Gulf Diversification
Oil revenues help fund diversification
The Gulf countries are investing billions of dollars to diversify their economies, which have traditionally been dominated by hydrocarbons.
This is a long-term process, often involving large projects, such as the construction in Abu Dhabi of the world’s first carbon-neutral city. But in many cases, the results are already starting to show. Bahrain, for example, has focused its efforts on building a financial services industry, which is now the country’s main employer, and accounts for about 27 percent of gross domestic product, compared to oil’s 25 percent.
Gulf countries are investing heavily in petrochemicals, and they should have a strong competitive advantage over many producers because they are at the source of the raw material, crude oil.
The UAE government is also encouraging development of cutting edge green technologies. For example, the Abu Dhabi Future Energy Company is spending something like US$350 million on a solar plant, and Masdar is building the world’s first carbon-neutral city. This year, the deal by ABAAR Investments to buy a stake in car maker Daimler included a commitment to invest in electric cars and bring a training centre to the UAE.
In Abu Dhabi, Invest AD is helping lead a drive to build a strong financial services industry, which is a key diversification move in itself, but will also help to channel investment into other new areas of the economy that need growth capital.
The windfall from high oil prices in the mid-2000s is helping fund the diversification process. Gulf export revenues were on average $155 billion 1998-2002, but jumped to $600 billion in 2007 and $875 billion in 2008, as crude oil prices climbed to a peak at $145.6 per barrel.
Soaring oil prices meant hydrocarbons actually played bigger role in the economy in the mid-2000s, and the region’s economies became more closely linked to the global economy than before. According to Nomura research, correlation coefficients for real GDP growth in Saudi Arabia and the United Arab Emirates vis-à-vis global growth increased from -0.65 and -0.15, respectively, in the 1990s to 0.78 and 0.89 in the past six years.
Unlike in previous oil price booms, governments channeled hydrocarbon revenue into new areas, and particularly infrastructure, helping spark a consumer spending binge across the Gulf region. As a result, average real GDP growth accelerated from just 0.5% between 1980 and 2002 to 6.8% in the past six years.
However, according to The Conference Board, the Gulf needs to make more effort to improve the performance of non-oil sectors. According to research carried out by the consultants, output per hours worked in the GCC fell 0.2 percent between 2002 and 2007, once the oil and gas sector was excluded.
The non-oil sector has assumed the lead on growth in Saudi Arabia, accounting for about 70 percent of headline growth since 2003. The finance, construction, transport, communication and petrochemicals sectors have led to solid non-oil growth in recent years, which has averaged 4.6% since 2002 versus 2.7% in the 1990s
But with oil accounting for 88% of total exports, 87% of budgetary revenues and 31% of GDP, Saudi Arabia remains an oil story. However, the Kingdom has been more cautious on spending than in past oil booms, saving 76% of the oil windfall between 2002 and 2008. Public debt fell from over 100% of GDP in the 1990s to 13.5% in 2008.