Data Point. Why West Asia may not slip on oil

The recent drop in crude oil prices is seen as a bonanza for India, an oil importer.

But what is the impact of this oil price collapse on oil producers in West Asia? It may not be as severe as everyone thinks.

Economic growth in oil-rich countries is expected to inch up despite low crude prices. For one, leading oil producers in the Gulf region have chosen to maintain rather than reduce production. This decision is likely to contribute to real GDP growth, albeit small, from the hydrocarbons sector.

But diversification into non-oil segments holds the key to growth. Take the case of Saudi Arabia, whose GDP is expected to grow 3.6 per cent in 2014. The oil sector grew by 1.7 per cent year-on-year, but the non-oil economy expanded by 5.2 per cent. Sector such as construction and retail clocked 6.7 per cent and 6 per cent year-on-year growth. Likewise Qatar’s growth in 2014 is likely to exceed 6 per cent and is estimated to be 7.7 per cent for 2015 and the non-oil sector is expected to overtake oil and gas as a percentage of GDP.

Also, unlike the past, when the Government segment posted the largest growth, the role of the private sector is expanding in these countries. A case in point is Bahrain. The Government’s share of GDP contribution in 2013 was only 13 per cent, compared with financial services, which contributed 17 per cent to the GDP. The Government’s share is also likely to shrink due to its strategic aspirations to put the private sector at the forefront of growth. Growth in the Government sector has already moderated, averaging 3 per cent annually in 2013 and 2014. In contrast, several private industries, including real estate, retail and manufacturing, clocked over 4 per cent growth in that period.

Downstream industries such as plastics are seeing good momentum thanks to the lower cost of petro-chemical inputs. Data from the ‘Islamic Growth Markets Investment Report 2015’ from Thomson Reuters and DinarStandard shows that Saudi Arabia exported $17 billion worth of plastics and rubber in 2013. Plastic and rubber products topped the kingdom’s list of non-oil exports with a 32 per cent share, as per data from the country’s Central Department of Statistics and Information.

What is true for the economy also holds true for the wealthy in the country. Data on ultra high net-worth individuals — those with $30 million and above in net assets — indicates that they aren’t over-reliant on petro dollars either.

For instance, in the UAE, only 3 per cent of the ultra-rich made their wealth through oil, gas and consumable fuels, as per the World Ultra Wealth Report 2014 from Wealth-X, a research firm. It turns out that most significant source of wealth for the country’s wealthy individuals is industrial conglomerates.

Thanks to the diversification strategy followed by the wealthy and good performance of its equity and currency markets in 2014, West Asia was the fastest growing region for the second year in a row both in the number and wealth of the ultra-rich.

The overall wealth of the ultra-rich in this region increased 13 per cent, nearly twice the worldwide average of 7 per cent, notes the report.

The region is also attracting the rich from other countries. Over 8 per cent of the ultra-rich population was not born here. Interestingly, 60 per cent of this group were born outside West Asia.

The report estimates that by 2019, the number of ultra-rich would be 8,000, up from 6,000 in 2014, and their wealth will increase to $1.2 trillion, up from $1 trillion in 2014.  

Governments in these countries are launching programmes aimed at promoting foreign investment and improving the region’s financial infrastructure. The low or no corporate tax in many of the Gulf region countries is also an attraction for many global companies who want to set-up manufacturing and service operations.

China is among those actively investing in projects across a number of sectors. Chinamex, a Chinese government agency, is establishing Dragon City — a 55,000 sq m retail and wholesale area. The facility will focus on Chinese goods and is expected to be completed by June 2015.

Tourism is also another focus area for these countries, with Dubai recording 11 per cent annual growth in tourist traffic in 2013. Data from Master Card’s Destination Cities Index for 2014 ranked Dubai number five among global cities. The country plans to reach 20 million tourists by 2020, double the 2012 numbers.