GCC needs new revenue streams and improved productivity
According to investment industry insiders, although over the past two decades GCC countries have significantly increased the contribution of non-hydrocarbon GDP to their overall GDP, the annual budget spending still continues to be driven almost entirely by income from export of hydrocarbons. Despite attempts to diversify the economy, and make it less reliant on oil income, countries in the region have not been able to fully wean their economies’ dependence on global oil prices. Kuwait and Saudi Arabia are the Gulf nations that are most dependent on oil revenues.
The latest report from Saudi-based investment firm Alkhabeer Capital shows that since the global financial crisis, the GCC economies have consistently outperformed their global peers, but it has been solely on the back of robust oil revenues. Alkhabeer Capital noted that hydrocarbon revenues in Qatar and UAE account for close to 60 percent of the total revenues of the countries, while in Kuwait and Saudi Arabia the figure is close to 93 percent and 90 percent respectively.
This is in contrast to other resource rich economies such as Norway, where revenues from oil account for just about 30 percent of government revenues. Alkhabeer said the UAE, specifically Dubai, has been exemplary in diversifying revenue streams and building on its non-oil growth, which is projected by the IMF to expand by over four percent annually over the next few years.
With its recent rights for the World Expo 2020, Dubai will be able to transform itself into a hub for retail and wholesale trade and tourism. Abu Dhabi has the highest hydrocarbon reserves and generates more than half of the GDP in the UAE. The government envisages cutting the capital's reliance on oil to 36 percent of GDP by 2030.
The report also said the overall fiscal position of the GCC remains stable but there are several key steps that need to be taken to lower dependence on oil revenues and mitigate long term risks that may arise as a result. It noted: "With the IMF projecting dramatic change in the fiscal environment by the end of the decade, a close watch must be kept on the fiscal policy stance of the region's governments, which must be cognizant of the prospect of lower hydrocarbon revenues.
"A well poised strategy must be put in place to diversify the GCC economies and increase their non-oil revenues to mitigate long term challenges. Another pressing issue that must not be ignored is the subsidy bills for Gulf governments, with energy subsidy costs in some of the GCC countries as high as 28 percent of government revenues."
Meanwhile the latest quarterly Economic Insight report, by the Institute of Chartered Accountants in England and Wales (ICAEW), concurred with the Alkhabeer view and held that falling oil prices will pose a challenge to GCC oil exporters unless governments step up their diversification efforts and develop more export industries.
The accountancy and finance body said GCC economies are now more dependent on commodity exports than they were 10 years ago despite the diversification agenda. Commodities still account for 86.8 percent of Saudi Arabia's total goods exports by value and nearly two thirds of the UAE's. Even Bahrain, with the fewest hydrocarbon resources of any GCC economy, relies on commodity exports for nearly three-quarters of goods exports, the report said.
Vernon Soare, executive director, ICAEW, said: "With global oil prices forecast to fall over the medium-term, the need to broaden the industrial base is becoming more pressing. "While the GCC economies have the infrastructure and financial means to advance their manufacturing output and export potential, more attention needs to be paid to fostering innovation in order to compete more effectively in international markets."
While the UAE ranked 42, followed by Bahrain at 43, Oman at 47 and Saudi Arabia at 50 were all in the top half of the World Bank's Knowledge Index, and show marked improvements over their previous position in the list, Qatar dropped 5 points to reach 54 and Kuwait dropped 18 points to rank 64 on the list, which compares 145 countries and their ability to develop modern competitive industries.
The report noted that with competition from other emerging markets intensifying, the GCC countries must now improve education, increase labor productivity and attract more foreign direct investment to progress their skill- and technology-intensive manufacturing sectors. The study also added that improving the pace of labor productivity, or output per worker, will also help economies of GCC States to prosper, in the cut and thrust of international markets. Despite strong GDP growth and high oil prices, several of the GCC economies have experienced falling labor productivity for some time, a trend which accelerated after 2009.
Average annual labor productivity growth in Kuwait fell from 6.9 percent in the five years to 2007 to zero percent in the five years to 2012. In Bahrain, labor productivity has actually fallen in recent years, declining by one percent in 2012 compared to the previous year. However the report said the amount of output produced per worker is improving in the UAE with marginal productivity growth recorded in 2011 and 2012. Saudi Arabia, Oman and Qatar have also recorded improvements in productivity over the five years to 2012.
"Strong investment will continue to see growth across the GCC outpace the rest of the world, but the prospect of falling oil prices due to increasing global supply, will put pressure on the GCC economies to diversify and grow their high-tech manufacturing industries. Fortunately, the region will remain a key destination for foreign direct investment flows over the coming years, providing a welcome boost to labor productivity by introducing domestic workforces to new technologies, production techniques and management procedures, added the report.
The report also showed the pace of expansion in Saudi Arabia is expected to remain strong with the economy forecast to grow 4.3 percent in 2014 while economic growth of 4.5 percent is expected in the UAE this year. Sustained investment in infrastructure will support growth in Qatar over the next few years, with GDP expected to rise by 6.3 percent in 2014 while GDP growth in Oman is expected to fall 3.6 percent in 2014 as growth in oil production slows, the report said.
It added that growth in Bahrain will dip slightly in 2014 as it suspends expansion of its main oil field while GDP growth in Kuwait is expected to reduce to 2.5 percent in 2014, down from three percent in 2013, due to weaker oil production.