LONDON, 27 December 2004 — If GCC governments were to make New Year’s resolutions regarding their economies, one wonders what they would be. Would they opt for continuing high oil prices and production; a persistent weak US dollar therefore making their exports more competitive in terms of the currency exchange and therefore mitigating some of the political flak from developing countries.
Perhaps it would be more useful to look at the economic challenges that countries such as Saudi Arabia, the United Arab Emirates (UAE), Kuwait and the others are faced within the coming year, and to see how surplus oil revenues, budget surpluses, economic and political reforms, compliance and regulation, high liquidity, and record stock returns have impacted on or may mitigate some of these challenges.
The statistics of oil price inflation and its attendant market liquidity, stock exchange buoyancy, and import boom can be both beguiling and misleading, especially in an economic environment which is not known for its natural transparency and culture of disclosure.
There are already concerns that the persistent high oil prices (crude oil future in November 2004 remained above the $50 per barrel) may adversely affect global economic recovery. On the supply side, the impact of higher output from the Gulf of Mexico may depend on any future disruption of supplies from Iraq and elsewhere in the Middle East. On the demand side, China has already increased interest rates to dampen rising prices. Whether this slows down economic growth remains to be seen, although China’s economic rivals in East and Southeast Asia are watching like hawks to make sure that they stay ahead in terms of export and currency competitiveness.
On a wider spectrum, the challenges for the GCC region over the next decade are governance; institution building; and the development of political and economic culture.
But the more immediate challenges for countries such as Saudi Arabia, by far the largest and most important market in the region, are not the maintenance of strong economic fundamentals on the back of high oil prices; but of preparing to cope with impending changes in the structure and scope of their economies.
The Kingdom will almost certainly become a member of the World Trade Organization (WTO) in early 2005. Grace period withstanding, how will Saudi business cope with the rigors of market liberalization?
The GCC economies are still dependent on oil and gas. Although economic diversification policies have in the last two years increased the contribution of the non-oil sector to GDP, the pace of diversification remains slow. As such, the GCC economies will remain dependent on the vagaries of the oil market for the foreseeable years to come.
One encouraging sign is that some of the top Saudi corporates are now much more confident and successful in venturing abroad to markets which hitherto would have been unheard of. Saudi Basic Industries Corp. (SABIC), for instance, has acquired a Dutch petrochemical company and has taken a large stake in Mexican petrochemical company, Pemex. Savola, on the other hand, has taken a controlling stake in a major edible oil company in Kazakhstan.
Perhaps the biggest economic challenge for Saudi Arabia, apart from servicing its massive internal public debt which incidentally it is doing with part of the proceeds from the windfall oil price surplus, is job creation.
Over 70 percent of the Saudi population of 26 million is under the age of 25. Adult male unemployment is officially at 20 percent, although other estimates put it as high as 45 percent. In addition, there is a high level of disguised unemployment, especially in family-run businesses; and massive under-employment among the Kingdom’s female population.
Saudization, or affirmative action or positive discrimination, per se is not the long-term solution. As Malaysia, South Africa and other countries have shown, at best it is a short-term solution. The best way is to affect economic policies which enhance market development and investment. This, however, must be done in conjunction with educating the work force to meet the varying requirements of the job market; and to make sure Saudis are equipped with the right skills sets.
At the same time labor laws should not be over-protective because companies will simply go to other places where they can have a competitive advantage. As such, employment policy should be market-driven but coupled with the protections needed especially against unscrupulous employers. However, gone are the days when a Saudi worker would expect a well-paid job for life, simply because he is a Saudi. Not even all the oil wealth in the world can guarantee jobs for life in an era of globalization in the 21st century.
