Against a backdrop of high oil and gas prices on international markets, global inflation and enhanced geopolitical risk due to Russia’s invasion of Ukraine in February 2022, CEOs in the Gulf were comparably more optimistic than their global counterparts about the prospects for 2023 in the Global CEO Survey conducted by OBG in late 2022. Buoyed by surging commodity prices, 62% of respondents in the region expected that conditions would either improve or significantly improve. This elevated optimism rating is 22% higher than the average for all regions surveyed and reflects the positive recent economic performance of GCC members, with the IMF estimating that the collective GDP growth rate for the bloc reached 6.5% in 2022.
According to the fund, higher commodity prices were key in cushioning the region from some of the more widespread effects of tighter global financial conditions. Indeed, commodity price fluctuations were cited by the largest proportion of CEOs (38%) in the Gulf as the most important external factor impacting business conditions, followed by changes in demand from top trade partners, regional conflict and supply chain disruptions (each 16%).
Challenges
In terms of domestic factors most likely to negatively impact corporate performance, 24% of CEOs in the Gulf chose inflation, followed by the availability and cost of credit (23%), and labour shortages (15%). This mirrored international trends, with global respondents pointing to inflation (33%), the availability and cost of credit (18%), and labour shortages (12%) as the most pressing domestic concerns.
For many emerging markets, one of the biggest issues has been US dollar-denominated debt. Higher US benchmark interest rates – an essential tool to dampen domestic inflation – increase debtor countries’ costs significantly. If this occurs at a time when emerging market policymakers would traditionally turn to public spending and support packages to ease economic pressure, it can compound matters.
Expenditure & Revenue
Despite such challenges, optimism among business leaders in the Gulf was illustrated by their keenness to ramp up capital expenditure in their domestic markets; 43% reported that they expect capital spending at their firm to increase in the year ahead, compared to a global average of 38%. When it came to financing such future capital expenditure, 55% anticipated tapping internal financing, 35% would seek bank loans, 8% would utilise initial public offerings or new share issuances, and 1% each would turn to bonds and development funds.
Energy revenue has been a key factor in bolstering public finances, with the IMF estimating that in 2022 the GCC’s overall fiscal surplus exceeded $100bn, or 7.3% of the region’s combined GDP. Such positive conditions have provided room for Gulf countries to press ahead with plans to accelerate economic diversification, as well as ease long-term dependence on oil and gas revenue.
The region’s traditional reliance on hydrocarbons as a driver of growth featured prominently in the responses of CEOs when asked for their views on the long-term threats to economic stability and development in the region: 19% cited dependence on hydrocarbons, second only to regional conflict (38%). Other key challenges were government subsidies (12%) and climate change (8%).
Strategy
In recognition of the risks posed by a lack of diversification, in 2022 Gulf governments announced a series of strategies to boost high-value, non-oil sectors. For example, in October of that year Saudi Arabia launched a new National Industry Strategy with an aim to triple industrial output and increase the value of industrial exports to $149bn by 2030. The plan calls for increasing the number of factories from 10,640 in 2022 to 36,000 by 2035, and adding SR1.3trn ($346.6m) in new investment in manufacturing.
Elsewhere, in November 2022 the authorities revealed the UAE Tourism Strategy 2031, which seeks to increase the sector’s contribution to GDP by an average of Dh27bn ($7.3bn) a year through to 2032 to Dh450bn ($122.5bn). Meanwhile, 2022 also saw the launch of Oman’s Green Hydrogen Strategy, which aims to invest $140bn through to 2050 in order to increase its output of the lower-carbon energy from 32,500 tonnes per year to up to 3.7m and 8.5m tonnes per year in 2040 and 2050, respectively. These efforts are in line with the country’s goal of reaching net-zero emissions by 2050.
Indeed, digital transformation and technological innovation are widely viewed by GCC governments and business leaders alike as key to enhancing productivity, boosting competitiveness and unlocking new economic expansion opportunities across the region. When asked which strategy was the most important for driving corporate revenue growth over the next three years, 27% of CEOs in the Gulf chose investment in technology and innovation – making this the most popular response by a significant margin. More specifically, artificial intelligence, and automation and robotics were cited as the technologies with the most potential to improve in-country business operations, at 20% and 18%, respectively.
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