Dubai: Economic diversification efforts of Gulf Cooperation Council (GCC) countries in the recent years to withstand oil price volatility has yielded only limited success, according to analysts.
Now that oil prices have fallen to below $60 (Dh220) per barrel from around $100 in the past few months, the spending plans of most GCC countries will come under pressure that will be reflected in the non-oil economic growth across the GCC.
“Sustainable growth [of GCC economies] that is independent from the vagaries of the international commodities market will require a significant step-up of productive job creation and an improvement in the skills and productivity of their young workforces,” said Moritz Kraemer, S&P’s head of sovereign ratings for Europe, the Middle East and Africa.
Although the statistics from the International Monetary Fund (IMF) gives the impression that the diversification made big changes to the GCC economies, analysts say, countries of the region have a long way to go.
According to IMF [Regional Economic Outlook Middle East October 2014], between 2007 and 2013, GCC non-oil real GDP grew on average by 7 per cent per year, which far exceeds the growth of just over 2 per cent in the oil and gas sector. However, according to S&P, the share of oil and gas in the GCC economies’ GDP has actually risen over the past decade.
Cheap hydrocarbon
“This of course owes mostly to the surge in oil prices over the period, which boosts the nominal value of oil production. Even so, we believe that some of the diversification is to sectors that are themselves dependent on cheap hydrocarbon feedstock for production, such as petrochemicals,” said Kraemer.
The latest IMF regional economic outlook points to the strong correlation between the growth of the non-oil economy to oil price increases, with government spending from rising oil revenue becoming a major transmission mechanism.
Budgetary dependence on oil across the GCC has increased during the recent years. In 2013 the non-oil fiscal balance as a share of non-oil GDP ranged from 23 per cent in Qatar to 82 per cent in Kuwait. The non-oil deficit thus measured increased in all countries except Qatar, when comparing the 2013 number to the 2007-2011 average. This is seen as a reflection of expansionary fiscal policies that recycled some of the windfall oil revenues into domestic economies.
The UAE is the only exception to the trend of government expenditure rising faster than GDP. The oil prices at which the government’s budgets balance have been rising steadily, following the world oil price. Should average oil prices in 2015 hover around the current price of $80, its is estimates that only Kuwait, Qatar, and, barely, the UAE would run fiscal surpluses.
While economic and budgetary dependence seems to have increased over the last half-decade, export dependence has remained stable between 2008 and 2013 in Kuwait and Qatar and fallen in all others — by ten percentage points in both Oman and the UAE. Even so, oil and gas still accounted for 74 per cent of all exports in 2013, from 79 per cent five years before.
