GCC states were recently defined as economies ‘growing by oil’ and ‘slowing by oil’ by the World Bank. With oil and related products contributing to a major share of their GDP, GCC states do get affected by any fluctuations in oil prices.
In the last decade, many steps have been taken to diversify and reduce dependence on oil with another slew of initiatives lined up for the coming years. We analyze the GDP composition with focus on diversification efforts.
Source: Authorities data and IMF Estimates, World Fact book CIA, 2015
The first graph on GDP Mix above tells us about the contribution to income from agriculture, industry and services sector. A quick look above will tell you that it is difficult to find blue like water in a desert. Given the topography and climactic conditions of the region, agriculture forms a very small share, with highest being only 2% in Saudi Arabia.
Industry contributes maximum to output most of which is oil and related products. Industry dominates most GCC countries, closely followed by services. As an economy moves from a developing to a developed country, its GDP composition shifts more towards services. The services contribution is high for the GCC countries and increasing but its industry contribution is equally high due to oil production. As the economies move towards being a knowledge economy, the composition will shift in favor of services.
Given that GCC economies are major oil producing countries, it is important to also see the GDP mix from that angle. With oil price plummeting in the past and the world moving to cleaner renewable sources, GCC countries have been diversifying to other industries and services, reducing their dependence on oil.
Source: Authorities data and IMF Estimates, 2015, Statisca
The second graph shows how much oil and related products contribute to GDP in GCC benchmarked against USA.
The percentage is high across GCC countries except for Bahrain. Saudi Arabia has diversified to cement, fertilizers, plastics, metals, construction and electricity, gas and water distribution. Within services the l¬¬¬argest segments are: government services (13% of GDP), wholesale and retail trade, restaurants and hotels (8%), financing, insurance and real estate (7.9%).
Bahrain has increasing focus on banking and financial services—particularly Islamic banking. Reasons for its strong banking sector are proximity to neighboring GCC states and the MENA region, proximity to Saudi Arabia, the region’s biggest economy, strong ties with Kuwait, and Kuwaiti firms and skilled workforce.
Most of GCC states have strong banking services. This is reflective in the GFCI index where 4 of GCC countries featured with UAE in the top 20 in March 2016.
GCC is diversifying to solar energy and nuclear energy with investments in major projects. Banking is the leading area under the services sector. They have been successful so far in doing so and are bringing in more and more policies to reduce dependence on oil.