GCC countries could see additional gains of $17.7 billion if they match up to the level of diversification seen among OECD countries, a new report by audit firm EY said.
The report, which used a tracker to look at the levels of diversification across the GCC, noted that most Gulf economies had a low level of economic diversification.
The GCC’s level of diversification was just 38 per cent in EY’s 2012 index – the latest available figure – compared to a global average of 58 per cent and OECD average of 65 per cent.
“Dependence on oil and issues around youth employment are the GCC’s biggest economic challenges,” said Gerard Gallagher, MENA advisory leader, EY.
“With recent oil price volatility, diversification has returned to the top of the GCC agenda; it’s an opportunity worth $17.7 billion. To put that into context, it is more than three-quarters of the entire flow of foreign direct investment to the GCC region for 2013.”
The report also identified a ‘sweet spot’ in the Gulf where regional strengths, economic impact and nationals’ employment preferences meet, allowing all three factors to be achieved.
“The best drivers of diversification are those that have the strongest linkages with the rest of the economy,” said Gallagher.
“These sectors are said to have a high economic multiplier: in other words, a dollar of investment translates into far more than a dollar of GDP due to the stimulation of other sectors. Sectors that fall in the sweet spot include: transport, financial services, retail and tourism, telecoms and R&D.”
The report indicated that additional investment in oil and gas brings the least additional return to GDP at $1.30 and affects just seven other sectors.
Meanwhile, the construction sector has the highest economic multiplier effect, averaging an impact of $1.80 in GDP for every dollar invested in construction activity. This trickle down feeds into almost every other sector.
EY also noted that the key to achieve diversification is not to pump in public money but to facilitate private sector investments.
“The public sector needs to shift from being the main investor to being the enabler and driver of business, resetting the incentives, removing regulatory obstacles, encouraging collaboration and providing world-class infrastructure and services,” said Michael Hasbani, New Markets leader, MENA Advisory Services.
“The goal for diversification is not what is achievable in each individual country, it is how Gulf companies and governments can find innovative, proactive and profitable solutions to challenges such as resource scarcity, demographics and digitalisation, that are having a profound impact on how business is done and on where jobs are created.”
Gulf countries have benefited from high oil prices over the last few years that helped them spend lavishly on social welfare. However, many regional governments have set diversification targets to better protect themselves from growing oil price volatility.