oil and development in gcc
TRANSCRIPT
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Gulf Cooperation Council (GCC)GCC countries of the Arabian Peninsula are located at the west coast
of the Arabian Gulf and east coast of Red Sea.
Bahrain
Qatar UAE
Kuwait
Oman
Arabian Sea
GCC Countries: Bahrain, Kuwait,Oman, Qatar, Saudi Arabia, UAE
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Founded on 26 May 1981.
Total area is 630-million-acre (2,500,000 km2 )
Yemen is in negotiations for GCC membership
A customs union was declared in 2003,
GCC common market was launched on January 1, 2008
GCC is heading towards single currency
Some Facts about GCC countries
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Macroeconomic indicators of GCC
Country Capital Area (sq km) Currency Population
UAE Abu dhabi 83600
Dirham,
Pegged to USD,1$=3.675 dh 4707000
Saudi Arabia Riyadh 2,240,000
Saudi Riyal,
Pegged to US$= 3.75 riyal 27136977
Qatar Doha 11,437
Qatari Riyal,
Pegged to US$= 3.64 riyal 1696563
Bahrain Manama 716
Bahraini Dinar,
Pegged to US$= 0.376 dinar 807000
Kuwait Kuwait City 17,818
Kuwaiti Dinar,
Abandoned $ peg in 2007
US $ = 0.288 dinars 3051000
Oman Muscat 309,500
Omani Rial,
Pegged to US$= 0.3850 rial 2905000
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Country Brief Over view
UAE The UAE is a federation of seven emirates, of which Abu Dhabi is the largest. After gaining FDI to exploit oil and gas, the UAE has diversified into a prosperous economy
Saudi Arabia
KSA is a major economic power accounting for 55% of total GCC GDP
Oil accounts for 90% of exports and 75% of government revenue, which is being used to facilitate an
infrastructure boom
Qatar
Qatar has one of the highest levels of GDP per capita in the world, driven by oil revenue
The current Emir is initiating liberalizing changes to steer the economy towards diversification
Bahrain
The Kingdom of Bahrain is an island country in the Persian Gulf and is relatively highly diversified away
from oil
There is a major infrastructure overhaul in progress, aiming to cement Bahrains place as the gateway to
the Northern Gulf
Kuwait
Kuwait is slowly beginning to diversify its economy, with the hope of reducing dependency on oil revenue
However, it remains relatively closed-minded towards new inward investment
Oman
Oman is regarded as one of the more conservative and traditional GCC states, where the local citizens are
still a majority
The construction industry is beginning to see returns from the diversification policies instigated under the
Vision 2020 plan
Overview of GCC Countries.
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High dependency on oil,
Dominant public sector with a significant fiscal surplus,
Young and rapidly growing national labor force,
High dependency on expatriate labors.
Common feature of GCC countries
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Diversification
Addressing low productivity and Labor market setbacks;
Developing the non-oil private sector;
Improving the capacity of administrative and public sector institutions.
Common challenges of GCC countries
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Bahrain - In 1932 Standard Oil Company of California (Socal) discovered oil incommercial quantities in Bahrain. The first Gulf state to discover oil, it wasalso the first to reap the benefits that came with the revenues, in particular amarked improvement in the quality of education and health care.
Saudi Arabia discovered oil in commercial quantities in 1938.
Kuwait discovered oil in the Burgan field of Kuwait in 1938,
Qatar discovered oil in 1940 in Dukhan Field in the west coast of thepeninsula.
Oman discovered oil in 1964
UAE discovered in early 1960
History of oil discovery in GCC
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Proven oil reserve and HDI in GCC
GCC
countries
2009
(ThousandMillion Barrels) (% of world)
UAE 97.8 7.3
Saudi Arabia 264.6 19.8Qatar 26.8 2.0
Kuwait 101.5 7.6
Oman 5.6 0.4
Total 496.3 37.1
Source : Statistical review of World Energy (2010)*Bahrain has 0.12 Thousand million barrels
GCC countries
Human
Development index
ranking (out of 169
countries) HDI Category
UAE 32 very high
Saudi Arabia 55 high
Qatar 38 very high
Kuwait 47 high
Oman na na
Bahrain 39 very high
Source : UNDP Human Development Index 2010
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Country 2007-8 2008-9 2009-2010
UAE 4.55 (29) 4.76(27) 4.85(23)Saudi Arabia 4.07 (48) 4.28(40) 4.30(38)
Qatar 4.42 (32) 4.68(29) 4.53(30)
Bahrain 4.13(45) 4.38(37) 4.58(29)
Kuwait 4.01(52) 3.98(57) 3.62(76)Oman 3.97(53) 4.08(50) 3.91(50)
Network Readiness Index
Figure in parenthesis is overall ranking. Ranking out of 133 countries.
