Positive outlook in the Gulf, despite political jitters
28 Oct 2019
The Gulf has had to navigate some challenging terrain in recent times, and in the second half of 2019 these challenges have come in the form of steady escalation of tensions with Iran, which have dominated global headlines emanating from the region. Although Crown Prince Mohamed bin Salman emphasised recently in a television interview with CBS News that a “political and peaceful solution is better than the military one”, concerns over the ratcheting-up of tensions loom large in the regional business community’s collective psyche. In the results of our most recent annual OBG Business Barometer: GCC CEO Survey, 76% of CEOs identified regional political volatility as the biggest external risk (other than movements in commodity prices) facing the region in the short to medium term, up from the 71% recorded last year.
From a more global perspective, the ongoing trade war between China and the US is another growing concern for Gulf economies, which are increasingly deepening economic ties with China via trade agreements as well as through a series of infrastructure investments associated with China’s Belt and Road Initiative. Speaking in terms of external risk, 9% of CEOs surveyed cited Chinese demand growth as their biggest worry, up from 7% last year.
These concerns notwithstanding, however, there is a definite sense that the challenging economic circumstances are being successfully managed. When asked what their expectations of the local business environment were for the coming 12 months, 72% of CEOs responded positive or very positive, slightly up from the 70.3% who responded likewise in 2018 (despite the fact that oil prices were on average higher than they have been in 2019).
This sentiment is broadly in line with major indicators for the region. While in 2018 growth in the UAE stood at 1.7%, in 2019 this is expected to expand to 2.8%. Meanwhile, in Bahrain, growth levels are set to hit 2.3% in 2019, up from 1.8% last year.
Robust projections are also being underpinned by private sector spending plans across the region. Of the CEOs we interviewed, some 63% said they were either likely or very likely to make a significant capital investment in the next 12 months.
However, while all of this undoubtedly bodes well, the broader challenge of generating higher levels of private sector activity in regional economies continues to guide policy.
Although 2018 saw oil prices begin to rally from the lows of previous years, the tumble last December demonstrated once more the vulnerability of being overly beholden to hydrocarbons receipts. Therefore, diversification as a mantra remains the order of the day, and sits at the centre of the series of development blueprints onto which Gulf countries have mapped their future economic prosperity.
The central preoccupation of these plans is the provision of employment for the region’s burgeoning population, which is currently projected to reach 53.5m in 2020, a 30% increase over 2000 levels. This population growth is being fired by an expanding youth demographic, into which regional governments have invested billions of dollars over the last two decades, with budgetary allocations for education sectors consistently weighing in as the largest or among the largest when it comes to national spend. Regional governments must now unlock the vast potential of these highly educated nationals as their economies increasingly execute the pivot towards growth led by the private sector. In particular, these citizens need to fill engineering, leadership, and research and development roles – the three areas identified by our CEOs as most in need.
There remain certain cultural challenges that must still be overcome. The widely accepted social contract that exists in Gulf countries has historically ensured that the wealth generated from hydrocarbons extraction trickled down to the wider citizenry in the form of well-salaried public sector jobs, as well as free health and education, generous state subsidies and negligible tax burdens.
However, as regional governments recognise only too well, and as international bodies such as the IMF, the World Bank and OBG have regularly pointed out, reliance on a single commodity to fuel broader economic prosperity, while undeniably effective in the short to medium term, cannot be considered sustainable in the long term.
The fall in oil prices from 2014 was a timely reminder of the need for transition. Perhaps the biggest example of this new-found sense of urgency was witnessed in Saudi Arabia, with the launch of the far-reaching Saudi Vision 2030. This was soon followed by the shorter-term National Transformation Plan, which laid out a guideline to increase the GDP contribution of the private sector from 40% to 65% in five years.
However, sitting back and expecting the private sector to pick up the slack was never going to be a feasible option as oil prices plummeted. Meanwhile, public spending continued and indeed kicked on last year with both the UAE and Saudi Arabia drawing up the biggest budgets in either nation’s history on the back of a stronger oil price in 2018. The immediate aftermath of the drop in budgetary shortfalls resulted in the exploration of more traditional forms of generating receipts, and in 2019 sovereign debt issuance in the Gulf has hit a record high, demonstrating the extent to which revenue streams are being successfully broadened.
A dose of austerity was also needed, coming in the shape of much-needed spending and fiscal reform, which was widely welcomed by international bodies. Fuel and electricity subsidies were cut across the region as petrol pump prices were hiked, and in 2019 the UAE and Saudi Arabia became the first countries in the region to introduce a value-added tax. Bahrain and Kuwait are set to follow suit in 2020 and 2021, while in 2019 Oman became the most recent member of the GCC to implement a so-called sin tax. The first to introduce the tax – which charges excise on sugary drinks and tobacco, among others – were Saudi Arabia and the UAE in 2017. They were soon followed by Bahrain and Qatar, which introduced the levy at the start of the year.
Crucial now will be maintaining the initiatives put in place during more difficult times, ensuring that efforts don’t backtrack and the inroads into curbing the mentality of public sector reliance do not diminish as regional economies look ahead and begin to regain firm economic footing.
Tags:The Middle East Bahrain Kuwait Oman Qatar Saudi Arabia UAE: Abu Dhabi UAE: Ajman UAE: Dubai UAE: Ras Al Khaimah UAE: Sharjah Economy