As the world emerges from the immediate impact of the COVID-19 pandemic, governments around the world are busy trying to rethink how best to respond to such unexpected events. GCC countries, in turn, seem intent on reconfiguring their economies in such a way to capitalize on success and enact policies for a bright future. In particular, they want to benefit from three dominant trends that will shape their economies for the years to come.
Leveraging technology
Economic development requires skilled labor and skilled labor develops along with technological advances. Financial technology, artificial intelligence and technology-based businesses represent a huge boost to productivity and a power to economic growth. Technological integration can produce unemployment but is also key to rapid and sustained economic development. Government support for the integration of technology and automation is a move in the right direction. This favorable approach in leveraging technology for economic development is rewarding in the long run.
There is no question as to why the GCC countries have substantially improved their digital economies. Governments came to understand that it is a lucrative source of foreign direct investments and an enabler for growth and development. Recent investment trends have demonstrated this focus. Most notably, the GCC countries have moved from simply acting as a magnet of investments toward becoming a hub for digital innovation. Smart cities, cryptocurrencies, cybersecurity, data hosting and fintech in the GCC countries show that the region is rapidly moving to building a world-class digital infrastructure. The challenge is in building and sustaining human capital, along with setting up a conducive business environment with all the legal, regulatory and policy frameworks necessary for its success.
Moving into a low carbon future
While the Gulf region still has substantial amounts of hydrocarbon reserves, the global demand is expected to decline, and climate policies and investments in renewable energy are expected to have their impact. The future looks more promising for countries that are getting ready to a low-carbon scenario. As renewable energy becomes cheaper and energy efficiency increases, western governments are pushing hard for more rigorous climate policies and greener economies. The concern of fossil fuel assets becoming stranded has become a pressing policy issue and a challenge for oil companies.
Leaderships across the GCC countries are starting to consider the ways to reduce their dependence on oil as they strive to diversify their economies. While some countries have made steady steps in diversifying successfully into finance and tourism, others have already become a hub for multinational corporations. A few are navigating their ways with more business-conducive and investment-friendly environment, while decarbonizing at the same time. Promising initiatives, such as the UAE’s Energy Strategy 2050 and Saudi Arabia’s Vision 2030 show the seriousness of governments and their intent on moving ahead with a strategic outlook for their countries. They know that the world’s energy transition needs tremendous investments into renewable energies and the GCC region has the potential for such an endeavor.
Building sustainability
Faced with the shock of the pandemic and the oil price collapse, GCC’s economies have proved to be highly resilient and dynamic. Yet, they have learned important lessons: they need to reduce their dependence on oil, plan for sustainable public finances, and work their way to become economically resilient.
The first step is to move towards a diversified economy, which could be realized through investing heavily in the productive sectors. The huge saving accumulated in sovereign wealth funds could be used for this purpose. While economic resilience requires diversifying away from oil and gas, it is also about building the abilities to cope with and recover from future shock and adapt to changing economic circumstances.
On a micro level, this means that firms in the GCC countries need to maintain a financial ability to build and use pre-disaster income to smooth shocks over time, and to use savings, low-cost borrowing, and insurance to keep themselves solvent and liquid. On a macro level, this means that governments need to have sound public finances and perhaps consider moving into currency sovereignty as they transition into robust, diversified economic systems. This, in turn, will allow them to use ample fiscal space to subsidize firms in times of crisis without the pressure on their currencies or the need to incur high-cost debts. Otherwise, there will need to strike a delicate balance between fiscal consolidation and using a fiscal space to stimulate growth.
More particularly, as the pandemic-induced global slowdown has resulted in a substantial decrease in production and consumption, firms have been hit hard and government revenues decreased considerably. The price of oil has fallen to 40 USD in early June 2020. For most GCC countries, these prices are below the fiscal oil breakeven prices – the price at which governments can balance their budgets. While this has already significantly affected government revenues, it also tested their abilities to manage their finances. Larger deficits mean more borrowing and more borrowing adds cost that could make deficits spiral out of control, particularly when chocks hit hard. The question, then, is how to build sustainability to manage the long-term consequences of the fall in the prices of oil and gas. The answer is economic diversification but also smart policies that attract foreign direct investment into the productive sectors.
The GCC's deep integration into the world economy and some of its members becoming economic heavyweights offer a lot of opportunities. However, challenges are abound and the economic outlook hangs on the governments' commitment to interdependence and inclusive policies.