Scores are out of 7.
Source: The Global Information Technology Report,2010
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Oil Cycle
Phase-1: Boom of 1970-1980Phase-2: Volatile price of oil 1980-2001Phase-3: Boom of 2002-2008
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Crude oil price in $/bbl (Nominal)
Nominal
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Public spending on infrastructure andservices.
In the 70's most of the petrodollars,accumulated after the oil boom, ended upsupporting the US and European economies.
High Unemployment rate (15 percent in SAand 17.5 percent in Bahrain and Oman.)
Low average growth (3 % Appox)
Low participation from private sector.
Intensifying budget deficits with the relativedecline in oil prices during the 1980s and1990s
Oil Boom of 1970-80
Year US $ per barrel
1970 $3.39
1971 $3.60
1972 $3.60
1973 $4.75
1974 $9.35
1975 $12.21
1976 $13.10
1977 $14.40
1978 $14.95
1979 $25.10
1980 $37.42
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GCC countries Nationalization
UAE 1971
Saudi Arabia 1972
Qatar 1972
Bahrain 1974
Kuwait 1972
Oman 1975
Nationalization of oil
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Buoyant Economic Activity : Overall growth averaged 6.6 percent a year
Diversification: Diversification of GCC countries toward the non-oil sector
Stronger Fiscal & External Balances: For 2008
Oil Boom of 2002-2008
GCC countries
Fiscal Balance
(% of GDP)
Current Account
Balance(% of GDP)
UAE 20.5 8.5
Saudi Arabia 33 28.6Qatar 11.5 33
Bahrain 8 10.6
Kuwait 34 43.7
Oman 13.9 9.1
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Contribution of Oil for 2002-2006
Economic Developments between 2002-2006 largely due to increase in oil price
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Infrastructure Development : The increased levels of public spending channeled atmodernizing the infrastructure
Diversification: Toward the non-oil sector.
Deregulation: Important sectors such as the financial sector, education, andtourism.
Encouraging private sector: Compelling the private sector to strengthen itscompetitive capacity.
Benefits of high oil price
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Except for KSA in all other countriesnon-oil GDP real growth is higherthan oil GDP.
Bahrain and Oman suffer from arapid decline in oil reserves and a
small production capacity
The non-oil growth in the GCCcountries was driven by a newlyemerging private sector.
Gowth of oil and non-oil sector in GCC
-15
-10
-5
0
5
10
15
UAE Saudi
Arabia
Oman Qatar Kuwait Bahrain
Oil real GDP Growth
Non-Oil GDP growth
Source: Regional Economic Outlook ,2010, IMF
2009
(Annual)
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Except Qatar, Bahrain and Oman allother GCC countries have reducedproduction.
Crude oil Production
GCC
countries 2008 2009
UAE 2.6 2.3Saudi Arabia 9.2 8.4
Qatar 0.8 0.8
Bahrain 0.2 0.2
Kuwait 2.7 2.3
Oman 0.8 0.8
(Millions of barrels per day)
Source: Regional Economic Outlook, 2010, IMF
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Public spending is instrumental to understanding thedynamics of growth and oil revenue distribution in theGCC countries.
Fiscal policy in the GCC countries has been expansionary
Public spending has been the primary tool used to influence economicperformance.
Public Spending in GCC
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On average, domestic taxesamounted to less than 5 percentof the GDP.
