Why the Gulf region is well placed to play a key role in the post-pandemic global economy

Even as the robust post-pandemic rebound has been disrupted by the cost of living crisis and war in Eastern Europe, the Gulf region looks set to remain a relative bright spot for the global economy.

Projected gross domestic product (GDP) growth for the Gulf region as a whole in 2022 is close to 7%, while about 3.5% seems achievable even in 2023. For instance, Bahrain’s non-oil growth reached an 11-year peak of just over 9% year-on-year in Q2 and has been running at an annual 7.2% during the first three quarters.

These are strong figures by the current global as well as historical standards. While this strong performance owes a great deal to the recent oil market dynamics, there is more to the story.

The strength of the Gulf economy reflects the effective handling of the COVID-19 pandemic by the regional authorities who showed successful crisis management in terms of tracking infections, managing risks and rolling out vaccines.

This resilience has permitted an impressive rebound in economic activity. External connectivity has largely normalized, supported by the competent management of a growing tally of mega-events such as Dubai Expo 2020.

This has also enabled the Gulf to ramp up its efforts to develop strategically important outward-looking activities ranging from trade facilitation to tourism.

The Gulf countries are also well positioned for a pivotal role in the global energy transition. They are showing leadership in areas such as the circular carbon economy, while boosting efficiency across the oil and gas value chains. But at the same time, they are embracing the transition through national clean energy and net-zero targets.

The Gulf has repeatedly seen record-breaking solar energy investments while energy efficiency is emerging as a key driver of productivity. Green hydrogen presents considerable export potential, allowing the Gulf to capitalize on its empty spaces and ample solar radiation to enable the global fight against carbon emissions.

Increasing energy market integration within the Gulf and beyond is making clean energy exports possible. This would allow the regional countries to replicate their strategic role in oil and gas in energy provision more generally.

The growth momentum in the Gulf Cooperation Council (GCC) is underpinned by a strategic vision that is continuing to propel the diversification of the regional economy into new areas. Located at the heart of the Old World, the Gulf offers first-rate infrastructure, globally competitive regulations and a young, well-educated population. These factors are an important guarantor of economic dynamism, resilience and adaptability going forward.

The regional policy visions and development strategies depict a future underpinned by dynamism, productivity and innovation. To this end, substantial investments have been channeled for years into areas ranging from education and research to technology adoption and innovative start-up entrepreneurship, and they are accelerating further.

Fiscal overhauls, unprecedented capital mobilization and a culture of openness are transforming the rentier economies of yesteryear into a dynamic hub of global importance.

Economic diversification is not only continuing to overhaul the GDP composition of the regional economies, but also driving export growth and sophistication. Substantial progress has been made with service exports such as logistics, finance and tourism, but value chains are also being stretched with non-oil exports to create new opportunities.

Global connectivity has been at the heart of the Gulf development strategies for decades – a logical focus for a region flanked by the world’s two most populous and demographically dynamic continents, Asia and Africa.

But the Gulf countries’ first-rate infrastructure and adaptable regulation are increasingly leveraged by businesses from Europe and the Americas as they pursue opportunities in the growth markets of tomorrow. They are also enabling a growing number of GCC corporations to operate with an increasingly global reach.

The Gulf's advanced infrastructure is coupled with openness to trade through a region-wide commitment to low tariffs, supported by ongoing progress in establishing favourable trade arrangements in multiple directions.

The Gulf is a key partner of the Pan-Arab Free Trade Area, but has also established free trade agreements with countries ranging from New Zealand to Singapore.

Multiple other free trade agreements are being negotiated. For instance, the China-GCC deal is reportedly at final stages. Individual GCC countries have many additional trade agreements. Together, they amount to minimal barriers to trade in multiple directions.

This not only allows the region to pivot in different directions in its trade relations in response to evolving circumstances. But it also entails a strong basis for multi-directional foreign economic policy that allows the region to effectively capitalize on its competitive infrastructure.

The regional economies have over the years strengthened their external ties through substantial investments and development aid. Deposits made by Gulf central banks in their counterparts in countries hit by the COVID pandemic or the disruptions linked to Russia's war in Ukraine have been instrumental for safeguarding macroeconomic stability in important regional economies such as Egypt.

But the focus is shifting increasingly toward commercial investments. Saudi Arabia’s Public Investment Fund, for instance, recently announced the creation of five companies to drive multi-billion-dollar investments in Bahrain, Iraq, Jordan, Oman and Sudan. One of the many benefits of this growing regional focus for capital mobilization is the creation of value chains that can leverage the resources of multiple economies and bring broader economic benefits.

Investment in general is at the heart of the Gulf countries’ future ambitions. It represents a logical way of capitalizing on the region’s exceptional financial wealth by creating new productive capacity.

Perhaps the most salient example of this posture in Saudi Arabia’s recent National Investment Strategy, which envisages the mobilization of more than SAR27 trillion ($7.1 trillion) in the national economy by 2030, thereby boosting the GDP contribution of investment from 22% in 2019 to 30% by 2030.

Other ambitions investment programmes, whether it be the UAE Projects of the 50 or Bahrain’s Economic Recovery Plan with $30 billion of planned projects, envisage unprecedented capital mobilization in a way that is balanced and focused on creating new productive capacity.

The Gulf countries are all committed to attracting foreign direct investment (FDI), which, even amidst global economic challenges, has been rising again in recent years, from a regional total of $14.5 billion in 2017 to $44.4 billion in 2021. Bahrain alone attracted FDI of $921 million in Q1-3 of 2022. In addition, the Gulf has seen sharp pick-up in activity in its capital markets with a growing number of initial public offerings.

The Gulf region’s young population is an important source of competitiveness. The average age of the regional population remains below 30 while the level of human development, as measured by the UN Human Development Index, is very high by global standards.

Massive investments also continue to be made in education, including through institutions such as the King Abdullah University of Technology in Saudi Arabia, which is one of the world's fastest growing research institutions.

The Gulf countries are also redoubling their efforts to attract exceptional talent and retain it through visa regulations that recognize the value of human capital in driving economic development. For many in today’s world, the Gulf region offers a unique combination of economic dynamism, high quality of life and an attractive location.

The Gulf countries at the heart of the broader Middle East are well positioned for a place of rapidly growing importance in the evolving global economic order. They will build their success with a long-term perspective on openness, quality regulation and economic diversification. Their regional value proposition, which is compelling today, is likely to continue to grow in the years and decades ahead.