IBDE

THE GULF CO-OPERATION COUNCIL (GCC) region (here: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) has been an attractive region in which to do business over the past many years - indicating strong growth potential. However, the recent events unfolding in the Arab world have caught many business executives off-guard. Still, this “wind of change”, in the long term, should be seen as a positive development by the international businesses operating in emerging markets. In general, positive changes bring greater democracy and therefore better business legislation and regulation. In the short term, however, these abrupt changes bring a significant instability to the regional and international markets.  

When it comes to the Gulf States the current crisis will undoubtedly have an impact on trade, foreign direct investment, tourism, and regional as well as other international business activity. As a con-sequence, Bahrain and Kuwait could be the countries most affected in the region whilst Qatar and the United Arab Emirates (UAE) the least affected. The cancellation of the Bahrain Grand Prix, which was supposed to generate in excess of $500m a year of direct and indirect business in the country, is the first indicator of the potential losses that Bahrain could face. That said, the overall business and economic prospects in the region are mainly positive, partly due to strong regional economic co-operation.  

In this regard, the GCC members, as a part of their overall plan for deeper economic integration, have taken important steps to deepen their economic integration. These moves have led to the establishment of a Customs Union in January 2003, unifying customs and tariffs policy throughout the GCC. In January 2008 they launched a Common Market throughout the GCC which grants national treatment to all GCC firms and citizens in any other GCC country - removing all barriers to cross-country investment and trade services. Economic regional co-operation has been relatively successful in promoting trade in goods, and eliminating or reducing both internal and external tariffs among states. Their trading activities with other regions such as the EU have also increased.   

In order to further generate economic growth by removing the administrative costs of cross-border transactions the region has sought to introduce a unified currency. A single currency for the Gulf States, if created, will offer states a degree of monetary stability which the region currently lacks, and will transform the monetary control from national governments to GCC institutions. However, although a monetary union was aimed to be completed by 2010, old political rivalries mean states have not yet created one. The progression of a common monetary union has been further handicapped, first by Oman’s refusal to join - due to slow progress on implementing customs union regulations - and by the UAE’s refusal following a dispute about the location of the GCC Central Bank. The recent currency crisis within the Eurozone could potentially strengthen the opposition towards a joined currency. 

This process is further  hampered by an inability of the GCC to implement some agreements as a consequence of  many member states being plagued by poor governance and limited administrative capabilities. Nevertheless, in order to further attract foreign direct investments in the region further economic reforms would be necessary for the countries themselves and foreign investors. Further reduction in tariffs barriers, liberalization of services and further administrative and institutional reforms would increase the potentials and the possibilities of the Gulf States in offering good business and attracting more foreign direct investments. 

Another big threat to the Gulf economies is water scarcity and energy security. The Gulf States - as the world’s largest oil exporters - therefore need to further deepen their economic cooperation to effectively meet the challenges that the region faces, as a result of the declining levels of oil and water. As a response to this threat there seems to be a move towards diversifying their economies in other sectors (Bahrain, for instance, has diversified its economy in the financial sector) in an attempt to avoid its financial dependence on oil. Further enhanced regional economic cooperation would certainly go some way to helping countries find other forms of cross-border investment opportunities. The production of solar energy, for example, as the most advanced form of energy in terms of technology and profitability could attract foreign investors. 

Finally, it is important that, when devising long term investment strategies, multinationals look at a broader picture. Strong regional economic cooperation (as is the case in the Gulf States) brings many benefits to both countries engaged, but also to multinationals operating in the region. Governments in this region should send clear and reassuring messages to the international business community that they will continue to commit themselves to sustainable fiscal policies, and under-take the unnecessary economic, political and regulatory reforms that are appropriate for the current circumstances, taking into account the scope of the recent unrest in the Arab world.  

Some key data for the GCC countries:  

·         Oil accounts for about 50 per cent of the GCC’s GDP and 80 per cent of its fiscal and export revenues

·         The global crisis combined with current political instability in parts of the Middle East have underscored the need for enhanced communication and transparency in both public and private sectors in the GCC

·         Life expectancy in the GCC area increased by almost 10 years to 74 years during 1980–2000

·         Literacy rates increased by 20 percentage points to about 80 per cent over the same period

·         Central Bank international reserves alone in some GCC countries are equivalent to about 10 months of imports 

The GCC  Economic Structures according to M Sturm, J Strasky, P Adolf, D Peschel  

·         A high dependency on hydrocarbons as expressed in the share of oil (and gas) revenues in total fiscal and export revenues, and the share of the hydrocarbon sector in GDP

·         A young and rapidly growing national labour force; and a heavy reliance on expatriate labour in the private sector

·         In terms of trade, the RCC role as trade partners has increased over the years, with the European Union being the major region in the world maintaining a significant surplus in bilateral trade with the GCC

·         Most of the RCC imports originate in Europe. By contrast, exports by GCC countries –mainly consisting of oil and oil derivatives are strongly oriented towards Japan and emerging Asia, while Europe’s oil imports originate mainly from oil producing countries in the Commonwealth of Independent States and North Africa

·         In terms of business environment, the World Bank Doing Business indicators rank GCC countries at the top of Middle Eastern and North African countries, with Saudi Arabia in particular having improved its ranking over recent years

·         In terms of governance, World Bank governance indicators also show that GCC countries do considerably better than their peers in the Mediterranean region and in other emerging markets in the broad neighbourhood of the EU, but lag behind the OECD countries   

The GCC in 2020 according to the Economist Intelligence Unit  

·         In 2020, the GCC is projected to be a US$2trn economy, providing nearly one-quarter of the world’s oil supplies as well as increasing quantities of petrochemicals, metals and plastics

·         GCC is likely to continue gradual efforts at economic integration, including a single currency, a single central bank and greater harmonisation of legal and regulatory environments

·         Iran’s role in the region is seen as one of the key uncertainties over the next decade. The evolution of the GCC’s relations with Iran will be closely linked with developments in Iran’s relations with the US, given the existing ties between the US and the GCC

·         GCC investors are likely to be at the forefront of investment in Iraq, assuming its security situation continues to improve, given the size of its market and the great potential of its oil sector