In the wake of fluctuating global energy markets and the ongoing commitment to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+), the Gulf Cooperation Council (GCC) countries are strategically exploring ways to enhance their economic resilience and diversify their economic structuresThe GCC, comprising Saudi Arabia, the United Arab Emirates (UAE), Qatar, Kuwait, Bahrain, and Oman, is seeing a contraction in oil revenues, which is subsequently leading to a slowdown in overall economic growthHowever, significant strides are being made toward reducing dependency on oil, as growth in non-oil sectors becomes increasingly robust.
According to a report released by the World Bank in December, the GCC economies are projected to grow by 1.6% in 2024. Nevertheless, oil production cuts and ongoing global energy price fluctuations are set to restrict oil exports, with forecasts suggesting a 2% contraction in oil revenue for GCC countries next year
During the first half of the year, the GCC oil sector experienced a contraction of 7.5% due to OPEC+ production agreementsNotably, countries like Saudi Arabia, Kuwait, Oman, and Bahrain saw significant declines in their oil sectors, whereas Qatar maintained relative stabilityAlthough the UAE's oil output dipped, this was offset by an increase in natural gas production.
The ambitious reform agendas across the GCC have propelled nations toward notable economic diversificationThe non-oil sector achieved a commendable growth rate of 3.8% in the first half of the year, with expectations of an overall annual growth of 3.7%. The International Monetary Fund (IMF) forecasts sustained growth for the non-oil sectors, estimating 3.7% in 2024 and 4% in 2025. An illustrative case is the UAE, which continues to lead in diversification efforts; its financial services, logistics, and transportation sectors are thriving, reflecting the success of its service-driven diversification strategy
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Saudi Arabia's "Vision 2030" initiative has catalyzed massive investments in tourism and renewable energy, further showcasing the effectiveness of its commitment to diversifying its economy.
However, the fiscal situation within the GCC is divergent, primarily influenced by increased government spending and declining oil revenuesSaudi Arabia and Kuwait are grappling with mounting financial pressures and growing deficits, while Bahrain faces significant fiscal challengesOn the other hand, the UAE has managed to maintain a relatively robust fiscal standing, largely due to substantial reductions in government expenditure and the introduction of corporate income taxes that have diversified revenue streamsIn the medium term, the continuation of OPEC+ production cuts, in conjunction with lower oil prices and elevated fiscal expenditure, poses challenges to improving fiscal conditions across GCC countries.
The reduction in oil export revenues and increased imports have narrowed the current account surpluses for several GCC nations
Both Saudi Arabia and Kuwait are experiencing pressure on their current accounts, while the UAE, Oman, Bahrain, and Qatar have either maintained or bolstered their advantageous positionsThe UAE's economic surplus is not solely reliant on oil revenues; its free trade agreements have spurred growth in non-oil exports, evidencing the gains from its diversification strategyConcurrently, GCC nations are preserving substantial foreign exchange reserves that act as buffers against fluctuations in global financial and oil markets.
Foreign direct investment (FDI) reception across the GCC presents a mixed pictureThe UAE has capitalized on several key reforms aimed at attracting foreign capital, such as streamlining regulatory procedures and relaxing foreign ownership restrictionsThese measures have solidified its status as a major investment destination, drawing significant investments across manufacturing, tourism, and finance
Conversely, Saudi Arabia's FDI inflows have stagnated in 2024, indicating ongoing challenges in boosting investor confidence within the kingdom.
Supporting the financial landscape in the GCC, the banking systems remain robust, characterized by strong capital adequacy ratios, liquidity buffers, low non-performing loan ratios, and effective regulatory oversightDespite the global economic challenges and market volatility, the banks in the region continue to demonstrate solid financial performance, sustained profitability, and sound risk management capabilities, bolstering their stability in an ever-evolving economic environment.
Overall inflation within the GCC has remained low, although the real estate sector is under notable inflationary pressureComparative to other regions globally, inflation rates in the Gulf are moderate; the World Bank anticipates a decrease in the region’s inflation rate to 2.1% in 2024, down from 2.2% in 2023 and 3.5% in 2022. The IMF expects an inflation rate hovering around 2% through 2025 and into the medium term
The stability of inflation rates in the GCC can be attributed to multiple factors including tight monetary policies, generous subsidies, fuel price controls, and the global decline in food prices.
With economic growth anticipated to accelerate in the medium term, driven by a revival in the oil sector and ongoing diversification efforts, the World Bank projects an overall economic growth of 1.6% in 2024, with an acceleration expected from 2025 to 2026, averaging 4.2% during that period.
Despite the GCC nations striving to overcome challenges associated with diversification, oil revenues remain a pivotal factor influencing the fiscal outlook for the regionProlonged voluntary production cuts led by OPEC+, combined with persistently low oil prices, will exacerbate the overall fiscal pressures on GCC countriesThe IMF predicts that overall current account surpluses will shrink to about 2.5% of GDP in the medium term
Meanwhile, the World Bank forecasts a slight expansion of fiscal deficits in the Gulf region, projected to reach 0.2% of GDP between 2025 and 2026.
Looking ahead, the economic growth of the GCC nations will continue to face several hurdlesOne pressing challenge is the ongoing instability caused by persistent conflicts in the Middle East, which exacerbates regional political ambiguity and heightens spillover effectsRising geopolitical tensions contribute to uncertainty, undermining business and consumer confidence, curtailing tourism, precipitating capital flight, and tightening financial conditions, all of which serve to dampen economic growth prospectsMoreover, geopolitical crises, such as those affecting shipping routes in the Red Sea, disrupt global trade, impacting the oil and gas exports, maritime traffic, and investment flows for Gulf nations, further threatening economic growth.
Additionally, the OPEC+ decision to extend production cut agreements or intensify voluntary reductions may stifle economic recovery and exacerbate fiscal difficulties
On December 5, the OPEC+ ministerial meeting announced an extension of voluntary production cuts scheduled to end in December to three additional months until March of the following yearFull cessation of cuts has now been pushed back to December 2026. In the absence of significant external shocks, the expected average oil price for 2025 may decline further, resulting in decreased government revenues, expanded fiscal deficits, and reduced foreign exchange earnings, hindering economic recovery.
Moreover, escalating pressures related to climate transition present mid-term risksAs the global economy shifts towards net-zero emissions, demand for fossil fuels is increasingly under downward pressureUncertainties surrounding future oil prices, driven by factors such as the global pivot towards low-carbon consumption, add complexity to the macroeconomic outlookConcurrently, GCC nations face substantial challenges in advancing their own energy transitions; their per capita carbon emissions rank among the highest in the world, exceeding global averages by 1.5 to 4 times, underscoring the urgency for a shift towards a green economy.
In response to these multifaceted challenges, GCC countries may need to further reduce their reliance on oil and vigorously promote green economic growth to achieve comprehensive economic diversification.