oil and development in gcc

8/4/2019 Oil and Development in GCC

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Gulf Cooperation Council (GCC)GCC countries of the Arabian Peninsula are located at the west coast

of the Arabian Gulf and east coast of Red Sea.

Bahrain

Qatar UAE

Kuwait

Oman

Arabian Sea

GCC Countries: Bahrain, Kuwait,Oman, Qatar, Saudi Arabia, UAE


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Founded on 26 May 1981.

Total area is 630-million-acre (2,500,000 km2 )

Yemen is in negotiations for GCC membership

A customs union was declared in 2003,

GCC common market was launched on January 1, 2008

GCC is heading towards single currency

Some Facts about GCC countries


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Macroeconomic indicators of GCC

Country Capital Area (sq km) Currency Population

UAE Abu dhabi 83600

Dirham,

Pegged to USD,1$=3.675 dh 4707000

Saudi Arabia Riyadh 2,240,000

Saudi Riyal,

Pegged to US$= 3.75 riyal 27136977

Qatar Doha 11,437

Qatari Riyal,

Pegged to US$= 3.64 riyal 1696563

Bahrain Manama 716

Bahraini Dinar,

Pegged to US$= 0.376 dinar 807000

Kuwait Kuwait City 17,818

Kuwaiti Dinar,

Abandoned $ peg in 2007

US $ = 0.288 dinars 3051000

Oman Muscat 309,500

Omani Rial,

Pegged to US$= 0.3850 rial 2905000


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Country Brief Over view

UAE The UAE is a federation of seven emirates, of which Abu Dhabi is the largest. After gaining FDI to exploit oil and gas, the UAE has diversified into a prosperous economy

Saudi Arabia

KSA is a major economic power accounting for 55% of total GCC GDP

Oil accounts for 90% of exports and 75% of government revenue, which is being used to facilitate an

infrastructure boom

Qatar

Qatar has one of the highest levels of GDP per capita in the world, driven by oil revenue

The current Emir is initiating liberalizing changes to steer the economy towards diversification

Bahrain

The Kingdom of Bahrain is an island country in the Persian Gulf and is relatively highly diversified away

from oil

There is a major infrastructure overhaul in progress, aiming to cement Bahrains place as the gateway to

the Northern Gulf

Kuwait

Kuwait is slowly beginning to diversify its economy, with the hope of reducing dependency on oil revenue

However, it remains relatively closed-minded towards new inward investment

Oman

Oman is regarded as one of the more conservative and traditional GCC states, where the local citizens are

still a majority

The construction industry is beginning to see returns from the diversification policies instigated under the

Vision 2020 plan

Overview of GCC Countries.


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High dependency on oil,

Dominant public sector with a significant fiscal surplus,

Young and rapidly growing national labor force,

High dependency on expatriate labors.

Common feature of GCC countries


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Diversification

Addressing low productivity and Labor market setbacks;

Developing the non-oil private sector;

Improving the capacity of administrative and public sector institutions.

Common challenges of GCC countries


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Bahrain - In 1932 Standard Oil Company of California (Socal) discovered oil incommercial quantities in Bahrain. The first Gulf state to discover oil, it wasalso the first to reap the benefits that came with the revenues, in particular amarked improvement in the quality of education and health care.

Saudi Arabia discovered oil in commercial quantities in 1938.

Kuwait discovered oil in the Burgan field of Kuwait in 1938,

Qatar discovered oil in 1940 in Dukhan Field in the west coast of thepeninsula.

Oman discovered oil in 1964

UAE discovered in early 1960

History of oil discovery in GCC


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Proven oil reserve and HDI in GCC

GCC

countries

2009

(ThousandMillion Barrels) (% of world)

UAE 97.8 7.3

Saudi Arabia 264.6 19.8Qatar 26.8 2.0

Kuwait 101.5 7.6

Oman 5.6 0.4

Total 496.3 37.1

Source : Statistical review of World Energy (2010)*Bahrain has 0.12 Thousand million barrels

GCC countries

Human

Development index

ranking (out of 169

countries) HDI Category

UAE 32 very high

Saudi Arabia 55 high

Qatar 38 very high

Kuwait 47 high

Oman na na

Bahrain 39 very high

Source : UNDP Human Development Index 2010


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Country 2007-8 2008-9 2009-2010

UAE 4.55 (29) 4.76(27) 4.85(23)Saudi Arabia 4.07 (48) 4.28(40) 4.30(38)

Qatar 4.42 (32) 4.68(29) 4.53(30)

Bahrain 4.13(45) 4.38(37) 4.58(29)

Kuwait 4.01(52) 3.98(57) 3.62(76)Oman 3.97(53) 4.08(50) 3.91(50)

Network Readiness Index

Figure in parenthesis is overall ranking. Ranking out of 133 countries.

