Reproduced by Middle East Observer, Issue #4, Vol. 2, March-June 2011
The economies of the Gulf projected considerable resilience during the global economic downturn. 2010 generally proved a year of normalization across the region, and 2011 is widely expected to be characterized by a steady consolidation of this turnaround, partly due to the stronger oil prices. Several factors for the expected recovery in oil prices over their relatively low level in 2009, include increased demand by China and India, a weakening in the dollar, and expected regulations of the oil business following last year’s spill by British Petroleum in the Gulf of Mexico.
The Gulf oil producing economies are projected to sharply rebound by more than six per cent in 2011 while their combined budget surplus could climb by nearly 10 per cent to 130 billion dollars. Oil prices jumped by around 27 per cent to an average 77.2 dollars in 2010 and are expected to climb to 83.9 dollars and 86 dollars in 2011 and 2012 respectively.
The surge in oil prices supports the Gulf Cooperation Council (GCC) policy of economic diversification by fuelling the economic activity from the public to the private sector, and by supporting projection execution in the six-nation GCC, with the biggest 100 ventures under way in the region totalling a staggering 1.3 trillion dollars.
Economic diversification has been a catchphrase of economic policy in the GCC states since the first oil boom in the 1970s. It was initially prompted by concerns over the finite nature of oil and the recognition of the risks of economic instability inherent in heavy dependence on oil exports. Economic diversification, meaning the expansion of non-oil economic sectors, implies the reduction the public sector’s size, the reduction of the heavy reliance on expatriate labour, the improvement of the efficiency of monetary and fiscal policies, and the building of human capital through investment in training and education.
This baseline scenario appears to be moving fast towards the right direction, although the ongoing turmoil in parts of North Africa and the Middle East has affected negatively leading drivers of economic recovery and development. The situation in Egypt raised concerns over oil supply security through the Suez Canal and pipeline, and the ongoing events in Libya have jeopardized the output of a fairly significant oil producer as before the onset of conflict, Libya produced some 2% of the world’s oil.
The ongoing crisis is estimated to have reduced Libya’s pre-crisis output of 1.6 million barrels per day by up to three-quarters and this development, along with fears over potential contagion, pushed the oil price to its highest level since August 2008. Saudi Arabia responded to make up for any shortfall in production by putting its production at as much as 9.4 million barrels per day.
Additionally, social and sectarian tensions in GCC countries most prominently in Bahrain and Oman have put under test investor mood. While it is early to assess the ultimate economic costs of the crisis, it is obvious that sharp stand-off in Bahrain that eventually led to an intervention by GCC forces, has hit the country in ways that may have lasting economic development consequences. For as long as the region faces a period of uncertainty and investor caution, the effects are not expected to be uniformly negative.
In particular, Dubai is presented with a significant opportunity to capitalize on its enhanced cost competitiveness in real estate as investors reassess their views about Bahrain. For its part as well, Qatar investment on its real estate market has transformed it from a single road along the sea in the 1980s into a Mecca of development. The mushrooming of the Qatari real estate industry over the last six years presents an attractive example for the region. The US Patriot Acts is seen as the single major reason for massive redevelopment in the Gulf, because as foreign direct investment into the US became increasingly difficult, GCC countries focused on redeveloping their towns and shifting tourism to diversify from hydrocarbons.
Medium-to-long-term strategic programming has become a central part of the economic development plans in the GCC. Even though some of the plans are partly ambitious and programmatic statements, they substantially seek to set up longer-term guidelines on managing the countries’ oil wealth for the purpose of the transition to the post-oil era.
Qatar’s new announced National Development Strategy envisages investments of 225 billion dollars in the course of 2011-2016. Fuelled by gross investment in excess of 30% of GDP, Qatari GDP has almost quadrupled from 31.7 billion dollars in 2004 to an 110 billion dollars in 2010 with an annual average growth rate of 13.1% in 2001-2009. Also, Qatar has emerged as the world’s third-largest gas power after Russia and Iran as well as a leading liquefied natural gas (LNG) exporter, and has made massive investments in LNG exports to Asia. However, Qatar faces enormous employment challenges with a projected need for 1.6 million new workers over the planning period.
