Gulf Economic Update Presented by the World Bank

Good afternoon everyone. Thanks very much for being here for uh the presentation of our latest report, the Gulf Economic Update. The Gulf economic update is a bianual publication by the World Bank that looks at the economies of the GCC countries and looks at the macroeconomic development over the past year and presents also the outlook uh done by our country economists. This particular edition of the economic update takes stock of diversification efforts in the GCC countries. As many of you know, around a decade ago, GCC countries started to adopt national plans and visions to diversify the economies away from oil.

So what we're doing here is we're really taking stock of those diversification efforts with the objective of assessing the progress around 10 years later. So it's really a long-term perspective that we're taking here. We're focusing on three um major metrics that are typically used to assess diversification. The first one is on the real sector, the second on the fiscal accounts and the third on the exports uh diversification. So if we start with the real sector economic activities, the way we do that is we typically look at the weight of the nine hydrocarbon sectors in the total economy and we measure that by uh looking at the percentage of non oil sectors in total GDP.

And here what you can see on the graph is that when you look at those 10 years starting in 2015, you see that the curve is almost largely flat in most of the countries. Um it's true that the past two to three years you have seen that upward trend which is really encouraging and there's also another caveat that uh this measure typically suffers from what we call the denominator effect meaning that sometimes the increase in non-oil sector weight in the economy is just a reflection of a shrinking of the oil sector whether it's because of uh declining prices or declining production. Here we try to look at averages to take uh to uh get rid of the annual fluctuations. And on the left hand side you can also see that the curve is pretty much flat. Uh actually sometimes declining in some of the countries which actually gives a picture that there's still um much work in progress to be done on the diversification of non-oil sectors.

We also look at the growth rates of non-oil sector economy and we've seen the from the um from the bars there that in the second half of the of the past decade it captures the average of the non- oil growth which has been also not progressing that much. We also look at uh the revenue the government revenue side and uh these countries have also started to adopt tax reforms to diversify the government revenue away from oil. Um it started with indirect taxation. So uh many countries introducing excite taxes starting in 2017 then followed by VAT starting in 2018. Um and this is progressing very well.

uh the chart that you see here with the bubbles, it's actually uh very very simple to read, although it doesn't uh seem so from the first site, but the higher the bubble is actually the the higher the the standard corporate income tax rate in the country. So, it captures the how much is uh is the country taxing uh their their firms. And the size of the bubble is actually those regimes that uh impose higher tax rates on uh the oil and gas companies. The yellow color captures the countries that are taxing only foreign comp foreign companies. And here you can see also that Bahrain stands out that it does only tax oil and gas sectors rather than the entire economy.

So the implication of that is that uh tax revenue have been uh really uh not catching up that that much except for the UAE where you can see the gra the line is really picking up in the past years. If you compare to other high income countries you see immediately that there's still work to do. The last measure that I want to show you here and I'll end with that is that typically a a big measure of diversification exports baskets and you can see that all GCC countries are still also uh uh the weight of non-oil export is still u pretty much slow and also the the number and the complexity of their exports u um also has been progressing but there's more work to do. So I'll leave you with these uh three takeaways that uh the main message here is that there's been uh some progress on diversification in all GCC countries but there's still very much work in progress and I want to pass it on to my colleague Hudad here who's going to present the macro recent macro developments uh in the the past year or so. Over to you Hudabad.

Thank you very much Huda and a very warm welcome to all of you uh for this joining this presentation. Now in the next chapter of the report what we are trying to do is to give like a detailed overview of the macroeconomic health of all Gulf economies and I'm going to show you some sort of key findings from this part not go into the details. The first thing that the report actually looks into is what's happening with economic growth. And here you can see clearly in this chart what I'm showing you is the economic growth quarterly as well as annual for Saudi Arabia. And what you'll notice immediately is if you look at the orange bars on the left hand side, you'll see like an increase in quarterly growth in Saudi Arabia over time.

Now that's of course a good thing. That's a characteristic across Gulf economies that growth has been picking up over the last few quarters. The reason is that since April this year, OPEC plus basically phase started phasing out its uh oil production cuts. As a result, what you see is oil sector growth throughout the GCC picking up and is one of the key drivers of growth. What you'll also notice is what's happening on the non-oil sector side where growth has been resilient.

You will know that over the last few years there have been several macroeconomic shocks. This year everyone has been concerned about uncertaintity despite that growth has been picking up throughout the GCC economies. The next thing I will show to you is uh the the report then goes into like a lot of details into what sectors are driving growth. Here I have a chart for Oman which basically is showing what sectors and subsectors are the ones that have been driving growth. This is where all Gulf economies actually diverge quite substantially because each country has its own dynamic uh and structural sort of uh uh factors at play.

The next thing that we look at is inflation. You know, inflation is something that everyone worries about like over the last few years, especially in post-pandemic recovery, even in places like the US and EU, inflation has been at record high levels. But here is where GCC has been a really good example. On this chart, I'm really showing you a very simple sort of statistic, which is monthly inflation numbers as well as annual inflation numbers. And what you'll notice is monthly inflation numbers throughout GCC economies have been low.

It's been stable. And the reason is because of there like some targeted subsidies to fiscal sectors as well as a sort of exchange rate peg with the US dollar which basically constrains monetary policy somewhat which is of course uh good news. Now on the fiscal side the big development is as Huda was mentioning in her presentation a lot of fiscal revenues in GCC economies actually depend on commodities particularly on oil right what's happening over the last few years is there's been a substantial sort of stable decline in oil prices now your fiscal revenues are a function of two things which is the oil production quantity and the oil price oil prices have gone down production has slightly gone up this year. The net effect is revenues have declined and as a result the difference between your government revenues and government expenditures which is your fiscal balance has sort of reduced over the last few quarters. This is Saudi Arabia's case but that's something that we see across the board in all uh most GCC economies.

Now it's not a good or a bad thing to have a higher fiscal deficit. You can sustain a higher level of fiscal deficit as long as you have good shock absorbers buffers in place. What are these buffers? One is a sovereign wealth fund which is you know your government service government savings that they put into like a a savings account and invested somewhere. Uh and the second is having low and sustainable levels of debt.

Which brings me to my second last slide. Most GCC economies actually have very good fiscal buffers, good sovereign wealth funds that are well capitalized as well as low levels of debt. The exception is Bahrain where you're seeing debt levels rise from a very high base of above 120% of GDP and that's a risk that we flag in the presentation. Now I'll stop with this slide if there are three things that I want you to remember from this presentation is growth has been picking up because of increased oil production and in resilient non- oil growth. Fiscal pressures have been going up because of declining oil prices and the GCC has a stable macroeconomic foundation in place for structural reforms.

Thank you very much for listening. [music]

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