Until the end of 2023, Saudi Arabia, the world’s largest oil producer, will be implementing a voluntary reduction in its daily oil output by 1 million barrels. This reduction is in addition to the ongoing production cuts by members of the Organization of the Petroleum Exporting Countries Plus (OPEC+). Consequently, member states of the Gulf Cooperation Council are presently grappling with notable economic challenges.
Scott Livermore, ICAEW economic advisor, chief economist and managing director at Oxford Economics, delves into the repercussions of oil cuts in the region and what can be done to mitigate them.
What economic sectors can GCC countries bolster to try to negate or compensate for a 1.4 percent GDP loss due to oil production cuts?
National investment strategies look set to provide key support to non-energy growth and diversification plans spanning logistics, technology, infrastructure and finance. Saudi Arabia specifically is working toward meeting its Vision 2030 goals, particularly through giga-projects, with construction, transport and manufacturing seen attracting large shares of investment.
GCC countries should look to generate sustainable growth in the non-oil sector and achieve longer-term diversification goals. The strong public finances in the region give the financial means to achieve these. However, the governments of the region should not try to boost short-term non-oil growth to compensate for lower oil production. This would risk overheating, especially in the real estate markets, and inefficient spending. Long-term ambition and policy continuity and consistency are critical.
What impact can rising energy prices have on GCC budgets and investments in non-oil economies to improve non-oil GDP in 2024?
The energy sector trends have been less supportive, eroding budget positions in 2023. That said, the situation looks more positive in 2024, and higher energy prices should partly offset the budgetary impact of oil production cuts, allowing governments to cushion demand and non-energy GDP through higher spending. As the oil market tightens, it is likely that Saudi Arabia will scale back its voluntary production cut and OPEC+ will gradually raise production quotas next year.
Is de-dollarization core to the trade and investment success of an expanded BRICS Bloc? What is the foreign reserve strategy for BRICS nations, especially Saudi Arabia, the UAE and Egypt?
The planned inclusion of Saudi Arabia and the UAE in the BRICS bloc in 2024 will create new trade and investment opportunities within the group’s framework. The group will likely conduct more trade in their regional currencies, reducing dependence on the U.S. dollar.
However, this is unlikely to mean the end of U.S. dollar hegemony, even within the BRICS bloc. Changes are happening at the margins of global financial markets, including the renminbi being used in more FX trading, and some states such as Russia moving away from dollar transactions. But the big picture hasn’t changed – the dollar remains the dominant currency for global reserve assets, trade invoicing and broader financial market use.
How can banks in the region which are benefiting from high-interest rates and low inflation to improve profits use these economic conditions to attract more capital and investments into the GCC?
The scale of monetary tightening has weighed on lending and domestic activity but that hasn’t undermined the overall investment drive across the region. In Saudi Arabia, the Public Investment Fund is increasingly playing a central role in the domestic investment strategy, with a promised injection of $40 billion each year to 2030.
The non-energy sector is demonstrating resilience, with growth primarily fueled by the tourism sector. Can you share your insights on this?
High-frequency indicators point to the resilient performance of domestic demand and the non-energy economy. We have seen rapid growth in the tourism sector in particular, this is not just the story in Dubai, the whole region has seen tourism arrivals strengthen, supporting diversification efforts. In Saudi Arabia specifically, the government aims to attract 100 million visits (domestic and international), and for the tourism sector to contribute 10 percent of GDP by 2030. We think investments will continue to raise the appeal of Saudi Arabia as a tourist destination and expect 30 million international tourists to visit the kingdom this year, rising above 50 million by 2032.
However, resilience in the region stretches beyond just the travel and tourism sector. The region is an economic hotspot globally and this is attracting foreign investment and talent to complement the ambitious growth and diversification plans of the region’s governments. This is generating broad-based growth in real estate and construction to finance, trade and retail.
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