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    The future of Gulf diversification

    Published On: 21 March 2019

    Cordelia Begbie, Middle East Programme Manager and Isabelle Mere, Advisory Associate

    Ahead of our Future of Trade conference, held in partnership with DMCC in Dubai on 24 March, Asia House Advisory looks at the Middle East’s efforts to diversify and the role Asia will play in this transition.

    Amidst the changing global trade order, the Middle East is assuming greater importance in terms of both its strategic positioning and its favourable foreign investment incentives. Gulf Cooperation Council (GCC) member countries have seen the need to diversify their economies away from hydrocarbons and as a result have been looking abroad for both investment and cross sector knowledge transfer and expertise.

    GCC members – Saudi Arabia, the United Arab Emirates, Bahrain, Qatar, Kuwait and Oman – all have national and economic ‘visions’. These visions outline plans to create more diverse economies and more inclusive societies. The UAE, and Dubai in particular, is seen as a success story of economic diversification. However, other countries in the region still face uncertainty and significant roadblocks in their attempt to diversify, and further integrate into global markets, not least because so many sectors are still affected by the rise or fall of oil prices.

    Saudi Arabia and its Vision 2030 have been a key focus of international institutions when looking at the region, being the largest economy in the Gulf – closely followed by UAE. The recent trip of Saudi Crown Prince Mohammad bin Salman (MBS) to Asia, highlighted several significant trends that are pertinent for the Gulf region’s economic development pathway.

    Firstly, politics does and will continue to be a major factor for the region’s engagement with global markets. Secondly, Asia will have an increasingly important role in the Gulf’s economic transformation. Finally, despite efforts to diversify, oil dependency is likely to remain a key driver in the Gulf economies for the foreseeable future.


    MBS’ trip was part of Saudi Arabia’s ongoing efforts to promote international economic engagement with the Kingdom. It was a significant profile-raising exercise for the Crown Prince and the trip was widely regarded as brand management, after the reputational damage and bad publicity he received last year during the Khashoggi affair, specifically from Western media.

    Since then Saudi Arabia has experienced a ‘diplomatic chill’ from the West, forcing it to strengthen relations elsewhere and further increase its focus on Asian markets. Consequently, MBS signed agreements in all three countries he visited, Pakistan, India and China; countries that will work with Saudi in ways the West will not.

    Given the state and power structures throughout the Gulf and the nature of politics in Saudi in particular, it is likely that there will be further events causing political sensitivities. The on-going war in Yemen is another clear example, as well as the diplomatic spat with Qatar in 2017.

    In Pakistan MBS signed agreements worth US$20 billion, including US$10 billion for an oil refinery in Gwadar, the coastal city that is a key element in China’s Belt and Road Initiative. The China Pakistan Economic Corridor (CPEC), a key element of China’s strategy in the region, has also sparked the interest of the UAE. Pakistan is strategically positioned with access to China and other Central Asian countries; its current drive for foreign investment from regional neighbours in the form of incentives are increasingly too important to miss out on.

    In India, MBS received a warm welcome from Modi and signed five agreements on infrastructure, investment, tourism, housing and broadcasting. In China, Saudi Aramco agreed to form an oil refining and petrochemical complex joint-venture worth US$10 billion.

    China and India themselves are also increasingly interested in Gulf countries. Both countries are investing in Oman’s Duqm Economic Zone – including an oil refinery capable of processing up to 230,000 barrels of crude oil per day and a multi-purpose harbour, which would provide access to the main sea lanes in the Red Sea and the Gulf. This would allow the same access as Jebal Ali Port in the UAE but without the complications that come from having to go into the Strait of Hormuz.

    This is not to say that Western countries are absent from the region. The West have several huge deals with Gulf nations including energy and defence. Due to the strategic nature and the scale of these deals, backtracking is unlikely. Other elements to consider are that Western nations currently benefit from significant Gulf investments into major cities, including London, and the Gulf has also been increasingly a prime market for the West to export their services, sector expertise and manufacturing.

    MBS’ strategy of seeking engagement with Asia shows that Saudi power-brokers are all too aware that foreign investment and engagement in international markets may be jeopardised by political events. It is therefore imperative that GCC countries create a wider network of relationships and allies. Navigating political and economic affairs will continue to be a tricky balancing act for Western and Gulf nations, between ideological and economic imperatives.

    Emerging Asia’s relationship with the Gulf

    Trade between the Middle East and emerging Asia is growing at a faster rate than trade between the Middle East and the West. China is the top import and export destination of the Gulf as a whole; it is the largest trading partner for both Saudi Arabia and Bahrain and in the top five for all other GCC nations.

    Economic expansion, population growth and a burgeoning middle class across the region have driven commercial opportunities for Asia-based companies to provide not only products but sector-specific expertise. Meanwhile, emerging Asia is thirsty for the Gulf’s oil and investment.

    Cementing ties to these emerging markets will therefore be key for the GCC’s economic transformation. See more on this here.

    Oil reliance

    The investments and agreements signed off in Asia by MBS show that while Saudi is still heavily dependent on oil for now, it is trying to leverage its natural resources effectively for the future. Others will likely follow suit. Dubai has managed to reduce its oil revenue down to 1 per cent of GDP, however, other GCC nations still have oil revenues of around 50 per cent of GDP, accounting for most of the government’s revenue amidst rising budget deficits.

    Leveraging hydrocarbon resources for growth in other areas is not always easy. Continued reliance on oil exacerbates macroeconomic volatility; if the oil price drops, the resulting decline in the fiscal income of Gulf states can create holes in state budgets. In turn this hinders non-oil economic growth and private sector development, as this is often driven by public sector funding in GCC countries.

    Unfortunately, there is no clear trajectory for oil prices, based on several factors including the US production of shale oil and other fuels, the strong US dollar and changes in both global demand and OPEC output levels. So, although Gulf nations have a clear vision to move away from oil reliance, these macroeconomic factors could hinder the economic diversification in the short to medium term, if there is not a significant increase in foreign investment.


    The uncertain global trading environment, weakening global economic expansion and the effect of political differences and expectations with the region, all create impediments to the Gulf nations achieving their strategic visions. The Gulf therefore is looking to where they can gain advantages, by strengthening engagement with emerging Asia.

    These trends, as well as the challenges and advantages they create, should all be kept in mind when assessing the GCC’s economic diversification and the prospects of private sector development.


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