Tuesday, March 19, 2024 | Ramadan 8, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Challenges facing diversification in the region

Haider-al-Lawati
Haider-al-Lawati
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Haider Al Lawati - haiderdawood@hotmail.com - Economic diversification remains the main objective of the Gulf countries as they face challenges in the diversification process away from hydrocarbons. Moving forward with economic diversification policy requires political and economic security and stability of the region, along with the contribution of the oil and gas sector in the economies of these countries.


So far, the diversification efforts have not borne fruit despite the fact that Gulf governments announced ambitious diversification plans years ago, according to a report published by S & P Global titled, ‘Gulf governments face difficulties in diversifying away from oil and gas’.


These plans gained momentum recently after a sharp decline in the oil prices. Governments have drawn up national development plans ranging from 20 to 25 years, usually with medium-term strategies of five years.


They assess whether the country is on track to reach its short-term targets, mainly aimed at diversification by expanding sectors such as tourism, business, financial services and logistics.


According to S & P Global, this will likely take a decade or even pass on to the next generation. It believes structural constraints will hamper the transition to more diversified economies.


Today, GCC countries are using vast resources of oil and gas. However, heavy reliance on oil and gas revenues remains a major credit risk as viewed by various institutions and economic analysts.


GCC governments are facing difficulties in diversifying away from hydrocarbons despite the implementation of national development plans, but the structural constraints will hamper any attempts to diversify the economies away from oil.


These countries are still reaping benefits from huge oil and gas resources, amounting to 30 per cent of the world’s oil reserves and 20 per cent of the global gas reserves, while their population is less than 1 per cent of the world’s 7.5 billion.


This massive wealth of oil and gas, and a large income earned by these countries have generated surpluses to their governments in the past, resulting in a decline of government funding needs as well as enhanced net foreign asset positions in most Gulf states.


These were considered main strengths in the sovereign credit ratings of these countries with an average of 30 per cent of GDP and 60 per cent of total exports during 2015-2016 for the oil and gas sectors.


Taking into account the decline in oil prices since mid-2014, this constitutes a negative factor for credit.


The global rating companies have cut credit ratings of long-term foreign currency for most countries in the region. They were also placed under surveillance in under negative circumstances due to the crisis within the GCC.


According to the report, the depletion of hydrocarbon resources in most of the member states may not be imminent as their current economic models are working relatively well, while the lifespan of oil and gas production at current levels ranges between 98 years in Qatar and nine years in Bahrain.


However, the benefits of diversification away from revenues of oil and gas sector are largely driven by volatile market prices in terms of achieving further economic growth, along with government and export revenues.


Finally, the report notes that due to the decline in oil prices and pressure on public finances of GCC countries, their governments are trying to stimulate economic diversification led by the private sector, but the national workforce in the GCC requires training as creation of employment opportunities in the private sector is unclear.


In any case, the local workforce needs extensive training and education in order to be eligible for these jobs, and investing in education will take time to bear fruit.


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