Can the Gulf break the habit of half a century?
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Can the Gulf break the habit of half a century?

Less than five years after Euromoney began, the Arab oil embargo gave international finance a shot in the arm and provided an extraordinary windfall to the Gulf, but as the oil boom has repeatedly turned to bust, commodity cycles have laid bare the vacuity of the region’s diversification programmes. Today, with local populations expanding, harder and less stable times could lie ahead if the region does not take more drastic action – even when oil prices bounce back.


Reading through Euromoney’s coverage of the Middle East over the past 50 years, there is a feeling of déjà vu. It shows a region that has gone from a backwater to the forefront of global finance and back again. Now the region risks becoming marginalized, just as it did between the mid 1980s and mid 2000s in the years that followed the first oil boom. 

In the 2010s, Saudi efforts to put US shale producers out of business by ramping up production have failed, just as a similar strategy failed in the mid 1980s. Saudi Arabia and others had to wait for expanding Chinese and emerging market energy demand in the early 2000s for the Gulf’s boom times to return. By the time oil prices above $100 a barrel began to feel normal in the early 2010s, the region had firmly regained its reputation for wealthy extravagance.

A real estate bubble followed, as did a splurge on trophy assets around the world. In 2008, Gulf funds became several global banks’ investors of last resort. 

But the second oil boom ended with a lack of ceremony similar to the first one. Since then, with the oil price forecast to remain at around $50 or at best $60 a barrel for the next decade, spending to quell popular discontent after 2011 and the Arab Spring is proving just as unsustainable as earlier government efforts to ward off the threat of Islamist opposition after the Iranian Revolution in 1979.

Today, deep change to the Gulf’s economic model is urgently needed, thanks to weak oil prices and a demographic explosion. And yet there are already worrying signs that the initial reformist energies are flagging as oil prices rise from the sub-$40 a barrel level of late 2015. The delay of Saudi Aramco’s IPO, announced in early 2016 and supposed to happen last year, is the most vivid symbol of this difficulty in bringing rapid and radical change. 

“Increasing government spending by double digit rates, as happened between 2000 and 2014, is no longer feasible,” warns Garbis Iradian, chief Middle East economist at the Institute of International Finance (IIF), discussing the impact of lower oil prices. 

The IIF projects an average 3% growth in the Gulf at best over the next five years, compared with 5% on average between 2000 and 2014. This is not enough, says Iradian, to create the 350,000 jobs needed at a minimum for the new entrants to the labour force. 

The youth bulge is less of an issue for countries such as Kuwait and Abu Dhabi, where the population is still small. But Saudi unemployment is already at 13% and rising. 

In Bahrain, Oman and Saudi Arabia, 2019 fiscal breakeven prices for oil are all well above the actual price, which will force them to adjust their government finances, keeping growth low and unemployment high – and perhaps risking a vicious circle of political instability and economic stagnation.

In contrast to the early 1970s, the prospect of Saudi Arabia and other Opec members bringing the west to its knees by stopping large-scale exportation of oil would be preposterous, as they have become so intractably hooked on high oil revenues that their economies would soon collapse. 

Despite the high quality and accessibility of its oil, Saudi Arabia has become a high-cost producer – its government fiscal breakeven price for oil has risen to at least $78 a barrel, according to the IIF. That compares with a profitability threshold of about $50 for shale oil producers in North America. With a nation of 33 million to finance, Saudi Aramco cannot sustain low prices any more than the US shale producers.


The Gulf has made some good use of its oil wealth and managed it better than many oil exporters and is home to some of the world’s biggest sovereign wealth funds.

Over the years Euromoney has offered many insights into these entities, from an interview with the Saudi Arabian Monetary Authority (Sama) in the early 1970s, to a dissection of the Kuwait Investment Office in 1988 and then 20 years later unveiling the allocations and strategy of the Abu Dhabi investment Authority (Adia), well before it started publishing its annual reviews. 