Scores are out of 7.

Source: The Global Information Technology Report,2010


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Oil Cycle

Phase-1: Boom of 1970-1980Phase-2: Volatile price of oil 1980-2001Phase-3: Boom of 2002-2008

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Crude oil price in $/bbl (Nominal)

Nominal


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Public spending on infrastructure andservices.

In the 70's most of the petrodollars,accumulated after the oil boom, ended upsupporting the US and European economies.

High Unemployment rate (15 percent in SAand 17.5 percent in Bahrain and Oman.)

Low average growth (3 % Appox)

Low participation from private sector.

Intensifying budget deficits with the relativedecline in oil prices during the 1980s and1990s

Oil Boom of 1970-80

Year US $ per barrel

1970 $3.39

1971 $3.60

1972 $3.60

1973 $4.75

1974 $9.35

1975 $12.21

1976 $13.10

1977 $14.40

1978 $14.95

1979 $25.10

1980 $37.42


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GCC countries Nationalization

UAE 1971

Saudi Arabia 1972

Qatar 1972

Bahrain 1974

Kuwait 1972

Oman 1975

Nationalization of oil


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Buoyant Economic Activity : Overall growth averaged 6.6 percent a year

Diversification: Diversification of GCC countries toward the non-oil sector

Stronger Fiscal & External Balances: For 2008

Oil Boom of 2002-2008

GCC countries

Fiscal Balance

(% of GDP)

Current Account

Balance(% of GDP)

UAE 20.5 8.5

Saudi Arabia 33 28.6Qatar 11.5 33

Bahrain 8 10.6

Kuwait 34 43.7

Oman 13.9 9.1


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Contribution of Oil for 2002-2006

Economic Developments between 2002-2006 largely due to increase in oil price


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Infrastructure Development : The increased levels of public spending channeled atmodernizing the infrastructure

Diversification: Toward the non-oil sector.

Deregulation: Important sectors such as the financial sector, education, andtourism.

Encouraging private sector: Compelling the private sector to strengthen itscompetitive capacity.

Benefits of high oil price


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Except for KSA in all other countriesnon-oil GDP real growth is higherthan oil GDP.

Bahrain and Oman suffer from arapid decline in oil reserves and a

small production capacity

The non-oil growth in the GCCcountries was driven by a newlyemerging private sector.

Gowth of oil and non-oil sector in GCC

-15

-10

-5

0

5

10

15

UAE Saudi

Arabia

Oman Qatar Kuwait Bahrain

Oil real GDP Growth

Non-Oil GDP growth

Source: Regional Economic Outlook ,2010, IMF

2009

(Annual)


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Except Qatar, Bahrain and Oman allother GCC countries have reducedproduction.

Crude oil Production

GCC

countries 2008 2009

UAE 2.6 2.3Saudi Arabia 9.2 8.4

Qatar 0.8 0.8

Bahrain 0.2 0.2

Kuwait 2.7 2.3

Oman 0.8 0.8

(Millions of barrels per day)

Source: Regional Economic Outlook, 2010, IMF


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Public spending is instrumental to understanding thedynamics of growth and oil revenue distribution in theGCC countries.

Fiscal policy in the GCC countries has been expansionary

Public spending has been the primary tool used to influence economicperformance.

Public Spending in GCC


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On average, domestic taxesamounted to less than 5 percentof the GDP.

