2023-10-22 12:00:43
The economic weight of the member countries of the Gulf Cooperation Council (GCC) – Saudi Arabia, United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar – is greater than their size would suggest. They form less than 1% of the world population, but some 2% of world GDP, and more than 10% and 20% of gas and oil production. Restrictive measures once morest Russian hydrocarbon exports have strengthened the role of GCC countries as alternative suppliers in energy markets, and events such as the FIFA World Cup, World Expo Dubai and COP28 are consolidating their status as an international hub. GCC countries are striving to maintain their strategic flexibility despite the decoupling between global geopolitical blocs led by the United States and China. This summer, Saudi Arabia and the United Arab Emirates were invited to join the “BRICs,” an informal geopolitical club that brings together some of the world’s largest and fastest-growing economies, including China.
A significant but temporary slowdown in 2023
These countries’ emphasis on strategic flexibility is evident from their active intervention in the oil market. With oil and gas being the pillars of their economy and Russian supply having reduced, the year 2022 was marked by exceptional growth for many GCC countries: real GDP increased by 8.7% in Saudi Arabia and 8.2% in Kuwait. As global growth slows in 2023, OPEC+, the Organization of the Petroleum Exporting Countries, and several other producing countries, including five GCC countries, have reduced oil production. Saudi Arabia made additional production cuts. As a result, and due to sharp increases in interest rates, we expect growth to slow to 0.2% in 2023.[1] across the six GCC economies, with strength in the UAE and Qatar broadly offsetting weakness in Saudi Arabia and Kuwait. Under our assumption of a gradual reversal of oil production cuts in 2024 in some GCC economies, added to possible rate cuts, we forecast a modest rebound in growth in 2024.
The slowdown in activity will have a limited impact on the medium-term outlook for GCC countries. The extension of production cuts has increased the likelihood that crude oil prices will remain around USD 90/barrel in the coming months, above the levels needed to balance the books of most governments in the region. . Since these levels (dubbed “budget balancing prices”) are generally higher than those required to balance countries’ current accounts, GCC countries will be able to maintain twin surpluses (UAE, Qatar) or limit budget deficits resulting from the economic slowdown (Saudi Arabia, Kuwait).
National visions, megaprojects and continuing reforms
In the years to come, the pursuit of national economic transformation agendas will be the main driver of GCC members’ policies. The six countries announced long-term reform programs called “Visions”, with specific objectives in economic diversification, human capital development and green energy supply. Political commitment to these reforms appears strong as the region faces challenges posed by the global shift toward electric vehicles and clean energy. The peak in oil demand expected within five to ten years poses a significant challenge for GCC countries, where 30 to 50 percent of GDP is linked to the hydrocarbon sector. For this reason, financing and facilitating new projects within these national “visions” will be prioritized, and we expect the region’s sensitivity to oil prices to be particularly high in the years to come.
Investments in these projects are expected to increase at a sustained pace. In Saudi Arabia, they have already accelerated in the tourism and entertainment sectors. As for investments in even larger “megaprojects,” such as NEOM, a huge and sustainable city in the desert, or the King Salman International Airport, they are only just beginning. Over the past two years, public sector investment has surged in the UAE and the country leads the region in solar energy. Other GCC countries will follow their larger neighbors, although the scale of public investments will vary.
The effectiveness of these projects will strongly depend on reforms of tax frameworks, the energy sector and the structure of labor markets. Although there is still much to do, we have seen concrete improvements in this area in recent years. In Saudi Arabia, for example, fiscal dependence on oil has been reduced through the introduction of value-added tax and corporate income tax. Caps on retail fuel prices are beginning to be adjusted to narrow the gap with market prices, and electricity generation from solar and wind sources has increased by 61% annually since 2015. Female labor force participation rates have jumped in Saudi Arabia, the United Arab Emirates and Qatar. The continued upward trend in this rate should improve the long-term prospects of these countries, especially as they have the best demographic profiles among all emerging markets.
Reasons to hope for a strategic status quo
The tragic conflict between Israel and Hamas fuels concerns regarding the region’s prospects, but we believe that GCC member countries will ultimately opt for the strategic status quo. Their long-term development agendas require avoiding another geopolitical conflagration in the region, and any punitive rise in oil prices might harm their oil industry by further accelerating the global trend toward electrification. The unpredictable nature and scale of the conflict will, however, require close monitoring.
Supported exchange rate regimes
Meanwhile, following cycles of rapid interest rate increases, regional inflation has declined from 2022 peaks. The peg to the US dollar (or, in Kuwait, to a basket of currencies including the dollar) ties the monetary policy decisions of the GCC countries to those of the Federal Reserve. This time, trends observed in the US and GCC economies have largely coincided, making recent rate hikes an appropriate response to GCC growth and inflation dynamics, although the region’s monetary authorities might intervene in the money market to alleviate intermittent liquidity shortages, as the central bank of Saudi Arabia did in 2022. In the United Arab Emirates, authorities are preparing to adjust the regulation of the real estate sector rather than monetary policy to limit the risks of falling real estate prices in Dubai, which might be negatively impacted by rising rates. In Dubai in particular, state-controlled entities tend to be vulnerable to significant fluctuations in the real estate sector.
Despite recent initiatives to strengthen the region’s financial ties with China and other emerging markets, GCC member countries have maintained significant US dollar reserves to defend their fixed exchange rate regimes. Although these countries’ international reserves have declined in recent years, their level remains higher than that of many other regions. We see little imminent risk of a policy shift in exchange rate regimes, especially as we believe US policy rates have peaked.
[1] Weighted by purchasing power parity
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