Doha, 31 October 2010

New QFCA study looks at GCC’s economic diversification

A new Economist Intelligence Unit report, sponsored by the Qatar Financial Centre Authority (“QFC Authority”), aims to show how the structure of the six GCC economies is likely to change over the next decade.

Released today, the report assesses the motivations for diversifying away from oil and gas and identifies the most promising non-oil sectors out of a range of sectors currently being pursued. As well as looking at the most likely scenario for diversification, the report also highlights the risks to the economy and to business if the region does not become less dependent on oil and gas.

Shashank Srivastava, Acting CEO of the QFC Authority commented:

“We are once again delighted to be supporting this important piece of research, which highlights huge potential and the challenges that lie ahead for this dynamic and exciting region. At the QFC Authority our proximity to some of the regions richest hydro-carbon reserves makes us ideally positioned to lead the development of Qatar’s financial services sector with our uniquely sustainable platform for regional growth and economic diversification.

It is also reassuring to note that the QFC Authority is aligned with the reports findings that education and skills will be key to economic policy issues for the GCC moving forward. Our own educational academy, the Qatar Finance & Business Academy (“QFBA”) is well placed to provide the very best in educational programmes for the financial services sector.”

The report, which was produced independently by the Economist Intelligence Unit, argues that although the oil and gas industry is the mainstay of the GCC economies, diversification is imminent in order to keep it thriving. It is the single largest sector in almost all the GCC states, in most of which it also provides some 80% of export earnings and government revenue.

The region’s oil and gas endowments have been lucrative, but they are limited resources that historically have been vulnerable to price volatility. According to the report, there are three main reasons why all the GCC states are looking to develop non-oil sectors in order to diversify their economies:

• Previous oil price slumps have highlighted the risks of oil dependence to the GCC states.
• These states are also keen to diversify because oil and gas provide few jobs, and the region’s fast-growing young population can no longer be absorbed by the public sector.
• Over the longer term, the GCC needs to prepare for the post-oil age, knowing that technological changes could significantly affect demand for oil even before reserves run out.

Policymakers will face five key trade-offs when pursuing diversification:

• Focusing on areas of greatest comparative advantage—generally energy-intensive industries—versus reducing dependence on hydrocarbons.
• Targeting most competitive industries versus a broad range of industries.
• Increasing the tax base versus maintaining low levels of tax to attract investors.
• Maximising growth versus targeting growth to create jobs for nationals.
• Pursuing nationalisation policies versus flexible labour markets.

The report also identifies four clear areas of comparative advantage for the GCC, and outlines key trends in each sector over the next ten years: energy-intensive manufacturing, for example petrochemicals, plastics, and aluminium; mining and mineral-based industries; trade (wholesale and retail) and logistics (based on location and experience); and tourism, hospitality and aviation.

While challenges remain, the outlook for non-oil growth is robust. Over the next decade, the share of GDP that comes from the oil sector will gradually decline. Non-oil growth is forecast to average 5.1% per year, much higher than the 3.3% annual average growth expected in the oil and gas sector.

The key success factor here is the progress of education reforms. The best-case scenario, as hoped for by policymakers, is that the GCC states will manage to convert their current tangible oil wealth into intangible human capital, by investing in the education and skills that are needed for a transition from economies based on the primary sector to more diversified economies with more value-added, skilled sectors. Such a transition will be difficult and risky. It is not likely to be achieved within the ten-year timeframe covered by this report. But this overarching ambition will continue to shape policy over the next decade. It means that education will probably be the single most important economic policy issue for the GCC governments in the years to 2020.

The GCC in 2020: Broadening the economy is available free to download at:
http://tinyurl.com/eiugulfreport

Note to editors
For further information or to arrange an interview with the author of this report, please contact:
Adriano Konialidis
Memac Ogilvy
04 305 0311
00971 50 659 6062
Adriano.konialidis@ogilvy.com

About the research
This is the fourth report in a two-year programme of research into the long-term trends that will shape the GCC economies over the next decade.
It was produced by the Economist Intelligence Unit and sponsored by the Qatar Financial Centre Authority.
The Economist Intelligence Unit has had full editorial control over the report. The report is based on in-house analysis by the Economist Intelligence Unit as well as in-depth interviews with business people, economists and academics familiar with the region and does not necessarily reflect the views of the sponsor. Jane Kinninmont was the author and Delia Meth-Cohn and Aviva Freudmann were the editors.

The other reports in the series are:
The GCC In 2020: The Gulf and the Globe – looking at the changing role of the GCC in the global economy (March 2009)
The GCC In 2020: The Gulf and its People – assessing the outlook for the region’s demographics, education and skills, and what it all means for the labour market (September 2009)
The GCC In 2020: Resources for the Future – debating how the GCC states will manage key natural resources (oil and gas, minerals, water and food) over the next decade (March 2010)

All the reports can be downloaded from www.eiu.com/gulfin2020

About Qatar Financial Centre
The Qatar Financial Centre (QFC) is a financial and business centre established by the Government of Qatar and located in Doha. It has been designed to attract international financial services institutions and major multi-national corporations and to encourage participation in the growing market for financial services in Qatar and elsewhere in the region. The QFC operates to international standards and provides a first class legal and business infrastructure for those operating within the QFC. The QFC was created by Qatar Law No. (7) and has been open for business since 1 May 2005.

QFC Authority
The QFC Authority is the commercial, administrative and legislative body responsible for driving the commercial strategy of the QFC and for developing relationships with the global corporate community and other key institutions both within and outside of Qatar.

About the Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of 650 analysts, we continuously assess and forecast political, economic and business conditions in more than 200 countries. As the world's leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.