News Middle East04 Jul 2019

GCC:Economies, though resilient, need to accelerate transformation

| 04 Jul 2019

The combination of significant reserves of liquid assets and low debt levels can finance the local governments' ambitious economic transformation programmes, thereby creating a plethora of opportunities for most sectors of the economy, says the international management consulting firm Oliver Wyman.

In its report titled “The Arabian Gulf economies – Asset Rich, Transforming and Full of opportunities”, Oliver Wyman maintains that the Gulf economies are not entering a period that might lead to deep economic turmoil but are instead fundamentally resilient to turmoil.

GCC economies (and societies) will have the precious lead time they need to transform into post-oil economies, because fossil-fuel substitution will not happen as fast as many people believe it will.

Strong asset position

The Gulf economies have $43.7trn in liquid and quasi-liquid assets ($3.3trn in sovereign wealth funds and $40.4trn in proven oil & gas reserves) – which equates to $841mn in such assets per capita. This will provide the required collateral to finance the formidable economic transformation and diversification plans they are implementing.

Revenue diversification and deficit control

GCC governments' dependence on oil & gas sales for revenue is trending downwards through the introduction of taxes. The VAT launch in the UAE, Saudi Arabia, and Bahrain has proved to be a success beyond the revenue it has generated. Massive current account surpluses, relevant fiscal surpluses, and low debt levels have made the Gulf economic fundamentals among the strongest in the world. After the oil price fall of 2014, there was significant deterioration of these fundamentals. Five years on, they are weaker but have stabilised.

Fossil fuel substitution

Total energy demand will continue to grow steadily in the foreseeable future. However, this will go hand-in-hand with the rise of renewables, which is evidently unstoppable and a boon for the future of the planet.

It is expected that, over time, cleaner sources of energy will assume a larger share of the energy supply. Moreover, while it is expected that the substitution of fossil fuels with cleaner sources of energy will continue unabated, it is worth noting that the Gulf region’s cost per barrel is the lowest in the world. This means that the last barrel of oil will be extracted in the Gulf.

Transformation and diversification

Most Gulf countries have now embarked on ambitious transformation and diversification programmes, and this will result in a declining contribution of the oil & gas sector to GCC GDP. The UAE, a pioneer for change in the region, has a diversified economy with oil & gas representing only 30% of its total GDP. All other Gulf countries have also started major programmes, albeit at different speeds. In Saudi Arabia, which makes up almost half of the region’s GDP, changes are currently in full swing. They have, globally, one of the most ambitious programmes being implemented – one that is delivering a visible impact on the country’s economy and society.

There is more to foster the transformation ahead than just the strong assets position and the lead time from fossil fuel substitution: a growing population, substantial fixed capital investments, and the GCC countries’ stability in general, are – and will continue to be – key enablers of this transformation.

Population

The GCC’s population is young (30% are below the age of 21 this year) and it is expected to continue growing over the next 10 years. Alongside this, there is a positive trend in the population’s literacy level, with 32% expected to have completed tertiary education by 2025. This young, more-educated group will be the workforce of the future. Population growth will also increase internal consumption and therefore support GDP growth.

Substantial investments in fixed assets have enabled the remarkable transformation of the UAE economy, and the same is now happening with other GCC countries, with Saudi Arabia leading the pack. These investments are putting in place a state-of-the-art infrastructure that will make the Gulf countries one of the most attractive regions in the world in which to live, work, invest, and create. Business friendly regulations, low tax regimes, and relaxed immigration policies have contributed to the ease of doing business.

Looking forward

Oliver Wyman sees the following areas as providing the most relevant growth opportunities over the next five years:

• Overall restructuring of the public sector;

• Diversification into renewables and petrochemicals by the national oil companies and utilities;

• FinTech boom, and consolidation among financial services players;

• Revamping of the transportation sector and the construction & modernisation of the associated infrastructure;

• Expansion of tourism in terms of both what is on offer for tourists and source markets for tourism;

• Transformation of the private and public sectors driven by digitalisation and analytics.

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