In 1988, Euromoney reported that only the big Swiss banks had more funds invested internationally than the $60 billion or more at the KIO, an entity of the Kuwait Investment Authority (KIA). 

Now Adia and KIA manage about $800 billion and $550 billion, respectively, according to the Sovereign Wealth Fund Institute. And the Gulf’s physical infrastructure is excellent compared with many other emerging and even developed countries.

Saudi Arabia has the most mouths to feed in the Gulf. But its per capita income is about four times as large as Opec states with similar populations: Algeria, Angola, Iraq and Venezuela. Certainly, if the alternative is Venezuela, then Saudi Arabia’s uncharismatic leadership, unchanging political environment and its elite’s notorious fear of rapid change – at least until 2014 – might have served it well over the last two decades.

In an interview with Euromoney in 1979, then governor Mohammad Aba Al-Khail said Sama would keep its reserves in short-term money, as the kingdom’s capacity to absorb oil revenues was growing. 

Nevertheless, Sama’s reserves still stood at about $700 billion in 2014. This has since declined to about $500 billion to plug the fiscal deficit, but, according to Iradian, that is still more than enough to defend its peg to the dollar.

Our oil revenues were spent well on domestic development. If you were here in the early 1970s, you would see an enormous difference today – all this is from the huge spending by the government - Ahmed Alkholifey, Sama

Today’s governor of Sama, Ahmed Alkholifey, tells Euromoney: “Our reserves help to support the exchange rate and they are there if needed to help the government, as happened in 2014.” 

Compared to Adia, of which about half is equities, Sama has a reputation for putting more in US treasury bills. Yet today’s governor Ahmed Al Kholifey tells Euromoney Sama’s investments in equities, though the proportion is undisclosed, have helped ensure the returns of its investment portfolios are comparable to those enjoyed by other central banks charged with managing oil wealth. 

“We focus on the security of investment, liquidity, and returns. We have plenty of investment in equity, and that has gained a lot thanks to the appreciation of stock markets in the last two years.” 

Alkholifey disagrees with the proposition that the discrepancy with the size of the sovereign wealth funds in Abu Dhabi and Kuwait, at least relative to their populations, is evidence of waste in Saudi Arabia: “Our oil revenues were spent well on domestic development. If you were here in the early 1970s, you would see an enormous difference today – all this is from the huge spending by the government.” 

Nevertheless, Alkholifey admits the 2014 oil-price fall laid bare how much the kingdom still depends on oil revenues.

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Ahmed Alkholifey, Sama


Despite decades of diversification plans, oil still permeates every corner of the economy and society in the Gulf. The addiction is all-pervasive and international sovereign financial wealth is not yet enough to serve as a long-term replacement in Saudi Arabia, even if it might be in Kuwait and Abu Dhabi.

As the IMF and other multilateral institutions have shown, the Gulf has diversified less than other states previously more dependent on oil export revenues, such as Indonesia, Malaysia and Mexico. 

In fact, oil has decreased as a proportion of Saudi government revenues from about 90% to 70% in the past 30 years, thanks to streams such as excise duty and charges on firms employing foreigners. Yet corporate and income tax remains largely taboo across the region. In Kuwait, in the past 50 years, oil revenues have only fallen from about 91% to about 88% of total government revenue.

“The government collects all its revenues from oil and that is in lieu of taxes on citizens,” the then Saudi economy minister, Mohammed Al-Jasser, told Euromoney in 2012, in only a slight exaggeration.

In the 21st century, these states consequently still fit all too well into the description of a rentier state – something outlined in a 1987 article by Egyptian economist and later finance minister, Hazem Beblawi. 

According to Beblawi, a “rentier mentality”, in which reward comes as a windfall rather than from productive activity, spread across the Arab world. Government power derives from the harvest and distribution of money from this “gift of nature”, oil, Beblawi noted. Without taxation, in other words, there is no representation.


