The GCC’s bumper economic year and future challenges
Tuesday’s World Cup euphoria almost eclipsed the GCC-EU Economic Dialogue held in Brussels this week, an exercise that the two blocs have maintained regularly since 2003. The GCC-EU strategic partnership, which was announced in February, gave the discussions a more profound dimension, as the two sides looked for ways to grow that partnership with a more active engagement. The business forum, also taking place in Brussels this week, is a regular gathering of business representatives to carry out those ambitions.
This year’s dialogue was dominated by the repercussions of the Ukraine war, including energy shortages, food insecurity and the global economic slowdown. Despite these difficulties, GCC economies have done very well in 2022, passing a major milestone in their history. For the first time, their combined gross domestic product exceeded $2 trillion, making it the ninth-largest GDP worldwide. Saudi Arabia’s GDP alone is above $1 trillion. The International Monetary Fund expects
2023 to be the weakest year globally in terms of economic growth since 2009, with at least a third of the world in recession. But while it has revised growth rates downwards for most countries, it recently revised GCC rates up for next year.
Rising oil prices have certainly contributed to this contrarian trend in the GCC, but other oil-exporting countries have not fared as well, indicating that there are other factors at play. The Gulf states’ ambitious economic recovery and growth plans may be the main drivers for the upswing. For example, Saudi Arabia’s Vision 2030 megaprojects, the UAE’s insistence that Expo 2020 go ahead despite the pandemic, and World Cup-related investments in Qatar have contributed to the unprecedented growth.
The exuberance after Saudi Arabia’s upset victory over Argentina is almost matched by the euphoria over the improving economic fortunes in GCC countries in 2022. Real GDP growth has risen from 2.7 percent in 2021 to 6.4 percent. The IMF expects it to level off to 3.6 percent in 2023, still higher than the expected global average. Inflation is expected to edge up slightly to 3.7 percent in 2022 and taper off next year to 2.7 percent. Fiscal balances are sharply up to more than 7 percent of GDP in 2022 after eight years of deficits.
One of Saudi Arabia’s most significant achievements in 2022 has been lowering the unemployment rate of nationals to below 10 percent for the first time in nearly 20 years. During the pandemic, it reached 12.6 percent in 2020 and 11 percent in 2021, declining to
10.1 percent in the first quarter of 2022 and 9.7 percent in the second quarter. Saudi nationals’ participation rate increased in the second quarter of 2022 to 51.8 percent, compared to 50.1 percent in the previous quarter, driven mostly by the improvement in women’s participation rates. But this is still below the international average of 60 percent.
There has been a remarkable change in Saudi women’s unemployment and labor participation rates. Their unemployment rate went down in the second quarter to 19.3 percent,
to 20.2 percent in the previous quarter. This is the first time in decades it has dipped below 20 percent. Their participation rate went up two percentage points from 33.6 percent to 35.6 percent, ensuring it has almost doubled in less than five years — an unusual jump in this stubbornly difficult social indicator, pointing to the active encouragement of women to enter the labor force. However, there is still room for improvement to reach the global average for women of 50 percent.
The GCC currencies’ dollar peg means following US interest rate movements, although the American and Gulf economies are at different places in their business cycles. So far, the rate hikes have not affected GCC growth, but they could constrict borrowing and investment growth rates to below their optimal levels. Past experience shows that strong non-oil growth was compatible with high interest rates in the GCC, but it may not be the optimal situation.
GCC banks are in a strong position, with limited signs of nonperforming loans and higher rates improving their net-interest margins. However, the latter may be a mixed blessing because high interest rates dampen demand for credit and banks therefore need to provide incentives to borrowers to continue current lending rates.
GCC governments also have significant fiscal space. Saudi Arabia is expected to budget for significantly higher spending in 2023 than previously projected. Government initiatives include promoting small and medium-sized enterprises, which can be engines for growth and job creation, but will need help in offsetting rising interest rates. Saudi Arabia’s SME bank is increasing its concessional lending and the UAE has started a second phase of its entrepreneurial assistance program to develop startups. These programs could help in meeting the lending challenge for SMEs.
While the overall picture is optimistic, even uplifting, there are many challenges ahead, especially the risk of global recession and the need to further improve employment rates, especially for women.
There is also the need to attract more foreign direct investment, which remains below target. One of the purposes of the GCC-EU meeting was to discuss how to adapt to those challenges. One of Saudi Arabia’s National Investment Strategy goals is to increase FDI rates, which reached 2.1 percent of GDP in 2021. That is above pre-pandemic levels but still less than the global average of 3.8 percent. FDI is needed not only for funding but also to bring in skills and entrepreneurship.
Many in the GCC recognize that this is a once-in-a-generation opportunity to diversify and build a future beyond fossil fuel dependency. This transformation requires capital, skills for the new economy and transparent and accountable governance systems in both the private and government sectors.
Beyond the feared global recession in 2023, there are five systemic challenges in the GCC: Raising FDI levels, bringing labor participation rates to international standards, bridging the skills gap, increasing SME lending, and fighting corruption and mismanagement.
The Gulf states’ ambitious economic recovery and growth plans may be the main drivers for the upswing
It is clear that Saudi Arabia is diplomatically active and aiming to consolidate positive relations
with Iraq