GCC countries rely on rent madefrom the export of oil in order togenerate revenue for financingpublic spending

Public Spending and Tax revenue

0

5

10

15

20

25

30

35

40

UAE

SaudiArabia

Oman

Qata

r

Kuwait

Bahrain

Tax Burden (% of

GDP)

Government

Expenditure(% of

GDP)

Source: Index of economic freedom 2010


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GCC will need crude prices to remainabove breakeven to avoid a fiscal deficit

Breakeven Oil price of GCC

GCC countries 2008 ($) 2009 ($)

UAE 23 24

Saudi Arabia 49 54Qatar 24 24

Bahrain 75 84

Kuwait 33 34

Oman 77 78

Source: www.cnbc.com


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The oil boom delayed some of the economic reform measures that the GCCcountries had contemplated prior to 2002:

Increasing the level of domestic taxation,

Opening up some sectors, and

Implementing policies aimed at increasing nationals employment in the private sector.

Designing measures to avoid the inflationary pressure of public spending;

Enhancing the efficiency and transparency of public expenditure; and

Adopting steps to diversify sources of revenue away from oil.

Delayed economic reform


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Monetary policy in the GCC has been constrained as a result of the tight linkbetween the GCC and the U.S. economy.

This policy prevents central banks from utilizing domestic interest rates as a monetarytool to control inflation,

The pegged regime serves to stabilize exports as well as government revenues.

Restricting currency speculation. GCC monetary policy will continue to be driven by the actions of the US Federal

Reserve

Constrained Monetary Policy


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The increase in oil prices had a dramatic impact on the external economicposition of the GCC countries.

Considerable current account surpluses and to become importantinternational exporters of capital and investors in the rest of the Middle Eastand the world.

GCC became more attractive to foreign investors, thus attracting high levelsof foreign direct investment (FDI) ( Around 50 billion $ in 2009)

The relative slow increase in imports in comparison with their exportsallowed the GCC countries to enjoy a period of current account surplus.

Foreign Reserves in GCC


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High oil prices that reached over $140 per barrel by mid-2008.

The collapse of oil prices in the second half of 2008 at less than $35 perbarrel by the end of the year .

The combined GDP of the GCC countries contracted to 11.1 percent from26.4 percent in 2008, and its growth rate to decline to about 2.4 percent

from 5.2 percent in 2008.

Crude oil price of 27th December 2010 is $ 91.39 per barrel and expected togo up, this ensures fiscal surplus for some more time.

DECLINING OIL PRICES AND THE END OFRECORD FISCAL SURPLUS ERA


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Current account balance vs crude oil


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The challenges can be classified into two broad categories. Structural : Diversify the economy and the labor market.

Policy nature: Issues of inflation and Governance.

Challenges Facing the GCC Countries


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The first focuses on creating a parallel economy to overcome the existingrigid structure and burdensome regulations. (SA and Kuwait.)

The second aims at promoting a competitive position in sectors such asfinance, tourism, and education. (UAE, Bahrain, and Qatar.)

Economic reform process that aims at encouraging private sector

involvement and stimulating non-oil sectors by removing regulatory andadministrative barriers. ( All GCC countries)

Approaches to diversification.

GCC countries

(2010)

Oil

(% of real GDP

Non-oil

( % of real GDP)

UAE 37 63Saudi Arabia 27 73

Qatar 51 49

Bahrain 13 87

Kuwait 43 57

Oman 30 70

Source: SAMBA financial group report 2010


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Kuwait : Speedup the process of privatization and further deregulate theeconomy.

Saudi Arabia: To cut down import duties, privatized telecommunications,and proceeded with the liberalization of the aviation industry. The country

joined the WTO in 2005.

Dubai and Qatar: launched financial centers, the Dubai InternationalFinancial Center and the Qatar Financial Center respectively,

Oman: opened key economic sectors such as telecommunications, power,utilities, and tourism for private sector participation.

Some steps taken to diversify the

economy


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Duplication: Many of the diversification efforts were duplicated across theregion, thus raising the risk of oversupply.

Most countries offer the same services and similar attractions (shopping, tourism,business conferences)

This is the case in the financial sector with GCC countries competing to become the

regional financial hub.

Problems with diversification efforts


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In their attempt to diversify their economies and address domestic supplyproblems, GCC countries explored opportunities outside their borders.

The UAE and SA both invested in the agricultural sector in Sudan and Egypt.