George Abed, IIF

The oil sector has shrunk as a proportion of the overall economy, even in states like Kuwait and Saudi Arabia. But the so-called non-oil economy is also overwhelmingly reliant on rising government spending and, by extension, on oil, says George Abed, former Palestine Monetary Authority governor and scholar in residence at the IIF. As such, the non-oil economy is only a superficial indicator of diversification.

“Private-sector subcontractors prosper when the government increases spending on projects and infrastructure,” says Abed. “It looks like diversification, but most of the private-sector activity is dependent on oil.” 

As Abed notes, when the government’s oil dollars become scarcer, capital spending is easier to cut than salaries. This in turn lays bare the non-oil sector’s dependency, as delays and curtailments of government spending cause a ripple effect across supply chains and the economy. This is what happened after the second oil boom in 2014, in a fashion frustratingly similar to the end of the first oil boom 20 years earlier. Bankers in the Gulf still spent the boom in a rush to lend not to disrupters but to family business getting rich either from government contracts or from the government requirement for foreign brands to have local partners. 

Euromoney’s October 1986 article ‘Saudi bankers have their backs against the wall’ described how some of the most prestigious borrowers in the kingdom were forced to reschedule hundreds of millions of dollars in debt as the fall in oil revenues forced the government to delay payments. Non-performing loans soared, partly because borrowers relied on the protection of Islamic courts to avoid payments.

In the absence of financial statements, banks’ reliance on what they believe to be high-profile names subsequently only exacerbates their exposure to the least creditworthy families. 

“A new definition of bank robbery has entered the Saudi banker’s vernacular: make a loan to a prince,” Euromoney reported in 1986. The perils of name lending returned 25 years later, as hundreds of international banks tripped up on defaults, including those of the Saad and Al-Gosaibi family groups.

Private-sector subcontractors prosper when the government increases spending on projects and infrastructure... It looks like diversification, but most of the private-sector activity is dependent on oil - George Abed, IIF

One might have thought that lessons would have been learnt from the 1980s, or at least that the sheer volume of oil revenue between the mid 2000s and mid 2010s would have done more to insulate oil exporters from such an occurrence. However, as in other markets elsewhere in the world, a temporary state began to appear permanent. The so-called commodity super-cycle gave way about 10 years ago to what now seems a much less pressing debate about peak oil.

Since 2014, the Saudi government has reacted to the new pinch on oil revenues just as it did 20 years earlier – with reports soon emerging of billions of dollars of withheld payments to contractors. Banks across the Gulf rushed to the capital markets, as governments also pulled out their deposits from the banking system when their fiscal surpluses rapidly turned to deficits. 

Payment delays snared what were two of the strongest private companies after 2014: Saudi Oger and the Saudi Binladen Group. The government stepped in last year to try to ensure an orderly restructuring of around $13 billion in local bank loans to Oger after it ceased operations, according to Reuters. The state further moved to take managerial control of Binladen, which like Oger was previously one of the biggest beneficiaries of government construction contracts.


The Gulf is well aware of these problems. The question is their ability to change them. Shifting the economy away from oil is central to Saudi Arabia’s Vision 2030 plan, unveiled three years ago by Mohammed bin Salman, appointed crown prince in 2017. 

“In the past 50 years, we have progressed some way in terms of diversification, but now our ambitions are much higher, and we target more sectors of the economy, including services,” says Sama’s Alkholifey.

The Saudi plan, specifically, aims to increase non-oil exports from 13% of GDP in 2014 to 50% by 2030 and to increase the private sector’s share of the economy from around half to 65%. It aims to increase annual foreign direct investment by more than five times, surpassing 5% of GDP. 

“Historically the government of Saudi Arabia has been the key driver of economic activity,” says Rami Touma, Dubai-based managing director at Moelis & Co, which was one of the first banks to announce an Aramco IPO advisory mandate. “One of the key objectives of Vision 2030 is to allow the private sector to play a larger role and ease the strains on public finances.”

