GCC needs diversifications to sustain growth as oil prices fall

JEDDAH — Despite the first shock of the global financial crisis on GCC countries in the end of 2008 that resulted in the decrease of foreign financial investments in Gulf sovereign funds valued at approximately $1.4 trillion back then, still, GCC countries showed resilience in terms of shock absorption and dealt with aftershocks in record time, the Gulf Organization for Industrial Consulting (GOIC) said in its report “Repercussions and Available Options” in the face of oil prices decline. Even some European countries like Germany and Greece could not overcome the crisis that way. GCC countries’ strength was in their reserves of financial surpluses and the cash flow after the gradual increase of oil prices to approximately $107.5 per barrel in 2011. In addition, these countries adopted economic measures to deal with the repercussions of the crisis. After the signs of oil prices decline end of 2013, OPEC member states could not redress this drop by reducing production estimated at 32 million barrel a day which exceeded global demand. Since the global demand was valued at approximately $30 million, there was a surplus of supply, particularly with shale oil production in the USA which contributed to the decreasing of oil prices. “To add insult to injury, the global demand of oil declined in parallel with an internationally slowing economic growth. Thus, oil prices reached approximately $28 to $30 per barrel, a first since 2003,” the report noted. Economic sectors in GCC countries, particularly industries, construction and commerce, witnessed a remarkable prosperity throughout the last decade. In this regard, KSA and UAE have become key players in the world of commerce and investments, particularly in the Arab world. GCC countries secured huge financial surpluses between 2005 and 2015 of approximately $416.3 billion in 2014. A large share of these surpluses was spent on infrastructure which provided liquidity to banks allowing for the development of private sector investments. The GCC industrial sector received foreign investments worth approximately $53 billion contributing to about 15% of the GCC GDP. Traditional industries such as food and aluminum industries in the GCC became stronger, while new industries were born like ship production and aircraft spare parts. Furthermore, GCC countries offered financial support to other Arab economies that suffered from the so-called Arab Spring like Egypt, Jordan and Yemen. Thus, oil is at the core of the GCC development process. It is the economic shield against financial crises and shocks. Therefore, the current drop of oil prices will undoubtedly have negative repercussions on national economies in GCC countries, notably mid-term and short-term consequences. “This is why it is necessary for GCC countries to start looking for new sources to finance their budgets, as oil’s share is currently 75% of these budgets,” the report noted. In this regard, oil income is expected to drop to about $287 billion in 2016 should oil prices remain the same. If GCC countries are counting on the growth of non-oil sectors of about 3% per year to compensate for the shortage of oil income, this growth is not enough to cover the demographic growth rate and is unsustainable, for the momentum pushing growth forward in these sectors has always been backed by oil surpluses providing necessary financing for investments on the one hand and purchasing powers of its products on the other, in addition to the financing of the expansion of necessary infrastructure to attract and sustain investments, report said. The GCC’s endeavors of diversification have created a positive environment for non-oil economic activities should oil income drop. In fact, the economic pattern adopted in the past decades aimed at diversifying production base to develop GCC infrastructure, update economic legislations, develop institutions, and prepare the private sector to play a bigger role in the development process. Strategic decisions also need to be made in terms of economic reforms like the gradual lifting of subsidies, particularly hydrocarbons, the shift towards renewable energy, the deeper role of the private sector in development, the participation of the private sector in decision making, the preparation of Gulf citizens for a bigger participation in the private sector, the diversification of export base and income and profits taxation.