GCC countries rely on rent madefrom the export of oil in order togenerate revenue for financingpublic spending
Public Spending and Tax revenue
0
5
10
15
20
25
30
35
40
UAE
SaudiArabia
Oman
Qata
r
Kuwait
Bahrain
Tax Burden (% of
GDP)
Government
Expenditure(% of
GDP)
Source: Index of economic freedom 2010
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GCC will need crude prices to remainabove breakeven to avoid a fiscal deficit
Breakeven Oil price of GCC
GCC countries 2008 ($) 2009 ($)
UAE 23 24
Saudi Arabia 49 54Qatar 24 24
Bahrain 75 84
Kuwait 33 34
Oman 77 78
Source: www.cnbc.com
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The oil boom delayed some of the economic reform measures that the GCCcountries had contemplated prior to 2002:
Increasing the level of domestic taxation,
Opening up some sectors, and
Implementing policies aimed at increasing nationals employment in the private sector.
Designing measures to avoid the inflationary pressure of public spending;
Enhancing the efficiency and transparency of public expenditure; and
Adopting steps to diversify sources of revenue away from oil.
Delayed economic reform
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Monetary policy in the GCC has been constrained as a result of the tight linkbetween the GCC and the U.S. economy.
This policy prevents central banks from utilizing domestic interest rates as a monetarytool to control inflation,
The pegged regime serves to stabilize exports as well as government revenues.
Restricting currency speculation. GCC monetary policy will continue to be driven by the actions of the US Federal
Reserve
Constrained Monetary Policy
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The increase in oil prices had a dramatic impact on the external economicposition of the GCC countries.
Considerable current account surpluses and to become importantinternational exporters of capital and investors in the rest of the Middle Eastand the world.
GCC became more attractive to foreign investors, thus attracting high levelsof foreign direct investment (FDI) ( Around 50 billion $ in 2009)
The relative slow increase in imports in comparison with their exportsallowed the GCC countries to enjoy a period of current account surplus.
Foreign Reserves in GCC
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High oil prices that reached over $140 per barrel by mid-2008.
The collapse of oil prices in the second half of 2008 at less than $35 perbarrel by the end of the year .
The combined GDP of the GCC countries contracted to 11.1 percent from26.4 percent in 2008, and its growth rate to decline to about 2.4 percent
from 5.2 percent in 2008.
Crude oil price of 27th December 2010 is $ 91.39 per barrel and expected togo up, this ensures fiscal surplus for some more time.
DECLINING OIL PRICES AND THE END OFRECORD FISCAL SURPLUS ERA
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Current account balance vs crude oil
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The challenges can be classified into two broad categories. Structural : Diversify the economy and the labor market.
Policy nature: Issues of inflation and Governance.
Challenges Facing the GCC Countries
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The first focuses on creating a parallel economy to overcome the existingrigid structure and burdensome regulations. (SA and Kuwait.)
The second aims at promoting a competitive position in sectors such asfinance, tourism, and education. (UAE, Bahrain, and Qatar.)
Economic reform process that aims at encouraging private sector
involvement and stimulating non-oil sectors by removing regulatory andadministrative barriers. ( All GCC countries)
Approaches to diversification.
GCC countries
(2010)
Oil
(% of real GDP
Non-oil
( % of real GDP)
UAE 37 63Saudi Arabia 27 73
Qatar 51 49
Bahrain 13 87
Kuwait 43 57
Oman 30 70
Source: SAMBA financial group report 2010
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Kuwait : Speedup the process of privatization and further deregulate theeconomy.
Saudi Arabia: To cut down import duties, privatized telecommunications,and proceeded with the liberalization of the aviation industry. The country
joined the WTO in 2005.
Dubai and Qatar: launched financial centers, the Dubai InternationalFinancial Center and the Qatar Financial Center respectively,
Oman: opened key economic sectors such as telecommunications, power,utilities, and tourism for private sector participation.
Some steps taken to diversify the
economy
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Duplication: Many of the diversification efforts were duplicated across theregion, thus raising the risk of oversupply.
Most countries offer the same services and similar attractions (shopping, tourism,business conferences)
This is the case in the financial sector with GCC countries competing to become the
regional financial hub.
Problems with diversification efforts
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In their attempt to diversify their economies and address domestic supplyproblems, GCC countries explored opportunities outside their borders.
The UAE and SA both invested in the agricultural sector in Sudan and Egypt.