In Kuwait, too, central bank governor Mohammad Al-Hashel says diversification policies “require unremitting attention” – including efforts to rationalize spending, increase non-oil revenues, reform the labour market, and generally to boost private-sector jobs. 

Mohammad Al-Hashel_160x186

Mohammad Al-Hashel,
Central Bank of Kuwait

“Our high financial buffers provide us the space to gradually introduce structural reforms, provided the momentum is sustained,” says Al-Hashel, who is also a KIA board member.

If it happens, the Aramco IPO would be both a symbol of the plan’s seriousness and a big leg-up to the Public Investment Fund (PIF), which is supposed to receive the proceeds. The crown prince aims to build PIF up to $2 trillion by 2030, thanks also to proceeds from sales in stakes it holds in national petrochemicals company Sabic (which is already listed) and other firms. 

A plan announced late last year for Aramco to purchase and then integrate PIF’s 70% stake in Sabic could bring the fund about $70 billion. Aramco seems set to issue its first Eurobonds, perhaps amounting to tens of billions of euros, to support the acquisition. But the deal and integration will take priority over Aramco’s IPO, the national oil company’s chief executive Amin Nasser told the Financial Times late last year.

What is less well known is that the PIF, previously a sleepy arm of the finance ministry, already had a scheme to become a more internationally active fund eight years before Mohammed bin Salman became crown prince. In an interview with Euromoney in 2009, then secretary general of PIF, Mansour Al Maiman, said his organization and its parent, the finance ministry, was close to forming a new sovereign wealth fund, to invest in equity in companies inside and outside the kingdom, akin to Abu Dhabi’s Mubadala. 

Euromoney’s later 2012 interviews with Mubadala called it “a model for Middle East wealth funds” but an imperfect one. Workers at Emirates Aluminium, its cash cow, appeared entirely expatriate when Euromoney visited, while books at its Sorbonne Abu Dhabi University seemed unread. Its recent focus has been on its 2017 merger with IPIC, another Abu Dhabi state investment vehicle.

Our high financial buffers provide us the space to gradually introduce structural reforms, provided the momentum is sustained - Mohammad Al-Hashel, Central Bank of Kuwait

The prospect of Saudi Arabia becoming a global centre for the tech sector seems far-fetched. Nevertheless, PIF is taking stakes in companies such as SoftBank and Uber, not simply to gain international financial returns but also with a view to how those companies might help domestic development plans. This is an approach similar to Mubadala, which developed out of a military offsets programme, where foreign firms supported domestic industries in exchange for contracts. 

“PIF is trying to be closer to Mubadala than Adia and KIA,” says an investment banker close to the fund. 


Yet for all the hype, there is a basic contradiction in these plans because they amount to a kind of state dirigisme, despite promising to unleash the private sector. In this sense, Saudi Vision 2030 comes very close to the plan Abu Dhabi launched 10 years ago and to Vision Kuwait 2030, which has attracted even more scepticism, not least when the schedule was later knocked back to 2035. (“They say 2035? Make it 2050,” one Kuwaiti banker previously told Euromoney.)

“The willingness and resolve of the leadership in the Gulf are beyond what we’ve seen in the past,” says Georges Elhedery, regional chief executive at HSBC. 

HSBC hopes to be among the prime beneficiaries of any privatization drive, thanks to its leading Saudi investment banking operation. 

Elhedery remains optimistic that Saudi deals will follow the listing of 10% of the retail distribution arm of Abu Dhabi’s national oil company in 2017. He says “a lot more work has been taking place in the background” to prepare individual companies for privatization, such as bolstering finance and reporting functions and improving corporate governance.


Sjoerd Leenart,

Saudi Arabia has also been a focus for JPMorgan recently. It has developed local cash management, custody and equity brokerage capabilities in the kingdom over the past five years. Sjoerd Leenart, Dubai-based head of central and eastern Europe, Middle East and Africa, says regional mergers and capital raisings helped JPMorgan achieve its best-ever year for Middle East revenues in 2018. 