More recently, SA created a holding company to buy farms and fisheriesoverseas. The Saudi holding company is planning on buying rice farms in

Thailand.

Qatar and the UAE are considering buying underdeveloped farmland,especially in Pakistan and Sudan.

The Kuwaiti government has been considering Myanmar, Cambodia, andLaos as potential targets for its investment

Addressing food supply: OutsourcingEconomies


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Unemployment rate

Unemployment Rate

UAE 11.5

Saudi Arabia 9.9

Qatar 15

Bahrain 3.5

Kuwait 10.5

Oman 12.6

Source: Index of Economic Freedom, 2010

Population growth is around 4% for

GCC.


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The first is the high rate of unemployment among the youth, a problemexacerbated by the high rate of population growth

The second is the limited role of the private non-oil sector in generatingemployment opportunities accepted by GCC nationals.

The third is the status of foreign labor, which in most GCC countries

constitutes the majority of the workforce.

The fourth is the low female participation among the GCC nationals

The policy of trying to substitute foreign workers by natives has become acommon policy across the GCC countries.

The Labor Market Predicament


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Inflation in GCC

Inflation in the GCC, peaked at around 11.1 per cent in 2008 before diving tonearly 2.9 per cent in 2009


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Over the period 20022008, inflation in the GCC countries has mainly beendriven by

Demand pull side:

Inflow of liquidity as a result of higher oil prices thereby pushing aggregate demand

Increasing government expenditure for economic diversification further fuels the flame

Ever increasing population, due both to demographic transition and huge influx ofexpatriates

Strong domestic demand accompanied by a growth in money supply and credit;

Cost push side:

Pegging to a depreciating U.S. dollar by increasing the cost of goods imported.

Bottlenecks in the economy and lack of supply, especially in the non-traded sectorssuch as real estate;

Rising world food prices;

Rising raw material prices, for example for steel and cement;

Rising labor costs.

High Inflation in GCC


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Several central banks have increased the reserve requirements andtightened loan-deposit ratios in order to slow down private credit growth

All countries are trying to increase the supply of real estate while at thesame time monitoring the market, in order to avoid dramatic price increases.

The United Arab Emirates increased the salaries of federal public sector

employees by 70 percent; Oman raised them 43 percent.

In January 2008, Saudi Arabia announced a set of measures designed tocontain inflation including subsidizing a wide range of fees, awarding a 5percent cost-of-living allowance to all state employees and pensioners, andboosting social security payments.

Bahrain set up a $100 million fund to be distributed to people mostaffected by rising prices.

Besides the pricing control measures, authorities lowered duties onimports especially on construction materials to ease the pressure

Steps taken to reduce inflation


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In general political governance in the GCC countries is weak

civil liberties, Institutional Governance (Transparency)

Governance

Corruption Perception Index 2010

GCC countries Score on 10 Rank on 178Economicfreedom

UAE 6.3 28 Moderately free

Saudi Arabia 4.7 50 Moderately free

Qatar 7.7 19 Moderately free

Bahrain 4.9 48 Mostly free

Kuwait 4.5 54 Moderately free

Oman 5.3 41 Moderately free

High score indicates corruption free

Source: Transparency International survey, 2010


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USD 149bn of new contracts were awarded across the GCC in 2009, anincrease of 15% on 2008.

A large proportion of government spending in the GCC has been focused oninfrastructure investments to support economic development.

There are USD 31.9bn worth of university projects planned or underway in

the GCC.

There are USD 13.4bn worth of hospital schemes planned or underway in theGCC.

The GCC schools project market is much smaller with just USD 3.2bn worthof projects planned or under way.

Future outlook :


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Oil revenue is continued to be the driver of development in GCC.

GCC countries should be able to maintain a balanced budget quite easily.

manage oil revenues by balancing between creating jobs and improvingliving standards

A collective approach is needed to avoid duplication and it may enhanceintegration

Non-fiscal policy instruments should be brought into play.

Conclusion


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Oil is wealth


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Old Dubai

Old Sheik Zhayedroad Dubai

Old Dubai Creek

Airport


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Present Dubai

Sheik Zhayed Road Dubai

Old Dubai Creek

Airport

Gold Souk


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Shukran

oil and development in gcc

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