Gulf economies are witnessing strong non-oil growth, driven by strategic reforms and robust public investment. As economic diversification accelerates, understanding its depth, fiscal foundations, and investor impact becomes essential, highlighting the importance of clear benchmarks to track long-term progress across the region.
Jing Teow, partner and economist at PwC Middle East, shares her views about the region’s evolving economic landscape, its diversification plans, and its next phase of growth.
PwC’s Middle East Economy Watch – June 2025 report highlights the non-oil sectors as factors driving growth across the GCC, with Saudi Arabia’s non-oil economy expanding by 3.8 percent in 2024. However, oil still represents a significant portion of government revenues. What specific benchmarks should investors use to assess whether Gulf economies are achieving genuine economic diversification versus merely experiencing cyclical non-oil growth supported by oil-funded government spending?
There are a number of measures that can be used to track diversification, (e.g.)
- Correlation between oil prices and non-oil GDP growth: while this is historically correlated, diversification should indicate gradual decoupling of these trends
- Similarly, the correlation between oil prices and non-oil revenue growth
- Growth in non-oil exports, particularly services exports, vs oil exports
- Share of FDI and lending directed to non-oil sectors
While current investments into the non-oil sector may be largely driven by oil revenues in the short-term, as non-oil industries scale and become self-sustaining, the economy should progressively loosen its dependence on oil-sector cycles.
The report shows inflation moderating across the region, with some countries like Oman experiencing deflation at -0.3 percent. Given the Gulf states’ currency pegs to the US dollar and their limited monetary policy independence, how should regional central banks navigate the potential divergence between local economic conditions and US Federal Reserve policy decisions, particularly if regional inflation trends decouple from US patterns?
Government has control over fiscal policy as a demand-management measure, (e.g.) changing tax rates for existing policies (VAT, CIT/zakat, subsidies). The GCC countries also implemented subsidies and price controls, rent caps, etc. as direct inflation control or demand management measures.
Read: Moody’s affirms UAE’s Aa2 rating citing strong economic diversification momentum
According to the report, several Gulf states have achieved improved fiscal balances, yet break-even oil prices for balanced budgets remain elevated – Saudi Arabia’s at $96.2 per barrel versus current prices around $80. With ambitious diversification programs requiring substantial government investment, how do you assess the sustainability of current spending levels, and what fiscal adjustments might be necessary if oil prices remain below break-even levels through 2025-2026?
The Saudi government is already implementing measures to maintain fiscal sustainability – for example, the 2025 budget anticipates overall spending to be SAR60 billion lower than in 2024 – while preserving the critical investments required to advance Vision 2030 objectives. Capex spend in 2025 is in line with 2023 levels, and is higher than the SAR 160 billion average over 2016-22.
In addition, debt headroom remains comfortable given strong sovereign credit metrics (strong credit ratings and recent upgrades) and manageable funding costs. Saudi Arabia’s debt-to-GDP ratio is around 30 percent of GDP, which is among the lowest of the G20 economies, meaning that the fiscal space remains substantial.
You’ve highlighted strong performance in regional equity markets and successful sovereign debt issuances. However, the report also mentions challenges in attracting foreign direct investment outside of specific sectors. What structural reforms do you believe are most critical for the Gulf states to enhance their attractiveness to international institutional investors, particularly in non-traditional sectors?
The GCC states are accelerating efforts to enhance their attractiveness to global businesses and institutional investors through a wave of regulatory and fiscal reforms.
A key example is Saudi Arabia’s new Investment Law, effective from February 2025, which enshrines equal treatment of foreign and domestic investors, offers protections against indirect expropriation, and replaces legacy licensing regimes with a streamlined, transparent registration process. These changes are part of a broader push under Vision 2030 to make Saudi Arabia a hub for international capital and talent.
Across the region, corporate tax regimes are being modernized to meet global standards, particularly in alignment with the OECD’s Pillar Two minimum tax framework. Countries like Bahrain, the UAE, and Oman are implementing Domestic Minimum Top-Up Taxes (DMTT) for large multinational enterprises, while also introducing targeted incentives to attract strategic sectors.
For instance, the UAE is rolling out R&D tax credits of up to 50 percent for qualifying expenditures and is considering further incentives tied to high-value employment and advanced technology adoption.
In the context of its AI and technology ambitions, the GCC also benefits from three distinct structural advantages — each of which was underscored by recent high-profile partnerships signed with major global tech firms during diplomatic engagements in May 2025. These are:
- Deep capital reserves via sovereign wealth funds such as PIF (Saudi Arabia), ADQ (UAE), and QIA (Qatar), enabling early-stage investment in foundational models, data centres, and chip infrastructure.
- Abundant, low-cost renewable energy, particularly solar, which provides the clean, scalable power base necessary for energy-intensive AI workloads and green data infrastructure.
- Strategic geopolitical positioning, allowing GCC states to maintain balanced diplomatic and commercial relations with both the U.S. and China, a rare feat that enables technology transfer and investment flows from multiple poles of global innovation.
Collectively, these reforms and advantages position the GCC not only as an emerging capital destination, but increasingly as a platform for future industries, from AI and advanced computing to sustainable energy and digital services.
How can regional economic integration initiatives, such as the GCC railway project or unified tourism visas, help create a more balanced growth across the region, and what role should multilateral institutions play in facilitating this integration?
As the success of EU economic integration has shown, deeper regional coordination can deliver a “rising tide lifts all boats” effect — amplifying economic opportunity, reducing structural imbalances, and creating shared prosperity. The Gulf region, with its common language, similar regulatory environments, and growing infrastructure links, is particularly well-positioned to benefit from such integration.
For instance, the GCC Railway, once completed, will significantly reduce overland freight costs (by up to 30 percent according to World Bank estimates), enabling businesses across member states to access a larger, more efficient market and tap into regional supply chains.
Similarly, the planned unified GCC tourism visa, now in pilot phase, is expected to boost cross-border travel, increase average visitor stays, and spread tourism spending more evenly beyond traditional hubs like Dubai and Riyadh.
Deeper integration could also promote labour mobility, harmonize technical standards, and support capital market development, making the region more competitive and attractive to global investors. For smaller economies within the bloc such as Bahrain, Oman, or Kuwait, regional platforms can offer scale advantages they could not achieve independently.
In this context, multilateral institutions such as the Gulf Cooperation Council (GCC) play a central coordinating role. Beyond macroeconomic dialogue, the GCC has taken the lead in negotiating trade agreements (e.g., with the UK and South Korea), harmonising customs procedures, and developing region-wide infrastructure frameworks. Its potential to act as both a policy forum and implementation platform makes it a key enabler of the region’s next phase of economic transformation.
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