“There’s a lot more corporate activity, as well as sovereign borrowing to finance fiscal deficits,” he says. 

Leenart says there is more corporate finance work in particular in Abu Dhabi, as large clients there are coming out of a period of taking stock and re-engineering their strategies. He is confident, too, that Saudi equity capital markets activity will increase, as the economy gradually rises back to its long-term growth rate, after emerging from recession last year.

Even so, no one expects diversification in the Gulf to happen overnight. Given the extent of oil wealth in the Gulf, unless prices fall a lot further, diversification programmes may only mitigate rather than eradicate the reliance on oil. 

But for some, even small and gradual diversification over decades could be a success. Indeed, some think the Gulf’s grand plans are the problem, not the answer, because they leave even less room for the private sector to breathe. 

Ali Al Shihabi, the founder of Washington DC think tank Arabia Foundation, is one of the critics. A Saudi national, he has had a long career in finance in the Middle East, from helping Sama manage foreign investments, to founding a regional private equity firm, Rasmala. 

“With the exception of Dubai – which has a different business model built over decades – top-down diversification has not worked,” argues Al Shihabi. “There’s no non-oil, globally competitive business model that’s developed anywhere in the Gulf.”

Ali Al Shihabi_160x186

Ali Al Shihabi,
Arabia Foundation

In Shihabi’s view, a genuine non-oil economy would be more likely to flourish if the government were simply to let private businesses figure out for themselves where their competitive advantages lay; a task for which he says regional businessmen are amply equipped. 

“The Gulf never went through socialism, so the business community has decades of experience,” he says. “No McKinsey consultant will design the diversification plan. People have their own ideas.”

Al Shihabi’s comments echo Euromoney’s own sceptical reaction 10 years ago to Abu Dhabi Plan 2030, which was partly the brainchild of Mubadala’s chief executive, Khaldoon Al Mubarak.

Euromoney questioned the government’s claims to have cut its employees by more than three quarters, given how much state- or royally controlled corporate entities were growing and proliferating. It remains hard to distinguish where the government ends and the private sector begins in places like Abu Dhabi.

Ultimately, Abu Dhabi’s programme looked like a government-directed construction spree – which is usually the case with Gulf diversification plans – coupled with buying some trophy assets abroad. State investment allows real estate development to take place relatively easily and rapidly, notes Al Shihabi. Building up a powerful ecosystem of export-orientated private businesses is much harder. 

“Real estate creates the illusion of diversification,” he says. “There’s a feeling in the Gulf that if you’re building something, you’re creating something. That’s the hardware. They ignore the software, the people needed to fill it up.”

True to form, PIF’s planned investments include a $5 billion redevelopment of Jeddah’s seafront, and a new $500 billion carbon-neutral city on the Red Sea, Neom. The latter’s marketing looks as expensive as the implied construction contracts. The site spans 26,500 square kilometres. Keen to boast its green credentials, Neom is reminiscent of similar plans from the previous decade, including Mubadala’s Masdar City

Everyone got into the game of copying Dubai, and that’s a huge mistake - Ali Al Shihabi, Arabia Foundation

Planned in 2006 as a zero-carbon city for completion by 2016, Masdar would do well to merit that description by 2030. Saudi Arabia itself, meanwhile, planned the King Abdullah Economic City (KAEC) at about the same time as Masdar; one of six similar cities that were supposed to spring up across the kingdom. KAEC did best of the six in its partial construction but remains a long way from becoming a vibrant city where more than a handful of people would live.

“This is the Dubai bug,” sighs Al Shihabi. “Everyone got into the game of copying Dubai, and that’s a huge mistake.”

