth seen in 2007, and marking the first negative growth period since 2003.

The outlook is particularly bleak if you're in the investment services, banking or real estate sectors, where companies can look forward to slumps of 26 percent, 6 percent and 10 percent, respectively.

On the flipside, sectors tipped to cushion GCC economies from further damage include telecommunications, utilities and commodities, with projected growth rates of 21 percent, 10 percent, and 10 percent, respectively.

Those are the lucky ones, and what is clear is that with greater economic freedom, have arrived greater potential risks - as well as rewards - for those operating in Gulf markets. The region may be more open than ever before, and it may boast a more navigable and transparent business environment than has been the case in the past, but the inevitable casualties will be easier to spot as a result.

And while it remains cold comfort to those who will struggle to survive in the coming months, we must console ourselves with the knowledge that the ongoing turmoil can only act as a positive influence on Gulf economies in the long term. Flat growth rates can't last forever, and when the tide turns in the Gulf, then the region's matured and increasingly liberated economies will be well-placed for another era of strong growth.

Andrew White is the editor of Arabian Business.

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