Exclusive to The Middle East Online . . .

GULF STATES CONTEMPLATE AN ERA OF CHANGE

By Dr. Neil Ford

269323-aramco-saudi

 

Everyone agrees that economic diversification is needed in the Gulf states. More diverse economies are less prone to wild economic swings, oil reserves eventually become exhausted, prices fluctuate and the prospect that other forms of energy will displace oil and gas in the global economy is ever present. Yet even with government backing, creating broad based economies will take cultural changes and a new attitude to work that may take decades to emerge. Action is required now but it is likely that it will take a severe economic crisis to bring about a new mindset.

The debate over diversification has previously been largely hypothetical, as oil and gas income drove economic activity, paid for vital services and often generated a surplus. Oil prices are notoriously difficult to predict but there is an overall consensus that the GCC states will not be able to rely on oil revenues in a decade’s time. Reserves built up during the boom years, including in sovereign wealth funds, will help to bridge any shortfall but it is vital that reforms are put in place now. Hydrocarbon revenues will rise and fall in line with global economic growth but two trends look certain: the population of the Gulf Cooperation Council (GCC) states is rising more quickly than oil and gas production; and alternatives to hydrocarbons are becoming more economically attractive, on environmental if not always on commercial grounds.

At the Gulf Development Conference in Kuwait, the IMF identified two main changes that are needed if diversification is to become a reality in the GCC states: better education and greater competition. IMF deputy managing director Min Zhu told delegates: “The GCC countries have grown strongly and seen huge improvements in their development indicators, but they remain susceptible to fluctuations in oil markets and, hence, need greater economic diversification to help boost productivity and living standards, create jobs, and reduce the fiscal and external risks associated with the heavy reliance on oil revenues.”

However, one other important change is also needed: a cultural shift that sees citizens fully engaged in the economy, particularly in the private sector. Some of the smaller Gulf states may have limited local populations but bringing more people into the workplace would strengthen national cohesion as well as the economy. Saudi Arabia also has a large, rapidly growing young population that needs employment. Will Cooper, a partner at consultants Ernst & Young, said: “Educational reform is vital. Improving the quality of outcomes from the education and training system for nationals is imperative to creating a local workforce. The focus must be on developing the right skills for young nationals and encouraging an enterprise mindset as they progress from education to work. This is a call to action to develop closer links between employers, educational institutions, jobseekers and policy makers.”

Achieving educational qualifications is often viewed as a means of gaining social status rather than to be used in employment. Education was at the heart of the East Asian economic boom and could play a similar role here. In addition, the economic empowerment of women would increase the size of the potential workforce, although much depends on the extent to which social and cultural change is to be allowed or even encouraged. On average, the unemployment rate is five times higher for women than men in the region.

RTEmagicC_frauen_01

 

The key to encouraging entrepreneurship is the emergence of a far more substantial small and medium sized enterprise (SME) sector. Much of the private sector activity that does exist is managed by foreign workers and focuses on satisfying domestic consumption rather than export-driven businesses. The lack of nationals in the private sector distorts education and employment incentives but more local people need to move into competitive businesses. The population of the GCC area is set to increase by a third between now and 2020 to number 53 million but the revenue base will not rise at the same pace.

Falling oil prices

Although analysts and academics have predicted a move away from more polluting fuels for many years, the world is still a long way from such a trend becoming reality. Yet research into renewable power production and energy efficiency is increasing year-on-year; and even Washington is beginning to plan for a lower carbon future. In the short term, oil prices are also affected by the boom in unconventional hydrocarbons, such as coal seam gas. This fracking trend may have taken off in North America but is likely to spread to other areas, including Southern Africa, China Australia and even the UK.

Low or falling oil prices always provide some impetus for economic diversification and 2014 proved no exception, giving rise to considerable concern and helping to concentrate minds in even the most oil rich country. Governments in the region have been forced to adjust their revenue and budget predictions accordingly, several look likely to face significant budget deficits for the first time in at least five years. Cutting OPEC quotas is becoming less attractive as populations increase and to some extent merely open up upstream opportunities elsewhere, particularly on North American unconventional oil and gas projects where development is so price sensitive.

The Kuwaiti experience

The current debate in Kuwait is typical of many. Speaking to the Kuwaiti parliament in late October, the country’s emir, Sheikh Sabah al-Ahmed al-Sabah, said: “I have appealed from this podium many times to … work to develop and build productive economic activities that provide opportunities for the youth to work, diversify the state’s sources of income and reduce the reliance of our economy on oil. And here we are seeing another cycle of low oil prices as a result of political and economic factors shaking the global economy, casting a negative shadow on our national economy.”

sheikh-al-ahmad-al-jaber-al-sabah-kuwait

 

 

 

 

 

He added: “Kuwait needs to protect its oil wealth, which is not only ours, but is also the right of future generations”. The government has long talked the talked of encouraging inward investment but a combination of restrictions on foreign investors, apparent disagreements within the government over economic policy and inertia brought on by oil revenues has limited action.