Indeed, the UAE – especially Dubai, with its artificial islands in the shape of giant palm trees and the world’s tallest building, the Burj Khalifa – is the epicentre for this love of big building projects. Dubai is also the poster child for economic diversification in the Gulf. The non-oil sector accounts for more than three quarters of the economy in the UAE (similar to less oil-rich Bahrain). Logistics is one non-oil sector in which Dubai has succeeded, with DP World becoming one of the world’s largest ports operators.

Yet Dubai has become a hub for real estate and tourism in part thanks to regional oil wealth channelled through government sources. Saudi Arabia accounts for the second highest number of visitors to Dubai after India and ahead of the UK. More importantly, oil-rich Abu Dhabi is the implicit backer for the government-related entities that continue to spearhead Dubai’s construction boom, most recently in anticipation of Expo 2020.

After its 2008 real estate crash, a $20 billion funding package from Abu Dhabi and the federation in late 2009 was crucial in allowing Dubai to manage around $50 billion in debt coming due from state and state-linked liabilities in the early 2010s. The emirate was so grateful for this support from Abu Dhabi that it renamed the Burj Khalifa – previously the Burj Dubai – in honour of the president of the UAE and Abu Dhabi’s ruler, Sheikh Khalifa bin Zayed.


Susceptibility to oil busts as a result of the state’s outsized role in the economy is perhaps inevitable given the way the Middle East’s economy and society has developed. The Arab Spring, however, shows what happens when the carrot of government jobs can no longer prop up the state alongside the stick of government repression. 

Saudi Arabia reacted to the Arab Spring with $130 billion in extra spending, including cash bonuses for government employees. States like Egypt and Tunisia did not have the same resources – and now Saudi Arabia must tighten its belt too.


Since 2014, fiscal consolidation in the Gulf has served to reduce to government budget deficits. It has trimmed energy subsidiaries. In Saudi Arabia, a new value-added tax and higher fees on expatriate workers contributed to an increase in non-oil government revenues of about 20% in 2018, according to Iradian at the IIF. 

It would have served the economy better had spending and taxation been more stable. 

“Diversification becomes fashionable in the GCC when the price of oil drops, when there’s a shortage of funds for the budget and in the balance of payments,” says Abed at the PMA. “Diversification took place in the 1980s and 1990s. That’s when the kingdom built its petrochemical and metals industries and industries for domestic consumption.” 

Perhaps the single biggest sign of progress recently in the financial sector in Saudi Arabia is its stock market’s upgrade to emerging market status by index provider MSCI, last summer. This reflects steps to open up the stock market to foreigners, part of a gradual shift away from using it as an unofficial means of wealth distribution. It has been a long time coming. 

Euromoney’s report of a Saudi stock market crash in the midst of a global and regional boom in 2006 recalled the magazine’s 1982 coverage of the crash of Kuwait’s Souk Al-Manakh bubble, which was unofficial but similarly royally blessed. 

The Saudi government reacted to the 2006 crash by hurrying through more cut-price privatizations for retail and creating a bank that would soon be listed. When the government listed part of National Commercial Bank below the market price in 2014, once again, only retail investors could access it. 

However, the events in 2006 gave more backing to the argument that opening up to foreign money would not make the market any more volatile but instead reduce its dominance by retail speculators.

For the most part, these countries still have a long way to go before their debt level becomes a difficult issue and a concern - Atiq ur Rehman, Citi

On the debt side, Saudi Arabia and others are already raising tens of billions of dollars in foreign capital, after accessing the Eurobond market for the first time after 2016. 

“It’s quite remarkable that states in the Gulf have been able to place such a large amount of debt in such a short space of time,” says Atiq ur Rehman, Citi’s Middle East and Africa chief executive. 

He says the much bigger global economy and population compared with the 1980s gives a floor to the oil price. 


Atiq ur Rehman, Citi

“We probably won’t see the oil price at a level that creates massive financial problems in the region,” he says. “For the most part, these countries still have a long way to go before their debt level becomes a difficult issue and a concern.”

