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GCC prospects during 2013 and can they be sustained?

The IMF pessimistically expects GCC economies to grow at a mere 3.7 percent during 2013. I maintain that they are likely to grow by 6 percent, but that they could do better if they manage to address a number of serious structural challenges.
GCC economies have been growing at an impressive rate over the past decade. Their combined GDP exceeded $ 1.5 trillion in 2012, or double its 2006 level ($ 713 billion), and triple 2004 level ($ 485 billion). They have continued to grow despite an unusually sustained and sharp global slowdown. At these rates, their combined GDPs would reach the three-trillion mark before this decade is over.
This unprecedented prosperity is a product of several factors, including rising oil revenues, expansive government spending and improved business climate throughout the GCC. But how sustainable is it? What are some of the challenges that could limit growth in the future?
There are varying forecasts for GCC economies during 2013, depending on predictions of petroleum prices and demand for oil during the year. Those predictions in turn depend on forecasts of the global economy performance in 2013. If you optimistically expected the global economy to recover and grow at a higher pace than 2012, you would expect demand for oil to grow and subsequently GCC revenues to soar.
The International Monetary Fund is bullish on the global economy and as such expects demand for oil to be sluggish. It expects the world economy to grow by 3.6 percent during 2013. As a result, it expects GCC economies to grow, on average, by 3.73 percent during 2013, compared to 5.5 percent in 2012 and 7.5 percent in 2011.
I find IMF estimates of GCC growth to be rather pessimistic. They are also inconsistent with previous correlations between GCC and global economic growth.
Take first the time of the 2008-2009 crisis. The GCC managed to maintain relatively healthy economic growth when the world went through that steep recession, which led to a sharp decline of GCC oil revenues.
Furthermore, the world economy, according to IMF own estimates, is not expected to go through an actual decline, only a “growth recession,” with growth reaching 3.6 percent. Not great, but not a decline either. Therefore, the effects on GCC economies would be milder than during the 2008-2009 devastating recession.
In addition, the expansionary budgets that the GCC governments adopt have an important stimulating effect, even if oil revenue flattens or declines. Yesterday (Dec. 29), Saudi Arabia announced its 2013 budget, the largest in its history, allocating $ 219 billion for expenditure, a whopping 19 percent increase over 2012 budget. Larger government spending and subsequently higher domestic demand for goods and services during 2013 would have a noticeable stimulating effect even if the global demand for oil flattens or declines.
A comparison between global and GCC growth rates during 2012 should make this point clearer. During 2012, the world economy grew at a modest 3.3 percent rate, but GCC economies grew at 5.5 percent (i.e., 67 percent higher than the world economy). If the world economy grows by 3.6 percent during 2013, as IMF expects, the GCC economies could be expected to grow at around 6 percent on average, with some GCC economies exceeding that rate.
Thus there is little doubt that the GCC economies would maintain healthy growth rates during 2013. However, there is a legitimate question as to whether those rates are sustainable beyond 2013.
There are serious structural challenges that could threaten the sustainability of high growth beyond 2013. Look at these five challenges for a sample:
First: Conservation. GCC countries rely or non-renewable natural resources for their current prosperity and future survival. They have some of the highest per capita levels of uses of water and energy in the world. Unless brought under control, future economic growth could be jeopardized.
Second: Diversification, or the need to balance the oil and non-oil sectors of the economy. Some GCC economies have managed to reach reasonable levels of diversification, but most are still reliant on oil for growth. Diversification would reduce vulnerability to changes in global demand for oil.
Third: Increased economic and labor participation rates. We currently have some of the lowest participation rates in the world, indicating serious under-utilization of human resources. In addition, unemployment rates have been in the double digits for several years in Saudi Arabia, for example. Last week, I wrote in Arab News on the fact that GCC nationals’ participation in the private sector is almost non-existent in some GCC countries, dipping as low as 0.5 percent.
Fourth: Education reform. Currently GCC nationals are outnumbered and out-skilled in the labor force. There is urgent need to reform university and technical education with a view to increase GCC nationals’ competitiveness in the labor market.
Fifth: Improve macroeconomic absorptive capacity. Currently GCC economies are unable to absorb all oil surpluses, as well as private wealth. There is considerable GCC wealth, both public and private, that currently gets invested outside the region because of limited capacity.
If we manage to address these challenges in a significant way, high economic growth rates could be sustained during 2013 and beyond, even if oil prices fall. Failing to address them could limit growth in the future even if oil prices continue to rise.

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