Reasons why the GCC will play a major role globally
Most forecasts indicate that in 2023, a third of the world’s economies will face a recession. However, these projections do not include the GCC, as the region has demonstrated strong economic performance in 2022. Despite rising inflation, the GCC successfully navigated these headwinds, in stark contrast to many developed countries.
International financial institutions were impressed by the GCC’s impressive economic recovery in 2022, which was largely driven by stability in energy production during the global energy crisis. The IMF predicts that the GCC’s GDP growth will double to 6.5 percent in 2022.
The World Bank’s report on the economic prospects for the Middle East revealed that Gulf countries recorded a 5.7 percent growth rate by the end of December 2022, the highest annual rate in a decade. This growth was attributed to elevated energy prices and increased production.
The GCC, led by Saudi Arabia, the UAE, and Kuwait, has managed to rapidly increase production and export volumes while maintaining inflation rates below the global average. Despite ongoing inflation crises and the war in Ukraine, the Gulf region remains a relatively bright spot for the global economy.
With a focus on openness and economic diversification, the GCC is well-positioned to play a strategically crucial role in the evolving global economic landscape.
Read: Top GCC real estate trends to track in 2023
Why is That?
The World Economic Forum recently published a paper that highlights the impressive recovery of the Gulf region post-COVID-19. The authorities there demonstrated effective crisis management by tracking infections, managing risk, and rolling out vaccine inoculations, leading to a robust economic recovery.
The Gulf region is well positioned to play a crucial role in the global energy transition, showcasing leadership in areas such as the circular carbon economy while improving efficiency across oil and gas value chains. The region is committed to transitioning to clean energy and meeting net-zero targets.
The Gulf has witnessed unprecedented investments in solar power and energy efficiency has become a key factor in driving productivity.
Green hydrogen offers significant export potential, allowing the Gulf to take advantage of its vast geography and abundance of solar footprint to tackle the global war against carbon emissions.
Greater integration of energy markets within and outside the Gulf region would make the export of clean energy possible, allowing the region to emulate its strategic supply role in the oil and gas sector.
Growth momentum in the GCC is underpinned by a strategic vision that continues to drive the diversification of regional economies into new sectors.
To this end, and for many years, significant investments have been made in areas ranging from education and research to technology adoption and innovative entrepreneurship. And this is accelerating even more.
Significant progress has been made in exports of services such as logistics, finance and tourism, while value chains are also expanding non-oil exports to create new opportunities.
The Gulf’s advanced infrastructure is coupled with an openness to trade through region-wide adherence to low tariffs, supported by continued progress in developing favorable commerce arrangements using various pathways.
This is demonstrated by the region’s membership in the Arab Free Trade Area and various bilateral trade agreements with countries such as New Zealand, Singapore, and China.
Several other free trade agreements are also being negotiated. For example, the agreement between China and the GCC is in its final stages. Each GCC country also has made several additional trade agreements.
In addition to trade agreements, over the years the Gulf has strengthened its external ties through significant investments overseas, while also assisting in development processes. Deposits made by Gulf central banks in counterpart countries that were heavily impacted by the pandemic or disruptions associated with the Russian-Ukrainian war, proved useful in protecting macroeconomic stability in important regional economies such as Egypt.
However, according to the World Bank report, the focus is increasingly shifting toward commercial investments. Saudi Arabia’s Public Investment Fund (PIF), for example, announced the creation of five companies to drive billions of dollars in investments in Bahrain, Iraq, Jordan, Oman, and Sudan.
One of the many benefits of this increased regional focus on capital mobilization is the creation of value chains that can tap into the resources of multiple economies, delivering broader economic benefits.
Investments Toward Improving Production Capacity
Investments are generally central to the future ambitions of Gulf states. One of the most significant initiatives in this regard is Saudi Arabia’s National Investment Strategy, which aims to inject over 27 trillion Saudi riyals ($7.1 trillion) into the country’s economy by 2030, thereby boosting the contribution of GDP to investment from 22 percent in 2019 to 30 percent by 2030.