Kuwait’s Finance Minister Anas Al-Saleh said: “Kuwait’s growth model has generated large improvements in living standards and welfare. The public sector wage bill is currently very high as a percentage of public spending and subsidies are exhausting the state budget.” Subsidies account for about KD5.1bn ($17.6bn) a year, equivalent to 25% of the entire Kuwaiti government’s budget. The government does now plan to reduce some subsidies, mainly on fuel prices, but similar cuts to power subsidies have met with stubborn resistance. Kuwaiti firms have had some success in investing in the same sectors as their counterparts in many other Gulf states: real estate, financial services and telecoms; but none of these generate a great deal of employment.

Unlike in many other parts of the world that rely on the export of natural resources, a great deal of infrastructure is already in place in the region, much of it new and of a high standard, including ports and airports, while new railways are being developed in Saudi Arabia and free trade zones are becoming more common. Telecoms infrastructure is world class and power prices are fairly low.

Massive Qatari Investment

qatar-skyline

 

In Qatar the non-oil economy is certainly outpacing the oil and gas industry, but it could hardly be otherwise with the country hard at work preparing for the 2022 FIFA World Cup. A massive $182bn is being invested in infrastructure over the period 2015-19. Despite the controversy over the emirate’s victory in the bidding process and the timing of the event, construction work on a host of infrastructural schemes is underway that could transform the country’s economy after 2022, but only providing a commercial use for each project is secured. The annualised growth rate after the second quarter of this year was 5.7%, which comprised a 2.2% fall in the oil and gas industry’s contribution to GDP but an 11.3% rise in the non-hydrocarbon economy.

Qatar National Bank predicts growth of 6.8% for 2014 as a whole, rising to 7.8% by 2016, on the back of the construction boom and anticipated growth in oil and gas revenues. Doha has previously sought additional outlets for its natural gas reserves, in the form of liquefied natural gas, petrochemicals and gas-to-liquids (GTL) production but now aims to develop a genuinely broad based economy. It hopes to transform Doha into a second Dubai, with a rapidly growing, international population working in the service sector and even manufacturing. The population is probably growing more quickly than that of any other country in the world, soaring by a current rate of 7.45% a year. Given its vast gas riches, Qatar has certainly set its sights high in terms of diverse ambition, although this process was kicked off by its need to find alternative commercial outlets for gas.

Generally, there is a fairly strong correlation between those economies that are most diverse and those with most limited oil and gas production.

Without the oil riches of many of its neighbours, Dubai has put most effort into diversification and has reaped the benefits, although the emphasis has been on low productivity sectors. Dubai’s growing prominence as an air travel hub and as a tourist destination in its own right has fuelled the construction of many shopping malls that now cater for nationals, other GCC residents and tourists from further afield. Non-hydrocarbon economic activities now account for more than 40% of government revenues in both the UAE and Qatar, although many other sectors benefit directly or indirectly from oil money. Saudi Arabia fares much worse, with a non-oil contribution of 10%.

With greater cultural constraints and a much bigger population than its neighbours, the big challenge will be Saudi Arabia, but the government seems to recognise this. Muhammad Al-Jasser, the Saudi Minister of Economy and Planning argued: “The role of the state should be as a growth facilitator rather than an employer of last resort. It should provide infrastructure, regulations, and incentives while ensuring that the heath care and education systems are improving and the skill sets of the population are developing.” The liberalisation of foreign investment on the Tadawul, the Saudi stock exchange, is an obvious sign of economic reform but much more is required.

 

saudi_1837811cRegional integration

Closer regional integration would encourage both local and international investment, particularly in the region’s smaller countries, allowing them to target the Saudi market. Removing trade barriers makes it easier for a firm to base itself in one country but market its products across a wider region. GCC economic integration has generally proceeded more slowly than planned but a full customs union is to be introduced next year that could provide the springboard for greater competition.

Integration could have another benefit. If the Gulf economies coordinate their economic strategies then they could avoid duplication and benefit from synergies, as each country focuses on its own strengths. For instance, Qatar and Saudi Arabia have made the most progress on developing industrial capacity, while the UAE has forged ahead banking and made a start on encouraging renewable energy.

Many states have developed desalination plants but renewables and desalination are two areas where the region could develop expertise in order to hedge their bets. The Gulf states have huge solar power resources that could be developed to satisfy local power requirements, displacing oil and gas that can then be freed up for export. Yet if climate change kicks in to the extent that has been widely predicted then the push for solar power will intensify and desalination technology will become more attractive. Gulf companies that have already taken a lead in this area will be able to benefit commercially.

The economic position of the GCC region would be welcomed by most other parts of the world. The six governments have the finances and the natural resources to choose the form of economic development that they feel best fits their societies. Yet the great lesson of human history is that adaptation most readily comes about when there is pressure for change, whether through crisis or competitive challenge. It would be better to create a society within which the latter is encouraged rather than waiting for the former to arrive.

ENDS

 

 

 

 

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *