Report: GCC economic growth closely linked to oil prices

DOHA, March 13 (KUNA) -- There is a close link between GCC economic growth and oil prices and oil surpluses are the first and biggest source of foreign currencies necessary for private and public sector financing to carry out development and investment projects, showed an economic report on Sunday.
Oil is the main source of income and the backbone of GCC economies, as its share of the gross dometic product (GDP) is approximately 47%, said the report released by the Gulf Organization for Industrial Consulting (GOIC).
The last decade was full of major events that had composite and overlapping effects on economies in the GCC and the region in general. For instance, there was an oil boom over two phases: the first was gradual and reached its peak in 2008, when the average price of an oil barrel was 94.5 USD for the OPEC basket. The second key event was the global financial crisis that started in the US and reached most world countries, it said.
The first shock of the global financial crisis on GCC countries in the end of 2008 resulted in the decrease of foreign financial investments in Gulf sovereign funds, worth USD 1.4 trillion back then. Still, GCC countries showed resilience in terms of shock absorption and dealt with aftershocks in record time.
GCC countries' strength was in their reserves of financial surpluses and the cash flow after the gradual increase of oil prices to approximately USD 107.5 pb in 2011. In addition, these countries adopted economic measures to deal with the repercussions of the crisis, it added.
Oil prices continued to increase gradually after the global financial crisis to a new peak in 2012 when the price was about USD 109.5 pb and approximately USD 150 for some types of oil.
Since the global demand was valued at USD 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 USD 28 to 30 pb, a first since 2003.
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. In fact, they are a bridge linking Arab countries with Southeast Asia. They have witnessed a remarkable surge in FDIs from 2005 to 2014; incoming cumulative foreign investments increased by a compound growth rate of approximately 19.9% per year, twice the global annual rate of 9.6% for the same period of time, it said.
Moreover, the sturdiness of Gulf economies transformed them into safe havens for foreign capital during and after the global financial crisis. These countries had the suitable economic environment and were ready to welcome investments fleeing the crises. As a result, GCC countries attracted about USD 285.2 billion in 2009, hence 1.6% of the cumulative foreign investments targeting countries all over the globe.
GCC countries secured huge financial surpluses between 2005 and 2015 of approximately USD 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 USD 53 billion contributing to about 15% of the GCC GDP. Traditional industries such as food and aluminium industries in the GCC became stronger, while new industries were born like ship production and aircraft spare parts, it noted.
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.
In this regard, oil income is expected to drop to about USD 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.
In spite of the humble results of the economic diversification efforts in the GCC, the endeavours 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. In this regard, GCC countries adopted serious development strategies to boost competitiveness and free national economies.
This will have positive repercussions by limiting the impact of the drop of oil prices. 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.
In fact, this drop makes it necessary for GCC countries to deal with a potential scenario in the future when the world will completely move to renewable energy with a reduced reliance on oil. The worst case scenario is the depletion of oil which makes it mandatory for GCC countries to restructure their economies in line with future scenarios. This has always been a challenge that planners and decision makers had to face in the GCC, the report concluded. (end) nnd.mt