As crude oil prices decreased in mid-2014, the Gulf Cooperation Council awoke to the new reality that has brought into focus one singular priority – economic diversification. Continued volatility in oil prices, negatively impacted by the Covid-19 pandemic, further underlines the fact that oil isn’t the safe commodity it once was. This new era is one that requires the primarily hydrocarbon-producing markets to focus on identifying new opportunities and creating non-oil jobs in their countries.
In response, the Gulf countries developed highly publicised National Strategies such as Saudi Arabia’s Vision 2030, Abu Dhabi Economic Vision 2030, and Qatar National Vision 2030. Each country’s strategy identified sector opportunities and clear steps forward into this new world. These ambitious strategies come with the inevitable unaligned priorities between the countries in the region, resulting in increased competition within the GCC in recent years.
The regional landscape is evolving at a rapid pace, marked by conflicting governmental policies and public disagreements between Saudi Arabia and its close ally the United Arab Emirates. Most recently, the UAE opposed an oil production plan proposed by Saudi and Russia which recommended extending OPEC+ oil output cuts until the end of 2022. The OPEC+ disagreement has since been resolved, but a clear new dynamic is on display that will dictate the progress and evolution of the region. Examples highlighting increased competition include:
- Free Zone Regulations: For two decades the GCC created a common market across its members that included a common external tariff which boosted intra-gulf trade in goods. The Kingdom amended its import rules to exclude goods made in GCC free zones by companies with a workforce made up of less than 25% of local people and industrial products that have less than 40% of added value after their transformation process from the GCC’s tariff agreement. This change highlights increased competition between Riyadh and the UAE, where free zones are a key pillar of the Emirates’ economy.
- Regional Headquarters: From January 2024, Saudi Arabia will only award contracts to international companies who have their regional headquarters inside the Kingdom. The Crown Prince Mohammad Bin Salman is pushing for a strategy valued at $800 billion that is working to double the size of Riyadh in terms of economic activity and turn it into a global hub. For companies that make the shift to KSA, the country is offering attractive incentives such as no corporate tax for 50 years, a waiver on compulsory quotas to employ Saudis for at least 10 years and the potential for those companies to be favoured in tenders for government contracts.
- New Relationships in the Region: The UAE and Israel are normalizing relations resulting in a significant new dynamic in 21st century Middle East. Other GCC countries including Bahrain and Oman have publicly accepted the Abraham Accord, while Saudi Arabia and Qatar maintain that in order to take those steps Israel must sign a peace agreement with the Palestinians.
The recent narrative around these events pits the GCC countries against each other and frames opportunities as zero-sum, with one country benefitting at the expense of another. In reality, an increase in productivity in one country provides increased opportunities for the region as a whole.
What can we expect to take place in this new competitive landscape?
- Increased FDI into the GCC: 2011 to 2015 saw a gradual decrease in number of projects going into the GCC, due to global economic factors and the subsequent decreases in oil prices. Since 2016, the impact of economic diversification strategies has led to an upward trend. Between 2016 and 2019, the UAE saw a 44% increase in the number of projects while Saudi saw a 75% increase during that same period. The exception to this upward trend was a dip in the in the number of FDI projects due to the Covid-19 pandemic which led to a 23% fall in number of projects.
- Improved Specialisation: In a mature Union such as the EU, countries regularly compete for similar opportunities, each making their best case to attract FDI but benefiting from the totality of the union’s offer: access to millions of consumers, relaxed intra-trade rules, and the movement of people across the union’s borders. The individual countries have also defined their specific advantages and specialisations – think of Ireland’s technology sector prominence or Germany’s specialism in advanced manufacturing. While there are overlaps in the types of investment countries want to attract, this recognition of competitive advantage allows each country – as well as the overall union – to thrive, in part due to the proximity of competition and specialist skills. In the GCC, Dubai is visibly ahead in the economic diversification process, but the reality is the Dubai model benefits from competition from neighbouring markets. Dubai has been able to attract significant investment because of its own value proposition but also because investors appreciate the accessibility of other growing markets such as KSA and Qatar.
- Innovation increases the region’s value: Knowledge sharing is a key driver for efficient and sustainable development. Partnerships and collaborations in research and implementation have led to the co-creation of innovative and ground-breaking ideas and solutions to the world’s most pressing issues. Each of the GCC’s strategic visions shares common themes, including sectoral focus on Clean Technology, Agriculture, and Fintech. The opportunity to enhance knowledge transfer within the GCC will result in higher quality products and increased efficiency in the region.
Unstable oil prices and the expected long-term impact of Covid-19 has given economic diversification a renewed sense of urgency among GCC countries. In order to diversify successfully, GCC FDI strategies need to ensure they focus on highlighting comparative advantages, as well as the benefits of a closely-knit region. The GCC countries should focus on sectors that truly reflect national strengths, as well as gaps that exist elsewhere.
OCO Global’s experience working with Investment Promotion Agencies in the region and globally has underlined the critical role that they play in achieving this diversification. As facilitators between foreign investors and national governments, IPAs are the ‘shop window’ for investors. They need to develop compelling propositions to attract investors and have effective enquiry management and aftercare functions to convert opportunities into investments. The knowledge and capability of their staff is a critical success factor in such a competitive environment. The sooner each GCC country defines their specialized positions, the sooner they will be able to seize the opportunities of the new post-oil era.
This article was first published in Arabian Business on 22nd August 2021.
About the author:
Noha Al Dhahri
Consultant
LinkedIn: Noha Al Dhahri