How diversification can ensure sustainable growth in the GCC

Like the rest of the world, the Gulf states have put in place policies to mitigate the effects of the coronavirus.

Unlike many of their emerging market peers, most Gulf nations have the fiscal cushion to support their economies through business-friendly policies that attract the attention of global investors. However, large reserves were not enough to fend off decline during Covid-19 and the International Monetary Fund (IMF) expects the Gulf states’ combined economic output to decline 7.1 per cent this year.

The IMF believes that the GCC as a whole will rebound by 2.1 per cent in 2021, buoyed by a 3 per cent surge in non-oil growth. Non-oil growth is precisely what the GCC need – in fact regional countries must diversify away from oil if they are to achieve sustainable economic growth at all.

The good news is that for many GCC states this is not new – before the crisis, many had blueprints for economic diversification, with investments in tourism, science, agri-foods, financial services, and technology.

The consequences of failing to diversify will be severe. We can see from the current situation in Oman, which has come late to the diversification strategy, that exposure to oil prices is no longer acceptable. This is reflected not only in the country’s large budget deficit of 17 per cent but also in the credit downgrades it has suffered – two downgrades from Moody’s Investors Service, one from Fitch Ratings and one from S&P Global Ratings.

There is no quick fix for countries with large deficits. Global markets will remain volatile until the pandemic is contained or a vaccine is developed. The good news for all countries is that interest rates will remain anchored lower for longer. There is no doubt that this is also an opportunity for many countries and companies to re-invent their products and services and create more sustainable and agile frameworks to withstand external shocks.

Issues such as domestic supply chains, healthcare, online education, digital services, fintech, renewable energy and online commerce, which were key sectors gaining traction before the crisis, will now see more interest going forward. It is absolutely essential for GCC countries to shift their focus towards creating enabling environments for these sectors.

There is, inevitably, greater interest in buying locally produced goods and services – in some ways it could be said that Covid-19 has expedited a resurgence in patriotism that was already a feature of a global economy dominated by Trump’s trade war, tariffs and ‘America First’ policies.

Supporting local SMEs and manufacturers is now a matter of economic urgency if not patriotism. Now is the time to build domestic infrastructure and capacity in diverse sectors such as food, agriculture, pharmaceuticals, education, medical equipment, hardware, e-commerce and manufacturing so that local entrepreneurs can do well at home – and so local value chains can become enriched by local innovation.

Enriching value chains also means developing non-oil energy solutions that are commercially viable. In Oman, for instance, which is heavily oil dependent, there are, arguably belated, moves towards clean sources of energy. Solar and wind plants are already in operation in parts of the country and the national energy company OQ is investing in alternatives like ‘green molecules’ – hydrogen and biofuels.

In the UAE, the government is eyeing renewable energy and the green economy as the two main driving forces that will lead the country’s sustainable, green recovery. By 2050, the country aims to source 50 per cent of its power from solar and nuclear energy.

In July, the Emirates Water and Electricity Co. awarded a consortium featuring France’s EDF Renewables and China’s JinkoPower a 2GW power project – the country’s biggest solar project. Meanwhile, Sharjah is planning to turn a 47-hectare landfill into a solar energy project generating 42MW.

In Saudi Arabia, US-based Air Products and its Saudi partners agreed to invest $5bn to build a green hydrogen-based ammonia production facility powered by renewable energy. A future built upon non-oil energies and non-energy industries can only truly flourish if countries have an enabling infrastructure, which is why it is good to see GCC states continue unabated in their drive to build.

Earlier this year, Etihad Rail awarded two contracts as part of a Dhs4.4bn 605-kilometre line from Ghuweifat to the Port of Fujairah on the eastern coast. In July, the emirate launched the Dubai Metro Red Line extension called Route 2020, spanning 15 km with seven stations. The Dhs11bn project will include seven stations and serve 125,000 passengers daily.

Oman’s new five-year plan, which will start next year, as well as Saudi Arabia’s Vision 2030, UAE’s Vision 2030, and Kuwait’s Vision 2035 programmes are all variations on a theme of diversification and building capacities.

After a pause, the GCC economies are revving up to resume the diversification that will tempt investors to take advantage of opportunities as they arise – because diversification is the only route to sustainable growth in the GCC – and every single government in the region knows it.

Vipul Kapur is the head of Private Banking at Mashreq Bank