Future Economy of GCC

Several countries in the west are suffering slowdowns in the growth of their economies. United States, for instance, is being affected by credit crunch and the prices of houses. The case is different among countries within the Gulf Region whose economies are experiencing increasing rates of growth. Inflation in these economies is an issue just like the case with other economies. This is caused by the bottlenecks in supply and the escalating rent and food prices. This has been blamed on the existence of too much money chasing few services and goods. Oil and gas play a vital role in the growth of the economies in these countries. Other sectors like tourism continue to boost the economies in these regions. The trend in the growth of the economy is of paramount concern in determining future growth drivers, in the country. This paper seeks to analyze the future economy of GCC by analyzing the main drivers of the economy in these countries.

Discussion

The Gulf Cooperation Council (GCC) consists of the UAE, Bahrain, Kuwait, Oman, Saudi Arabia, and Qatar. These states are expected to experience robust growth in GDP and population over the coming decade. Nominal growth in GDP is expected to reach 2 trillion US dollars by the year 2020. This portrays a positive economic forecast that is favorable for the performance of these economies if managed well. However, if this growth is not managed there will be negative effects such as shortage of power and soaring prices. The main challenge for the states in the Gulf Region lies in the management of food, water and energy resources. This will ensure the achievement of high standards of living and growth that is sustainable, in the long run. Future resources in these states are the main drivers of future economic growth, and they, therefore, determine future growth in these countries (Murshed, 2008).

Energy Resource

Energy sector is the main driver of economic growth in GCC region. The region enjoys wide production of oil and natural gas all over the world. This results in increased revenue generation from the energy sector. With the enormous gas and oil deposits within the region, conservation of energy within the region may seem to be unnecessary. The growth in demand for gas and oil is projected to increase. This is due to the rising demands within the emerging markets. Countries within the Gulf Region control 40% of oil reserves in the world and 23% of gas reserves in the world. The dependency on the GCC in the provision of energy, in the world, will grow by year 2020. The increased dependency means there is increased market for the energy produced within this region. Conservation of energy by these states is necessary in ensuring future growth in the economy. Governments within the GCC are developing mechanisms regarding the management and conservation of gas and oil. The energy reservation is vital in ensuring manufacturing of refined products, such as plastics and petrochemicals, for purposes of export. The region will also invest a lot of resources in the production of cleaner energy. This is favorable for the environment and will serve to supplement the domestic market requirements. All these policies of ensuring alternative energy use present a forward looking approach that is key in solving the problems, which may emerge in the future due to energy shortage. There is increased competition throughout the world in the energy market. This factor acts as a driver for the Gulf Countries, so as to start investing in alternative sources of energy. Investment in alternative energy sources will ensure that these regions have enough capacities for export, so as to meet the increased world demand. If the countries within this region develop technologies that will offer a competitive advantage, the performance of their economies will be boosted.

The GCC countries are taking measures that will help them in diversifying their operations. This will help reduce the dependence on gas and oil as their only source of energy and a key driver in the economic growth. Diversification will help the region in adapting to vulnerability in international demand shifts. This will also add to the creation of employment in the region especially in industries that are knowledge intensive. Over the coming decade, GCC will engage in the investment process of adding value to fossil fuel exports. This will ensure the creation of local industries, which are energy intensive hence contributing to increased employment within the region (Molyneux, Iqbal & Palgrave 2005).

The GCC countries will also invest in the sector of power production, so as to meet the increasing demand. This policy will ensure there is no shortage in the production of energy. Demand in electricity is expected to rise by an average of 8% per year. The expected increase in demand may fuel seasons of electricity shortage and thus GCC may take advantage in generating energy. Investment in renewable energy is another strategy taken by region with the objective of expanding their economies. Investment in alternative energy such as solar and wind will ensure a diversified economy. This is a benefit for the economy due to the existence of increased demand in the sector of renewable energy. This sector will help solve the shortage in the supply of electricity hence freeing up gas and oil for the purposes of processing and exporting. Other policies include the development of clean energy production. With the increasing environmental concern and changes in global climate concerns, there will be increased demand for clean energy. There are countries that have set emission limits in the energy sector. Investing in technologies that produce clean energy presents an opportunity for the GCC economies.

There are expectations that the oil market will continue to acquire support from the markets that are emerging. These markets have a growth in oil demand that is expected to remain robust and offset the declining demand in OECD. Energy agencies project an increased demand in oil in the coming years. The energy agencies do not expect a situation that was experienced in year 2008/2009 when there was decreased demand for oil and plummeted prices. The increased growth in the demand for oil implies there is increased supply opportunity. This will generate revenue through increased market for the GCC region.

