Falling oil prices have impacted the economic climate in the GCC, though the magnitude differs from one country to another. From 110 USD per barrel in mid-2014, prices more than halved to 50 USD in mid-2015.
The International Monetary Fund (IMF) forecasts have indicated that the average annual oil price for 2015 will be around 59 USD, rising marginally to 64 USD in 2016. The Middle East holds nearly 48% of the world's proven oil reserves, as per British Petroleum (BP) Statistical Review of World Energy 2015. Saudi Arabia, with the lion's share of 15.7%, has recently received a credit ratings downgrade from Standard and Poor's, which said the decline in oil prices will increase the budget deficit in the country, as it relies on energy exports for nearly 80% of its revenue. In comparison, the United Arab Emirates, which holds around 5.8% of the proven reserves, is one of the most diversified among the GCC countries. Hydrocarbon revenues account only for 25% of GDP and 20% of total export revenues. Yet, in fiscal terms, more than 60% of the country's budget revenues still depend on the hydrocarbon sector.
Diversification into non-oil sectors, increased global trade and foreign assets will be the key determining factors in offering a cushion against further drop in prices for countries in the region. This was highlighted at the Country Risk Assessment Conference 2015, co-hosted by trade credit management and risk assessment firm Coface, along with Ministry of Economy, Dubai. The conference held on the opening day of Global Trade Development Week (GTDW) in Dubai during October 2015, saw a gathering of high-level representatives from government, industry, and international organizations.
According to Coface, the UAE economy was eligible to post strong growth of 3.1 per cent in 2015, very close to the GCC GDP growth forecast of 3.2 per cent. Saudi Arabia is expected to grow by 2.5 per cent. Julien Marcilly, Chief Economist, Coface, said: "Though the GCC economies are still dependent on the hydrocarbon sector as its main export and source of fiscal revenues, in the past decade respective governments have decided to replace their growth model by economic diversification that aims to reduce dependence on hydrocarbon, where prices are volatile and can be a source of macroeconomic imbalances."
Saudi Arabia, the UAE and Qatar have been relatively more successful in terms of diversifying their economies; however, experts agree that there is still need for more. Trade in non-energy products needs more focus in the coming years and governments are working to improve the situation with increasing external openness. For instance, recent figures released by Dubai Customs show non-oil foreign trade during first half of 2015 to be Dh 652 billion of which imports are around Dh 402 billion and exports account for Dh 65 billion.
GCC countries have introduced measures to promote trade and attract more foreign direct investments (FDI). These include creation of free trade zones, establishment of GCC Free Trade Area, exports for free trade agreements with European countries and easing of bureaucracy. However, these efforts are marred by efficiency and regulatory issues in some GCC countries. Coface assessment for MENA region shows room for improvement in making these economies more accessible. According to Coface business climate assessment (BC), which rates on a scale of seven levels (A1, A2, A3, A4, B, C, D in descending order of quality of the business environment), Qatar and the UAE stand at A3, Bahrain (which is on the negative watch list), Kuwait and Oman all stand at A4, while Saudi Arabia stands at B.
In the World Bank Doing Business Report for 2016, the UAE was the only GCC country in the top 50 rankings at 31, and also among 12 economies of the world that introduced four or more reforms to make it easier to do business in 2014-15. These included streamlining procedures to make it easier to deal with construction permits by combining civil defense approvals with the building permit application process and improving process efficiency making it easier to get electricity. According to the report, the UAE also expanded court automation by implementing an electronic notification system allowing the initial summons to be served electronically.
In comparison, Bahrain stood at 65, Qatar at 68, Oman at 70 and Saudi Arabia at 82 in the worldwide rankings. The report highlighted that Saudi Arabia had made property transfers faster by introducing a new computerized system at the land registry, while Oman and Qatar improved port procedures making it easier to trade across borders.
These efforts point towards a growing shift in making the GCC economies more globally competitive. Many GCC countries have implemented long term economic and social development policies aimed at promoting sustainable development, increasing employment in the private sector and reducing oil reliance. In this regard, Saudi Arabia has implemented its long-term strategy 2025, Oman has introduced Vision 2020, the UAE Vision 2021, Bahrain Vision 2030 and Qatar National Vision 2030. Consequently, according to the IMF, in the period 2000 - 2013, growth in non-oil output averaged 6.8% and the share of the non-oil sector in total real GDP rose by 12 percentage points to 70% in the GCC countries.
Adapting to the new normal of global growth figures will require efforts in tapping new markets, increasing trade openness and improving regulatory environment. For the UAE in particular, economic strengths lie in diversification of the economy that has actively begun, the importance of Abu Dhabi, which holds 90% of the United Arab Emirates' hydrocarbon reserves, the emirate's growing importance in services, the sovereign fund (ADIA) with one of the world's largest asset portfolios and the federation's political stability, according to Coface. Experts agree that the region still has time to plan for the future. "Alternative means of revenues and moving away from dependence on hydrocarbon sector will need a unified approach. While governments are likely to cut spending in the short-term, avenues such as taxes need to be studied, since the region has historically not followed this form of revenue generation," concludes Khatija Haque, Head of MENA Research, Emirates NBD.
© Capital Business 2016
