Gulf sovereigns will find it hard to diversify away from hydrocarbons

According to a report from S&P, the Gulf economies’ high concentration and dependence on the hydrocarbon sector, which averaged about 30 per cent of GDP and 60 per cent of total exports over 2015-2016 could become a credit negative factor when not offset by substantial financial buffers. The report says that despite supporting the economy when hydrocarbon prices are high, a narrowly-based economy tends to be more vulnerable to core sector business cycle swings, amplifying the volatility of its growth, general government revenues and current account receipts.

The large hydrocarbon endowment and the high income it generates has resulted in past general government surpluses, low government financing needs, and net external asset positions for most GCC countries. The report considers the various impediments to diversification away from hydrocarbons, including the foreign exchange regime, climate, education and skills, openness to doing business, attractive public sector employment, and similarities of diversification plans.

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