The (Persian) Gulf Cooperation Council—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE—are now among the world’s 30 richest countries in terms of GDP per capita and fared well compared with emerging markets, developed markets and the world economy throughout 2008-14.
However, the latest episode of falling oil prices that started in mid-2014 saw average growth rates plummet throughout 2015-16, reaching only 0.3% in 2017, news outlets reported.
The lower-for-longer oil prices ($67 by the end of 2017 compared with an average of $100 during 2008-14) and subsequent lower growth are creating three big challenges for the (P)GCC states.
First, global oil prices have always played a major role in determining growth rates, and consequently income levels, of these economies. For instance, lower oil prices turned current account surpluses into significant deficits in most cases, putting pressure on foreign exchange reserves. Furthermore, fiscal balances turned into deficits, prompting the (P)GCC members to tap international capital markets, leading to increases in government debt.
Second, the dominance of oil and gas has resulted in a phenomenon familiar to commodity-exporting countries. Non-tradable sectors, such as property, tend to flourish (these attract a large share of oil and gas revenue), while tradable sectors, especially manufactured exports, do less well.
There are two key issues with this. First, higher oil prices can fuel asset price bubbles that could pose risk to the overall macroeconomic stability of (P)GCC economies. For example, the high oil prices that prevailed before mid-2014 led to rapidly rising house prices in Abu Dhabi and Dubai, followed by a significant correction as oil prices started to fall from the second half of 2014.
(P)GCC economies are often characterized by stubbornly low productivity, with labor-intensive sectors such as construction and light manufacturing (less dependent on technology and high-skilled labor) taking the lead over more high-value-added sectors, such as finance and high-tech manufacturing. Given the importance of productivity for long-term growth, the (P)GCC’s current low productivity levels may translate into lower growth rates in the medium to longer term.
Outside the distortions caused by an over-reliance on oil and gas, policymakers will face a third pressing issue in the near future: demographics. An increasing number of young people will enter the labor market in the coming years. Traditionally, (P)GCC nationals seeking employment have favored the public sector as it offers higher wages, better job security, shorter working hours and longer holidays than the private sector.
However, the public sector has reached saturation point, which means the (P)GCC states must find new ways to attract people to other sectors, or develop new sectors to absorb excess labor. To address their short-term imbalances, the (P)GCC will need to continue with fiscal consolidation while structural reforms are needed to address longer-term issues.