The UAE’s “Projects of the 50” and Bahrain’s $30 billion economic recovery plan are just two examples of the ambitious investment programs in the region.
All Gulf states are also focused on attracting foreign direct investment (FDI), which has been growing in recent years. Despite global economic difficulties, FDI in the region increased from $14.5 billion in 2017 to $44.4 billion in 2021. Bahrain, in particular, attracted $921 million in FDI in Q1 2022.
Capital Markets Activity
Additionally, the Gulf region experienced a significant rise in capital market activity in 2022, with a substantial increase in the number of Initial Public Offerings (IPOs). The Middle East and North Africa (MENA) region as a whole raised $23.9 billion from IPOs in 2022, compared to $11.1 billion in 2021, as per Ernst & Young data. This is the highest total since Saudi Aramco went public in 2019 with a billion offering. In terms of transaction volume, 2022 was the best year since 2008 with 46 IPOs in the region.
However, worldwide IPOs raised $179.5 billion in 2022, a 61 percent decrease compared to 2021. The largest deal in terms of value was the Dubai Electricity and Water Authority (DEWA) IPO in April 2022, which raised over $6 billion and had 9 billion shares available, representing 18 percent of the company’s capital. The Petrochemical company Borouj also launched an IPO that raised $2 billion during its listing on the Dubai Financial Market.
In Saudi Arabia, the number of IPOs in 2022 reached 17, an 89 percent increase from nine in 2021. Americana International Restaurants Company’s dual listing in the Saudi market was the first of its kind and represented the largest offerings with 2.53 billion shares, accounting for 87 percent of the total offering volume in the market in 2022. Nahdi Medical Company‘s second-largest IPO raised the largest proceeds among listed companies, with a total of 5.1 billion riyals ($1.36 billion).
Looking ahead to 2023, strong government support and economic stability are expected to boost investor confidence and accelerate capital market activity in the region.
Young Educated Workforce
The youthful demographic in the Gulf region gives it a competitive edge, as the average age of the population is still below 30 years. Huge investments in education remain a priority in the Gulf, with institutions such as the King Abdullah University of Technology in Saudi Arabia as one of the fastest-growing research institutions in the world.
In an effort to retain top talent, Gulf countries are revamping their visa regulations to acknowledge the importance of human capital in driving economic growth.
The UAE is attracting global attention as the host country for COP28 later in the year. The conference will center on conducting a “Global Assessment,” aimed at evaluating countries’ collective advancements toward fulfilling the goals set by the Paris Agreement, which took effect in 2016.
Several GCC nations have declared their intentions to achieve net-zero emissions and have introduced measures to track their progress toward these objectives. These targets examine the changes in carbon intensity in their economies, which is the amount of carbon dioxide released per dollar of GDP.
PriceWaterhouseCoopers reports that the GCC is taking significant steps toward making their economy more environmentally friendly and highlights some of the changes they have implemented in this area:
- Accelerated investment in renewable energy: Saudi Arabia has ambitious plans to develop 58.7 GW of renewable energy sources by 2030.
- Reduction in energy consumption, especially from homes, to reduce energy intensity levels. PwC expects further reforms to energy tariffs and subsidies to incentivize energy reduction in the region,with the UAE Strategy 2050 aiming to increase the contribution of clean energy to the overall energy mix to 50 percent by 2050 and reduce oil use. The goal is also to increase the consumption efficiency of individuals and businesses by 40 percent.
- Sustainable finance is an important enabler of the energy transition and the UAE aims to become a hub for sustainable finance. The Abu Dhabi Global Market (ADGM) is the world’s first “carbon neutral” international financial center and has partnered with AirCarbon Exchange, a Singapore-based global carbon exchange, to launch the world’s first fully regulated carbon exchange and clearing houses.
Thanks to financing and a focus on climate change, 2023 should be the year that Gulf states strategize with their regional counterparts to chart the MENA region’s path toward net zero.
For more on the Gulf, click here.