The Middle East economy in the next decade - Survey results

30 December 2010

While political reform, technology and China will be important factors shaping the region in 2020, the push to establish a sustainable, diversified economy will remain key to growth in the next 10 years

The sight of Qatar’s emir Sheikh Hamad bin Khalifa al-Thani celebrating in Zurich on 2 December after Doha won the right to host the 2022 Fifa World Cup provided a fitting image on which to end the decade.

Qatar has been the region’s star performer throughout the past 10 years, successfully using its abundant gas reserves to deliver consistent double-digit growth that has established the tiny Gulf state as the world’s wealthiest country and a leading regional player. And now, it seems, as a centre for international sport.

It is easy to forget that at the start of the decade, Doha had not delivered a budget surplus for almost 10 years, and that the country was close to bankruptcy.

MEED Survey Results
RankThe trends that will shape the regional economy over the next decade Percentage of votes
1Meeting rising demand for electricity and water67
2The shift from West to East55
3The opening up of Saudi Arabia48
4Defusing the demographic timebomb47
5The re-emergence of Iraq46
6The drive to develop social infrastructure and services45
7The succession of a new generation of regional leaders43
8Oil prices41
9The drive for political reform40
10Improving the region’s transport links40
11Delivering regional security40
12A nuclear decade39
13Changing technology38
14Ensuring regional food security38
15Financial market reform35
16Isolated Iran32
17Developing downstream oil and gas sector32
18The credit crunch hangover28
19Increasing regional integration28
20 = The rise of renewables28
20 = Public-private partnerships (PPP)28
Source: MEED

Looking back at the last decade in the Gulf

What a difference a decade can make. Ten years ago, regional icons such as the Kingdom Centre in Riyadh and Dubai’s Palm Jumeirah and Burj Khalifa, did not exist. Libya was a pariah state, and Saddam Hussein still ruled in Iraq. The transformational events of 11 September 2001 had not yet happened and no-one had heard of the ‘War on Terror’. 

Despite 40 years of heavy investment in the non-oil economy, the region is still geared around energy exports

But in the decade since, the Middle East has been transformed by a wave of liquidity from record high oil prices, increased hydrocarbons production and a global credit boom. The region’s governments succeeded in steering much of this cash glut into infrastructure and real-estate investment, which has laid the foundations for strong and sustainable economic development in the years ahead.

Doha, together with nearby Dubai, encapsulates the story of the Middle East economy over the past 10 years.

The next decade is sure to deliver equally significant change. But what will that change involve? Will Middle East economic growth still be dependent on oil sales? Will the re-emergence of Iraq as a market reshape the region’s economic power base? Or will a lack of political reform lead to more extremism?  

In November 2010, MEED conducted an exclusive survey of its subscribers aimed at identifying the key trends that will shape the region in the coming decade. In this special edition of the magazine, MEED looks in detail at each of the top 20 trends indentified by readers that will shape the Middle East economy in 2020.

Focused investment in the Middle East

The survey showed that the development of the region’s infrastructure will continue to be one of the most critical themes for the next decade, with the need to improve power and water capacity, transport links, and social infrastructure, such as schools, hospitals and housing, as well as industrial output, all featuring in the top 20.

That infrastructure development should feature so prominently is no surprise. Despite 40 years of heavy investment in the non-oil economy, the region is still built on the revenues energy exports bring.

This was highlighted in 2009 when the collapse of oil prices in late 2008 from $147 a barrel to about $35 a barrel, had a catastrophic impact on the Middle East. The regional economy shrank by 13.6 per cent in 2009, with the GCC contracting by 19.5 per cent.

Diversifying Gulf economies

It was hardly surprising. Since 2000, the oil sector has accounted for about 46 per cent of the GCC’s gross domestic product (GDP), about 75 per cent of the region’s exports and about 84 per cent of government revenues.

The push to diversify in order to create jobs for the region’s rapidly expanding young population and to create a more stable economic base will therefore remain the underlying driver of activity in the coming decade.

But, while the need to diversify is common across the region, the pace of development will not be. The enormous disparities in wealth between the oil-rich GCC states and the rest of the region – per capita income in Qatar is about $80,000 while it is little more than $1,000 in Yemen – mean that the GCC states will remain the engines of the regional economy in 2020.

Non-oil growth in the Gulf

The GCC accounts for more than 20 per cent of global oil supply and some 40 per cent of proven reserves. In the coming decade, high oil prices sustained by substantial growth from the emerging nations and recovery in the West, will see the GCC economy double in size from just under $1 trillion in 2010 to $2 trillion in 2020.

GCC governments will lead capital investment by recycling surpluses and promoting diversification

According to the Paris-based International Energy Agency, growth in global oil supply in the next 10 years will come mostly from the GCC, with the bloc’s share of global oil demand to increase from 18 per cent today to more than 24 per cent in 2020.

It is not merely access to petrodollars that will give the GCC states their strength in the next decade. Another key factor is the political will and structures needed to drive development. With systems of government in the region ranging from radical republicanism in Libya to Sharia-based tribal systems in Arabia, the GCC leads the region in its political will to drive market liberalisation and structural reform.

In recent years, the GCC’s non-oil sector, led by the private sector, has established itself as the main source of growth. Non-oil growth in the GCC from 2000-08 was about 7.1 per cent a year compared with growth of 4 per cent in the oil economy. The private sector, in particular the banking and financial services, real estate and retail sectors will drive economic expansion in coming years.

And while the credit markets will remain restricted by the continuing fallout from the global financial crisis in the early years of the decade, GCC governments will lead capital investment by recycling surpluses and promoting diversification.

Challenges ahead for the Middle East

The projects industry will remain a major employer of foreign labour and a key shaper of the economy and of long-term development. Focus will shift to downstream development of refined products and petrochemicals, as well as establishing metals industries that add more value domestically and provide more job opportunities.

There will also be major challenges for the GCC to overcome; prominent among these will be a growing shortage of gas and rapidly rising demand for power and water. The potentially inflammatory issues of youth unemployment and succession will also occupy policymakers in the coming years. But with the lion’s share of the region’s oil wealth, the GCC will continue as the business hub of the Middle East, offering the most attractive opportunities for international companies and investors.

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