After the end of the first oil boom, around the turn of the millennium, the Saudi debt-to-GDP level surpassed 100%, mostly to local banks. The 2000s commodities super-cycle came to the rescue. Now Alkholifey believes Aramco is sufficiently well-managed to support its international borrowing, and the new Saudi Debt Management Office, established 2015, targets a debt-to-GDP ratio below 30%. 

“Given our huge reserves, we are not concerned about the flow of funds,” he says.

But over the next five years alone, Saudi debt to GDP could again rise from around 18% today to more than 60% of GDP if oil stayed below $50 a barrel, according to Iradian. Meanwhile, Bahrain and Oman face a more immediate risk of default, unless they get a bail out from a bigger neighbour or take drastic action to cut spending and raise taxes. 

Policy changes that require relatively little fiscal adjustment could bring more real change to the Gulf, if the will was there. 

The IIF sets out the key ingredients: change labour incentives; improve the business environment; reform and invest in education so Saudis are better equipped with the skills that businesses need; and bring more women into the workforce. 

What the IIF does not describe is the political risks this involves, as each would imply a change at the heart of how Gulf states tend to function – less government patronage, better property rights and less reliance on political support from socially conservative clerics.

In a debate on diversification at the Brookings Institution’s Doha centre in September, fellow Samantha Gross argued that, as in the 1980s, the energy abundance demonstrated by new production in developed markets like the US is underlining the urgent need for a change in the social contracts that exist in the region – meaning, essentially, more freedom from the government.


Encouragingly, some things do now seem to be changing. If Dubai has set the standard of successful diversification in the Gulf, it is also the most socially liberal location and consequently attracts not just business people but leisure spending too. Last year in Saudi Arabia women were permitted to drive for the first time, although this is still a rare sight. A handful of cinemas were legally opened, although single males cannot go when women are there. Saudi Arabia has been so lacking in appeal that many richer expatriate workers in the kingdom have their main family home and weekend destination in Dubai.

For the first time since 1999, the 2019 Saudi budget allocates more spending to education than any other sector, including defence, notes John Sfakianakis, economist at the Gulf Research Center. 

A long-standing resident of the kingdom, he says Saudi doctors are gradually becoming more common. 

“The social changes you’ve seen over the past year are revolutionary,” he says. “Saudi Arabia is on the right track, but you need the execution and implementation sustained over time.”

For now, with the notable exception of the UAE, most Gulf states, including Saudi Arabia, seem securely lodged at about the 90th rank of the World Bank’s Doing Business survey; well below states like Morocco and Tunisia, for example. 

What little foreign direct investment that existed in Saudi Arabia has fallen further in the past two years. 

“There was an illusion that foreign investment would rush in,” says Al Shihabi at the Arabia Foundation. “Foreign investment will follow domestic investment.”

Unfortunately, rather than getting better, property rights might seem in greater doubt after the late 2017 detention of high-profile local figures at the Riyadh Ritz Carlton, which saw them reportedly promise to give up $100 billion to the state before their release. 

Was it an anti-corruption drive or a bid to consolidate power? Al Shihabi says there is no distinguishing the two. “The message is being sent that the circle of entitlement will be tighter.” One royal yacht is better than 100, he thinks.

Yet last August’s Saudi declaration that it would cease new trade and investment with Canada and sell all of its assets in that country because a Canadian minister publicly supported human rights activists detained in the kingdom, might make doing business there look worryingly contingent on the whims of a temperamental regime. 

Worst of all, the October murder in the Saudi consulate in Istanbul of journalist Jamal Khashoggi has given the kingdom far more global publicity than Aramco’s tentative IPO. Despite Saudi insistence the murder was the result of a rogue intelligence services operation and therefore not approved by the crown prince, it has not given the impression of a state where the rule of law prevails. 

These are serious constraints to the Gulf’s ability to offer more than just oil money and not just in Saudi Arabia. Oil money, it seems, has allowed these states to attain a veneer of wealth far out of kilter with their institutional development. 