More recently, SA created a holding company to buy farms and fisheriesoverseas. The Saudi holding company is planning on buying rice farms in
Thailand.
Qatar and the UAE are considering buying underdeveloped farmland,especially in Pakistan and Sudan.
The Kuwaiti government has been considering Myanmar, Cambodia, andLaos as potential targets for its investment
Addressing food supply: OutsourcingEconomies
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Unemployment rate
Unemployment Rate
UAE 11.5
Saudi Arabia 9.9
Qatar 15
Bahrain 3.5
Kuwait 10.5
Oman 12.6
Source: Index of Economic Freedom, 2010
Population growth is around 4% for
GCC.
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The first is the high rate of unemployment among the youth, a problemexacerbated by the high rate of population growth
The second is the limited role of the private non-oil sector in generatingemployment opportunities accepted by GCC nationals.
The third is the status of foreign labor, which in most GCC countries
constitutes the majority of the workforce.
The fourth is the low female participation among the GCC nationals
The policy of trying to substitute foreign workers by natives has become acommon policy across the GCC countries.
The Labor Market Predicament
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Inflation in GCC
Inflation in the GCC, peaked at around 11.1 per cent in 2008 before diving tonearly 2.9 per cent in 2009
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Over the period 20022008, inflation in the GCC countries has mainly beendriven by
Demand pull side:
Inflow of liquidity as a result of higher oil prices thereby pushing aggregate demand
Increasing government expenditure for economic diversification further fuels the flame
Ever increasing population, due both to demographic transition and huge influx ofexpatriates
Strong domestic demand accompanied by a growth in money supply and credit;
Cost push side:
Pegging to a depreciating U.S. dollar by increasing the cost of goods imported.
Bottlenecks in the economy and lack of supply, especially in the non-traded sectorssuch as real estate;
Rising world food prices;
Rising raw material prices, for example for steel and cement;
Rising labor costs.
High Inflation in GCC
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Several central banks have increased the reserve requirements andtightened loan-deposit ratios in order to slow down private credit growth
All countries are trying to increase the supply of real estate while at thesame time monitoring the market, in order to avoid dramatic price increases.
The United Arab Emirates increased the salaries of federal public sector
employees by 70 percent; Oman raised them 43 percent.
In January 2008, Saudi Arabia announced a set of measures designed tocontain inflation including subsidizing a wide range of fees, awarding a 5percent cost-of-living allowance to all state employees and pensioners, andboosting social security payments.
Bahrain set up a $100 million fund to be distributed to people mostaffected by rising prices.
Besides the pricing control measures, authorities lowered duties onimports especially on construction materials to ease the pressure
Steps taken to reduce inflation
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In general political governance in the GCC countries is weak
civil liberties, Institutional Governance (Transparency)
Governance
Corruption Perception Index 2010
GCC countries Score on 10 Rank on 178Economicfreedom
UAE 6.3 28 Moderately free
Saudi Arabia 4.7 50 Moderately free
Qatar 7.7 19 Moderately free
Bahrain 4.9 48 Mostly free
Kuwait 4.5 54 Moderately free
Oman 5.3 41 Moderately free
High score indicates corruption free
Source: Transparency International survey, 2010
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USD 149bn of new contracts were awarded across the GCC in 2009, anincrease of 15% on 2008.
A large proportion of government spending in the GCC has been focused oninfrastructure investments to support economic development.
There are USD 31.9bn worth of university projects planned or underway in
the GCC.
There are USD 13.4bn worth of hospital schemes planned or underway in theGCC.
The GCC schools project market is much smaller with just USD 3.2bn worthof projects planned or under way.
Future outlook :
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Oil revenue is continued to be the driver of development in GCC.
GCC countries should be able to maintain a balanced budget quite easily.
manage oil revenues by balancing between creating jobs and improvingliving standards
A collective approach is needed to avoid duplication and it may enhanceintegration
Non-fiscal policy instruments should be brought into play.
Conclusion
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Oil is wealth
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Old Dubai
Old Sheik Zhayedroad Dubai
Old Dubai Creek
Airport
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Present Dubai
Sheik Zhayed Road Dubai
Old Dubai Creek
Airport
Gold Souk
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Shukran