Oman’s 2011-15 Development Planseeks to achieve growth of at least 3% per year and the total expected investments amount to 78 billion dollars. Tourism, industry, agriculture, and fishing are identified as priority sectors. The Plan projects average oil output levels of 897,000 barrels per day and a price of 59 dollars per barrel while foreseeing average annual investment of 2.3 billion dollars in oil exploration and development as well as 1.9 billion dollars in the gas sector.
Bahrain’s Economic Vision 2030, a blueprint for the development of the country's economy, identifies key challenges and opportunities that focus on transforming the economy with the development of the quality and number of jobs for nationals, and on encouraging innovation and the development of new growth sectors. The share of Bahrainis in the national workforce is projected to grow by 29% over the coming decade, a goal essential to meeting the Vision’s central objective of doubling the real income of nationals by 2030.
The Vision envisages the economy diversifying away from oil with special emphasis on financial services, industry, logistics, business services and tourism. According to the annual Index of Economic Freedom published by the Heritage Foundation and Wall Street Journal, Bahrain is among the world's top 10 most economically free nations. This result comes in line with the aspirations of Bahrain Economic Vision 2030, and cites the commitment to structural reforms and openness to global commerce that have enabled Bahrain to become a financial hub and regional leader in economic freedom.
Saudi Arabia’s Vision 2020 is an expression for the national development strategies of the Kingdom. The Vision sees Saudi Arabia emerging as a diversified and prosperous economy and focuses on the development of human resources, the expansion of the private sector and the modernization of the public sector’s structures. A number of new development projects are underway, and for instance Saudi Aramco has identified gas as a key investment priority since the Kingdom is home to the fifth-largest reserves in the world, and seeks to boost gas reserves by 5bn cu ft/day within five years.
Kuwait Development Plan 2013-2014, the first such plan since 1986, aims to turning Kuwait into a regional trade and financial hub through sustaining economic development, economic diversification and GDP growth. The Plan approved an estimated 125 billion dollars of spending focusing on both oil and non oil economic sectors, and includes a series of Mega Projects, like the construction of the Silk City (Madinat Al-Hareer) that will serve as new business hub with an estimated cost 132 billion dollars, the allocation of a round 80 billion dollars of oil sector investments to raise production capacity and modernize current facilities, the construction of a major container harbour, railway and metro systems, as well as additional spending on new cities and infrastructure projects.
Abu Dhabi’s Economic Vision 2030 aims to achieve effective economic transformation of the emirate’s economic base and bring about global integration. Abu Dhabi has a core commitment to build a sustainable and diversified, high value-added economy by 2030. This will be achieved by broadening the sectors of economic activity, enlarging the enterprise base, and growing external markets. Economic development envisions to involving the averaging of growth at 7% till 2015, and thereafter at 6% so that Abu Dhabi grows at a faster, yet still sustainable, rate.
Within overall growth and as part of efforts to diversify, Abu Dhabi aims to foster non-oil GDP growth at a higher rate than that of the oil sector, in order to reach equilibrium in non-oil trade by 2028, thus demonstrating the ability to instil extra depth within the structure of the economy. Specifically, the central goal of Abu Dhabi’s strategy is to boost the share of the non-oil sector to 64% of GDP by 2030 from the current 45%.
By concluding, in an environment where risks still abound, the result of the current combination of investor caution and government activism may be a year of uneven growth, but with oil prices strong, the GCC region is definitely looking at a significant acceleration in its headline GDP growth which undoubtedly solidifies the regional policies of diversification and long-term economic development.
(Photo from: http://www.opfblog.com/11912/)
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