In a year of global economic uncertainty fuelled by inflation, geopolitical crises and supply chain insecurity, the Middle East witnessed a second consecutive year of economic growth, with countries in the region investing in new technologies and projects that could herald greater integration in the years ahead.
Whereas global GDP expansion is projected to slow from 6% in 2021 to 3.2% in 2022, sustained high oil prices are set to push GDP growth in the Middle East from 4.1% in 2021 to 5% in 2022, according to an October forecast from the IMF. Although regional economic expansion is slated to moderate somewhat to 3.6% in 2023, this nonetheless outpaces the projected global figure of 2.7%.
Oil-producing countries in the GCC were the region’s top performers this year: Kuwait’s GDP is expected to expand by 8.7% in 2022, followed by Saudi Arabia (7.6%), the UAE (5.1%) and Oman (4.4%). Iraq, meanwhile, saw GDP growth of 9.3% on the back of oil, while Egypt (6.6%) and Algeria (4.7%) continued their post-Covid-19-pandemic recoveries.
The windfall from oil revenue has generated more fiscal flexibility and external balance surpluses, allowing GCC members to continue to fund their diversification efforts, while improving diplomatic relations have opened the possibility for enhanced regional and global integration.
GCC members are in a strong position heading into the new year. High energy prices in 2021 helped the Gulf’s largest economy, Saudi Arabia, forecast its first budget surplus in eight years for 2022. Even so, many countries remained focused on balancing their budgets after two years of pandemic-related spending – a trend that continued into 2022.
In past periods of high oil prices − for instance, in 2002-08 and 2011-14 − public sector wages in the GCC rose by 51% and 40%, respectively. This time, however, the increase in expenditure, especially in wages, was limited despite the region accruing a combined $100bn surplus in 2022, according to the IMF.
Reforms in the banking sector were another factor behind improved fiscal balances, as GCC banks remained shielded from macroeconomic conditions and took measures to ensure future stability.
By embracing digitalisation, diversifying funding sources, and establishing sustainable finance networks that help safeguard against social and environmental risks, Gulf financial service providers are working to mitigate future risk.
Investment in cybersecurity was another notable trend in 2022, as cyberattacks proliferated in the wake of Russia’s invasion of Ukraine. In May Saudi Arabia’s National Cybersecurity Authority launched the National Portal for Cybersecurity Services to develop and manage cyber-services, support communication mechanisms and enhance cybersecurity capacities for more than 400 national entities.
Positive fiscal balances in the coming years – GCC countries are expected to save 33% of their oil revenue from 2022 to 2026 – are positioning the Gulf to fund efforts to diversify away from hydrocarbons revenue.
This past year was notable for the interest in new or emerging technologies such as artificial intelligence (AI) that can enhance high-value sectors such as energy, finance and government services. Abu Dhabi National Oil Company (ADNOC) has already deployed machine learning to mine its historical and current data to generate scenarios and forecast operations.
Manufacturing, health care, education, automotive, retail, e-commerce and transport are other areas of the economy that could benefit from such technology, which could generate an estimated $320bn for the region by 2030.
In recent years, Egypt, Qatar, the UAE and Saudi Arabia have published ambitious, government-driven strategies to develop AI, coupled with significant investment in education. With roughly three-quarters of Saudi Arabia’s Vision 2030 goals involving data and AI, the Kingdom plans to train 20,000 data and AI specialists by the end of the decade.
Diversification efforts in the region have also focused on enhancing food security in response to supply chain disruptions caused by Russia’s invasion of Ukraine. Prior to the Covid-19 pandemic, the GCC relied on imports to meet 85% of its food needs.
Substantial public funds are being allocated to support supply chain resilience, as well as agri-tech to produce innovation and local solutions, including alternative varieties of crops. Saudi Arabia, the GCC’s largest food importer, established two funds worth a combined SR2.5bn ($666m) – one focused on providing loan guarantees for exporters of key goods and the other directed towards local farmers.
Meanwhile, Egypt, despite being an agricultural powerhouse, relies on Russia and Ukraine for nearly 70% of its wheat imports, and several agri-tech start-ups are working alongside the government to address this shortfall.
Revenue drives the energy transition
The efforts and successes of GCC countries in driving the production policy of the Organisation of the Petroleum Exporting Countries (OPEC) has played a central role in keeping oil prices high.
When the global economy looked especially fragile in the September and high oil prices were adding inflationary pressures to consuming countries, oil-producing countries in the Gulf led an additional production supply cut despite pressure from the US against the action, seeing that demand was set to weaken.
Oil prices indeed fell in the subsequent months, which means that the Gulf’s leadership may have warded off a potential price collapse if OPEC had continued producing at summer levels.
This policy has ensured robust energy revenue, which has in turn been directed towards investment in the energy transition, specifically in the capacity to deploy carbon capture, utilisation and storage technologies and produce hydrogen.
Saudi Arabia announced plans to lead the world in hydrogen production and aims to produce 2.9m tonnes per annum (tpa) by 2030 and 4m tpa by 2035. In March it started construction on the $5bn wind- and solar-powered hydrogen plant at its NEOM mega-project. The facility will be the largest hydrogen plant in the world upon completion, producing 650 tonnes per day.
In May ADNOC announced a new energy partnership with BP to develop hydrogen centres in both the UAE and the UK. ADNOC is set to acquire a stake in BP’s H2Teesside hydrogen project, while BP will invest in ADNOC’s green hydrogen plant at Abu Dhabi’s Masdar.
Gulf countries have also committed to generate renewable energy sources, backed by the region’s abundant solar potential. Saudi Arabia, for example, aims to produce 50% of its electricity from renewables by 2030.
In 2023 the region will look to leverage these areas of focus within the energy transition as the UAE hosts the COP28 UN Conference on Climate Change. Home to a wide range of clean energy innovations and the International Renewable Energy Agency, the UAE’s role as host of the conference will shape the agenda, which is set to focus on decarbonising five sectors – power, road transport, steel, hydrogen and agriculture – to reduce energy costs and enhance food security.
With building and cement responsible for more than 50% of global emissions, COP28 is also likely to include efforts to decarbonise these areas of the global economy.
Future trade growth
An improved economic outlook encouraged Gulf countries to invest in projects that could enhance long-term regional economic integration and trade.
One promising development was the revival of the GCC Railway project, which would run from Kuwait City in the north through Jubail and Dammam in Saudi Arabia before passing through Manama in Bahrain and Doha in Qatar. The line would then return to Saudi Arabia and pass through major areas of the UAE − Abu Dhabi, Dubai and Fujairah – before moving south to Muscat in Oman. The ability to move large-scale goods by rail would augment connectivity and regional trade.
Last December the six leaders of the GCC countries agreed to establish the GCC Railways Authority to oversee the project. While the project was previously hindered by fiscal pressures, these moves could be a harbinger of increased regional economic integration. In the meantime, Qatar, Saudi Arabia and the UAE have taken steps to improve their domestic rail networks in 2022.
The GCC also launched negotiations with the UK in June for a region-wide free trade agreement that looks to bolster renewable energy and food security.
There is no official timeline for the completion of the deal, but both sides continued negotiations in 2022 and hope to reach an agreement by the end of 2023. Like the GCC Railway project, the deal stands to enhance the region’s leverage as a global trade bloc.