Table 1

% Change in Energy Demand for GCC and Other Economies

GCC

US

Japan

India Germany

Aggregate

Actual

Estimates

Projected

2007

6.3

7.9

1.7

-1.1

6.1

1.7

2008

8.4

7.3

-2.2

-2.3

6.0

1.1

2009

2.8

5.4

-2.7

-6.2

6.1

-6.1

2010

5.4

8.1

0.2

1.2

6.4

-0.3

2011

5.9

5.7

-0.1

0.6

6.2

0.9

2012

5.4

5.7

0.1

0.6

6.4

1.2

2013

5.9

5.5

1.2

0.8

6.7

1.2

2014

5.5

5.5

1.2

0.6

6.4

2.3

Challenging Environment

The weaker outlook in the global environment provides an economic environment that is challenging towards the performance of GCC. This provides a risk in the prices of oil. The trade within the GCC is oriented to the emerging markets and especially Asia. Lower growth in the economies that are developed is likely to generate headwinds in the presence of weaker tourism and trade activities. This will also create a dent in the growth activities of the emerging markets. The flow of capital within these regions may also suffer and may be coupled with a decline in earnings and valuations on external assets in GCC. The structural strength of economies in GCC is expected to allow sustained growth of states. Governments are working towards ensuring diversified economies and thus development within GCC. Continuing turmoil within financial markets in the international arena implies difficulties in accessing GCC market. The market within the GCC region remains favorable and thus there is the expectation of increased growth in these economies (Cordesman, 2009).

Government Expenditure

The surge in spending by the government will positively contribute to the growth of the economies within the region. The Arab Spring movements in MENA region, Bahrain and Oman unrest, have focused GCC leaders minds. The response of these leaders has been committed at the surge of accelerating measures to address social issues and unemployment within the region. This is achievable through government spending and creation of employment opportunities. Government spending is focused on the infrastructure and housing sector. These measures contribute to already existing fiscal policies that are expansionary. Government spending within the Gulf Region has risen since the periods of global financial crisis. The levels of public spending have boosted the growth of the economy especially in the non oil sector. This helps in creating confidence in the growth of the economy even in situations of global climate that are uncertain and changes in the political conditions within MENA region.

Table 2

Gross Domestic Product Growth in the Non Oil Sector

Saudi

UAE

Kuwait

Qatar

Oman

Bahrain

GCC

2007

2008

2009

2010

2011

2012

4.6

9.1

9.7

30.9

13.1

9.2

9.2

4.3

6.3

6.1

27.9

16.1

7.0

7.8

3.8

0.6

-1.2

9.8

-0.8

3.4

2.7

4.3

3.3

3.5

8.4

3.0

4.6

4.3

5.5

3.0

3.0

8.5

4.3

0.8

4.7

5.0

2.8

3.0

9.0

5.0

3.2

4.6

Source IMF, National Authorities, Samba.

There is a projection of an increase in the non oil gross domestic product within the GCC economy. When this is combined with the surge in the production of oil in the year 2011, it will raise the aggregate growth in the real GDP. The projection of GDP in 2011 was made at about10% since the output was raised with the objective of offsetting the Libyan output loss. Saudi Arabia was the principal beneficiary with output growth that exceeded 12%.

Table 3

GCC Oil Production

Saudi

Kuwait

UAE

Qatar

Oman

Bahrain

GCC

% Change

2008

2009

2010

2011

2012

9.12

2.57

2.25

0.84

0.67

0.18

15.93

3.9

8.09

2.27

2.26

0.77

0.72

0.18

14.29

-10.3

8.23

2.30

2.30

0.82

0.77

0.18

14.60

2.2

9.25

2.47

2.51

0.82

0.78

0.19

16.02

9.8

9.00

2.35

2.35

0.82

0.81

0.20

15.53

-3.1

Source: PFC, Samba.

This trend may not continue with oil from Libya getting back to the market and oil outlook fundamentals getting weaker. The oil sector in GCC may not have much impact on the economic growth of these economies given these conditions exist. The declining output in crude and oil prices that are weak may drag the performance of the economy. Despite a sustained growth in the non oil sector, the aggregate growth in gross domestic product may sharply slow down. This may be caused by the lagging growth in the oil sector which has proportionately large contribution to the growth of the economy within the region. The growth in GDP, in these economies, may significantly slow down unless these factors are put to consideration.

The increment in oil prices and the increment in the production of oil within the region contributed to wind fall of large earnings that are expected to be strengthened by the fiscal policies. Softer oil prices in the region and minimized gains in the production imply a weakening fiscal position within the GCC. This results in vulnerability of finances and oil prices (Economist Intelligence Unit, 2010).

Minerals

The larger market in the region has been in the sector of energy investment. Energy sector plays a vital role in the development and growth of economies in this region. GCC region is yet to exploit the non oil minerals. This creates a lucrative environment for increased revenue generation that positively impacts the performance of the economy. The minerals found within the region include silver, iron, gold, bauxite, and copper. The wealth in minerals within this region has been underexploited since the region has had more emphasis on gas and oil resources. This trend has changed due to the existence of the need to diversify the economy and the objective of job creation. Foreign corporations are also playing a crucial role in exploiting the mineral resources within the countries in this region.

