While 2022 was a year of global economic uncertainty fuelled by inflation, geopolitical crises and supply chain insecurity, the Middle East witnessed a second consecutive year of economic growth, with countries in the region investing in new technologies and projects that could herald greater integration in the years ahead.
In April 2023 the IMF’s “World Economic Outlook” projected that global GDP expansion would slow from 3.4% in 2022 to 2.8% in 2023. Oil-exporting countries in the Middle East are projected to see growth contract from 5.1% to 3.1% over the same period. Although regional economic expansion is slated to moderate somewhat to 3.2% in 2024, this nonetheless outpaces the projected global figure of 3.0%.
Oil-producing countries in the GCC were the region’s top performers in 2022: Saudi Arabia’s GDP expanded by 8.7% that year, followed by Kuwait (8.2%), the UAE (7.4%), Oman (4.3%) and Bahrain (4.2%). Iraq, meanwhile, saw GDP growth of 8.1% on the back of oil revenue, while Egypt (6.6%) and Algeria (2.9%) continued their post-Covid-19-pandemic recoveries.
The windfall from oil revenue has generated more fiscal flexibility and external balance surpluses, allowing GCC members to continue to fund their economic diversification efforts. Meanwhile, improving diplomatic relations have opened the possibility for enhanced regional and global integration.
Fiscal Strength
GCC countries are in a strong position in 2023. High energy prices in 2021 helped the region’s largest economy, Saudi Arabia, forecast its first budget surplus in eight years for 2022. Even so, many countries remained focused on balancing their budgets after two years of pandemic-related expenditure – a trend that continued into 2023.
In past periods of high international oil prices − for instance, in 2002-08 and 2011-14 − public sector wages in the GCC rose by 51% and 40%, respectively. This time, however, the increase in government spending, especially in wages, was limited despite the region accruing a combined $100bn surplus in 2022, according to a November 2022 report from the IMF.
Reforms in the banking sector were another factor behind improved fiscal balances, as GCC banks remained shielded from macroeconomic conditions and took measures to ensure future stability. By embracing digitalisation, diversifying funding sources, and establishing sustainable finance networks that help safeguard against social and environmental risks, Gulf financial service providers are working to mitigate future risk and enhance their longevity.
Diversification Pathways
Positive fiscal balances in the coming years are positioning the Gulf to fund efforts to diversify away from hydrocarbons revenue. Indeed, GCC countries are expected to save 33% of their oil revenue from 2022 to 2026.
In 2022 there was a notable interest in new or emerging technologies such as artificial intelligence that can enhance high-value sectors including energy, finance and government services. Abu Dhabi National Oil Company (ADNOC) has already deployed machine learning to mine its historical and current data to generate scenarios and forecast operations. Manufacturing, health care, education, automotive, retail, e-commerce and transport are other segments that could benefit from such technology deployment, which could generate an estimated $320bn for the region by 2030.
Diversification efforts in the region have also focused on enhancing food security in response to supply chain disruptions caused by Russia’s invasion of Ukraine. Prior to the pandemic, the GCC relied on imports to meet 85% of its food needs. To that end, public funds are being allocated to support supply chain resilience, as well as agri-tech to promote innovation, including alternative varieties of crops. Saudi Arabia established two funds worth a combined SR2.5bn ($666m) – one focused on providing loan guarantees for exporters of key goods and the other directed towards local farmers. Meanwhile, Egypt has traditionally relied on Russia and Ukraine for nearly 70% of its wheat imports. Disruptions in the global grains market resulted in a local shortfall, and several agri-tech start-ups are working alongside the government to address the gap.
Transition Economics
Oil prices remained high throughout 2022, thanks in part to the efforts and successes of GCC countries in driving the production policy of the Organisation of the Petroleum Exporting Countries (OPEC). When the global economy looked fragile in September 2022 and oil prices were adding inflationary pressures to consuming countries, oil-producing countries in the Gulf led an additional production supply, seeing that demand was set to weaken. Oil prices indeed fell in the subsequent months, opening up the question of whether the Gulf’s leadership may have warded off a potential price collapse if OPEC had continued producing at levels seen during the summer.
This policy has ensured robust energy revenue, which has been directed towards investment in the green transition. Specifically, countries have been investing in the capacity to deploy carbon capture, utilisation and storage technologies, and hydrogen production. Saudi Arabia, for instance, announced plans to lead the world in hydrogen production and aims to generate 2.9m tonnes per annum (tpa) by 2030 and 4m tpa by 2035. In March 2022 it started construction on the $5bn wind- and solar-powered hydrogen plant at its NEOM mega-project. Upon completion, the facility will have an output of 650 tonnes of hydrogen per day.
In May 2022 ADNOC announced a new energy partnership with UK-headquartered oil and gas giant BP to develop hydrogen facilities in both the UAE and the UK. ADNOC is set to acquire a stake in BP’s H2Teesside hydrogen project, while BP will invest in ADNOC’s green hydrogen plant at Masdar in Abu Dhabi.
Gulf countries have also committed to generating renewable energy sources, backed by the region’s abundant solar potential. Saudi Arabia, for example, aims to produce 50% of its electricity from renewable sources by 2030. In 2023 the region will look to leverage these areas of focus within the energy transition as the UAE hosts the COP28 UN Conference on Climate Change. Home to a wide range of clean energy innovations and the International Renewable Energy Agency, the country’s role as host of the conference will shape the agenda, which is set to focus on decarbonising five sectors – power, road transport, steel, hydrogen and agriculture – thereby reducing energy costs and enhancing food security. With building construction and cement responsible for more than 50% of global emissions, COP28 is also likely to include efforts to decarbonise these areas of the global economy.
Future Trade Growth
A brighter economic outlook has encouraged Gulf countries to invest in projects to enhance long-term regional integration and trade – particularly in transport. A promising development was the revival of the GCC Railway project, which would run from Kuwait City in the north through Jubail and Dammam in Saudi Arabia before passing through Manama in Bahrain and Doha in Qatar (see Transport chapter). The line would then return to Saudi Arabia and pass through major areas of the UAE − Abu Dhabi, Dubai and Fujairah – before moving south to Muscat in Oman. The ability to move large-scale goods by rail would augment connectivity and regional trade.
In December 2021 the six leaders of the GCC countries agreed to establish the GCC Railways Authority to oversee the programme. In the meantime, Qatar, Saudi Arabia and the UAE have taken steps to improve their domestic rail networks and transport infrastructure.
The GCC also launched negotiations with the UK in June 2022 for a region-wide free trade agreement that is expected to bolster renewable energy and food security. Both sides remain committed and negotiations continued in March 2023 in Riyadh, with the next round of negotiations expected to be held in the UK later that year. Like the GCC Railway project, the deal stands to enhance the region’s leverage as a global trade bloc.
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