Euromoney’s January 2010 cover story on Qatar’s refusal to grant David Proctor an exit visa, more than a year after his ouster as chief executive of Doha-controlled Al-Khaliji Bank, was a vivid depiction of the risks that come with doing business in the Gulf. 

After news outlets around the world took up Euromoney’s story and he finally managed to leave Qatar, Proctor warned other bankers to steer clear of the temptation of Qatar cash until it “operates by internationally accepted legal norms”. 

Similar worries have also recently arisen in the UAE, after the detention of a visiting British academic Matthew Hedges last year and following frequent stories of complaints about restrictions placed on some female members of Dubai’s ruling family.


Changing labour incentives will be just as difficult. What Beblawi termed the “gifts” of Gulf states are the flip side to their repressions. These gifts are more affordable in states like Qatar, where the government and its related entities employ more than 80% of national workers, according to Nader Kabbani, fellow at the Brookings Doha, speaking during the diversification debate. 

However, in Saudi Arabia about a third of total employment is in the government, according to the IMF, making the public wage bill about 12% of GDP.

Saudi government salaries are 60% higher than equivalent roles in the private sector. According to Abed, these jobs are so secure that it constitutes a drag on Saudi labour productivity. 

No wonder government employment is the favoured choice for Saudis entering the workforce, especially university graduates. According to the IIF, nationals hold around 90% of government jobs in Saudi Arabia but only 19% of jobs in the private sector. 

Productivity further suffers in the private sector as expatriates often have to make up for less hard-working or insufficiently experienced national colleagues. 

Saudi staff might be hired to fulfil Saudization or similar government-ordained quotas in Qatar and elsewhere, despite the doors in practice remaining open to cheaper and better qualified foreign workers from outside the Gulf.

Simply put, oil wealth means Gulf Arab workers – relative to their skills and productivity – will remain uncompetitive in the global market without an astonishing increase in the number of engineers, computer scientists and similarly qualified professionals in the region. Workers in Morocco and Tunisia are much more productive, according to the IIF.


In the manufacturing sector – usually a country’s next step up from primary goods – the Gulf has made genuine progress in areas such as petrochemicals and aluminium, partly as a result of investing state funds in the 1970s. 

Even so, the competitive advantages of firms such as Sabic and Emirates Aluminium, which remain state-controlled, are largely thanks to oil. 

It would have been unwise to concentrate on agriculture in an environment of water scarcity, says Alkholifey: “That’s one reason why we were successful with Sabic, but our success in the petrochemicals sector is not sufficient.”

Abed continues: “The most challenging part of diversification is to create new industries with trained people in areas like manufacturing, high-value goods and technology. In that sense diversification has failed.”

According to a 2014 IMF report on diversification, Malaysia, Mexico and Indonesia increased the sophistication of their manufacturing base by attracting foreign capital and technology, offering financial support to export-oriented entrepreneurs and opening free trade zones. 

Saudi Arabia and others are taking similar steps, including new state funding and more guarantees for bank loans to small and medium-sized businesses. As a result, in two years, Alkholifey says Saudi SMEs have increased from about 2% to 5% of total lending, though this is still way behind the norm in other regions.

Neom is intended as a kind of free trade zone with its own regulations – as is KAEC. Again, an inspiration for free trade zones is Dubai, which has succeeded in part through setting up zones with special sector-specific regulations and infrastructure, such as the Dubai International Financial Centre, and similar areas for media and the internet. 

However, Dubai built these zones as part of the growth of an existing city of relatively liberal inclinations. It did not require building an entirely new city or two.

“Saudi Arabia has been preaching about diversification for 40 years, but diversification has not gone very far,” Abed concludes. 

“Funds keep coming into the budget, so there’s no urgency to find other sources of revenue. People are not motivated to work hard in a factory, day-in day-out, to generate revenue… It’s nice to dream of diversification, but, as long as they follow the path they are, it’s not going to happen.”

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