The mineral deposits within the region remain untapped. Investment in this resource sector could result in the establishment of a large, substantial industry. The performance of this industry can be well exploited if the government grants exploitation and investment licenses to these resources. This industry will serve key sectors of the economy including building up the job opportunities. However, investing in exploration is risky and companies, who are engaging in the industry, need to be risk takers. The legal framework guiding international investment in this sector is not tested and thus foreign investors fear joining this industry. The expectations lie in exporting these minerals in raw form. The initial focus on industries majorly focuses on exportation. It is projected that, over the coming years, new industries will emerge and will focus on operation in the local industry. The sector of mining is vulnerable to international prices shifts. This sector is relatively labor intensive as compared to gas and oil in the energy sector. This sector creates relatively higher levels of employment as compared to gas and oil. The opportunities created in this sector present a chance for long term employment. The creation of employment opportunities boosts economic growth. This will also serve a vital role in improving the living standards of the population. Opportunities are created both in the production level and management of these industries. The presence of local management in these industries is currently limited due to the newness of these industries, and most people with a lot of expertise are employed by the government. Local management is critical in the navigation of cultural and political landscape. Building up of local expertise and attraction of foreign expertise in these industries may take some time. When this is achieved, GCC will receive substantial reward from this sector and, as a result, the Gross Domestic Product is expected to improve. The GCC countries have made policies aimed at diversifying their operations (S & O, 2008).

Setting of better policies by the government to encourage foreign investment is critical for the growth of the economy. The government should ensure that the inflow of foreign direct investment does not lead to negative impacts in economic performance. The availability of infrastructure and human capital are factors that will encourage the existence of sustained inflows. Foreign direct investment is a significant factor that contributes to additional inflow in revenue. The growth of the economy is largerly influenced by capital inflows. The mineral sector in the GCC can act to attract foreign direct investment since it is unexploited. The attraction of foreign investment in this sector is uncertain but if fulfilled it will positively contribute to the growth of the economy.

UAE’s economy grew by about 3.2% in the year 2011 and was expected to lead to an increment of 3.5% in the following year. Other members of the GCC were also expected to have strong performance in gross domestic product in the year 2012. This performance contrasts the one expected in other countries among the Arab countries since they have suffered a hit by the political unrest. The increment in the gross domestic product within the GCC increased to a level of 5.7% in the year 2011. This was an increase as compared to the previous year that recorded 4.4% with projection of 4.6% in the year 2012. The increment in economic growth, in the year 2011, from the growth seen in year 2010 is attributed to the escalating oil prices. Production of oil in Saudi Arabia, Kuwait, and United Arab Emirates was noted with the objective of compensating the dismal production of oil during the unrest in Libya. The social movement in these countries did not negatively affect the performance of economy in these states due to the presence of high prices of oil. The high prices enabled these countries to manage private consumption and household income as well as maintain fiscal expansion. The case was different in Bahrain since social unrest in the year 2011 left the reputation of the country tarnished as a tourism sector and a financial hub, thus leading to a drop in the growth of the economy from 4.5% in the year 2010 to about 2.5% in year 2011. Growth in the oil sector results in better performance of the economy, in GCC states. Non-hydrocarbon sector is also increasingly contributing to economic growth. With the oil prices remaining high, growth in GCC economies is expected to continue performing well in the future. This is boosted by the investment in the non-oil sector.

The GCC countries have taken measures to ensure performance of their economies. These policies serve to ensure stability in the financial sector. The injection of capital by the governments into the private sector banking encourages more lending into the private sector. The current situation in the GCC countries is different as compared to few decades ago. The existence of elites and professionals is an addition to the growth of the economy. With favorable conditions, growth in the economies of these states is expected to increase even if the growth is constrained by external factors beyond GCC. The economic growth in the world economy, in general, will highly impact the performance of GCC economies.

Diagram 1

GCC Real Economic Growth in%

10

8

6        

4

2

  2005        2006        2007        2008          2009         2010       2011            2012

                                     Non oil growth                                  Real GDP growth

The projection shown above indicates a positive growth in non oil sector since 2009. The trend is increasing which indicates growth is expected to increase in the future. The performance of the economy in this sector is expected to improve. The growth in real GDP is projected to rise in the future despite the fall in 2012 and world financial crisis, which have caused the decline. The policies put by the government in diversification of the economy will boost the performance of the economy in the future given there is stability in the world’s economic situation (Samba Report Series, 2011).

Conclusion

The performance of the economy within GCC is expected to perform better in the future due to the measures put by the government. The diversified economy in the GCC is expected to contribute to better performance of the economy. The projections provided in this study assumed that other factors in the economy remain constant, which, most of all include stability in the growth of the economy.

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