During a financial crisis or in times of uncertainty, it is possible to miss the big picture. Years of strong oil prices have enabled GCC governments and their respective economies to increase their spending and build reserves. Saudi Arabia, the largest economy in the region, serves as a proxy to study. Contextually, it may be relevant to compare three time periods to appreciate the bigger picture: 1998, 2008 and 2014. According to the Institute of International Finance and the World Bank, during the last 15 years, the region witnessed three inflection points where it has braced the lowest oil price (1998), suffered collateral damage inflicted by the global financial crisis (2008) and experienced steep oil price decline (2014).
As compared to 1998, the GCC region today is well poised to weather any storm given the large surpluses that it has built during this period. Saudi Arabia’s foreign reserves, at about $800 billion, are nearly 17 times greater than they were in 1998. The period marked an increase in the overall economy, in terms of Gross Domestic Product (GDP) and the attendant increase in stock market capitalisation and liquidity. During this period, the population also increased. Growth in GDP outpaced population growth and this has resulted in higher growth per capita.
It is also insightful to focus on spending for Saudi Arabia. From a modest $50 billion (Dh183.6 billion) in 1998, overall spending has increased fivefold to $260 billion; current expenditure increased by a factor of 4, while capital expenditure increased by a factor of 16. These expenditure increases most likely explain the lower fiscal balance today compared to earlier inflection periods. During this period, the stock market soared from an index level of 1400 to 7900, though in the interim it had reached 20,000. Measured in GDP terms, the market cap/GDP ratio is still a modest 55%, providing room for significant market cap expansion.
The growing demographics punctuated by a young population is triggering demand boom for several goods and services including banking, telecoms, housing, retail products and capital goods. The increase in current expenditure has unleashed a consumption boom, while the increase in capital expenditure has resulted in infrastructure spending focused on power, roads, aviation, water, ICT, education and health care.
The period also witnessed significant regulatory developments, with several countries including Saudi Arabia launching independent capital market regulators to modernise capital markets and attract new players. Several other sectors, like telecoms, insurance, etc, also witnessed a launch of independent regulators.
However, economic and investment expansion has not been accompanied by improvements in business environments, as reflected by the World Economic Forum’s Global Competitiveness Report. While performance on issues like starting business, infrastructure and access to loans were better, critical parameters like ease of doing business, health and primary education, labour market efficiency and capacity to retain talent deteriorated from 2008 to 2014.
The GCC economies must therefore prepare for oil price volatility and utilise their enormous reserves to rapidly diversify their economies by improving the business environment. While the big picture is promising due to years of strong oil prices, the GCC needs a qualitative change in global rankings to tap the vast potential available in several key sectors including banking, telecoms, infrastructure and services. Improvements in these indicators require a variety of reforms at various levels and their subsequent successful implementation. As part of their implementation strategy, GCC governments should form Key Performance Indicators (KPIs) for relevant ministries. The need to accelerate reforms and diversify the economy is acute, especially given the ever increasing break even oil price required to balance the budgets of GCC economies. This is the new reality faced by GCC governments and economies in the new year!
— M.R. Raghu, a member of CFA Society Kuwait
