GCC states rapid economic recovery fuels major investment in the energy transition according to PwC Middle East Economy Watch - Q2 2022

05 July 2022: Energy prices are driving a rapid economic recovery in the GCC, with most states forecast to achieve significant fiscal surplus by the end of the year. However unlike in past cycles, we expect to see stronger discipline around spending and surpluses utilised to pay down debt and to invest domestically and internationally. Some of the investment in the region is funding the energy transition, where the region’s abundant sunshine and cheap marginal land is driving a boom in solar power and the development of hydrogen as a key component of a future circular carbon economy. This is according to the latest PwC Middle East Economy Watch - Q2 ‘Oil booms and hydrogen looms’, launched today.

In February, the invasion in Ukraine resulted in various implications across the region. The surge in oil and gas prices - which is the third major oil price boom of the 21st century - had a radical impact on the fiscal outlook for oil-exporting countries (the GCC, Iraq and Libya), forecasting to achieve fiscal surpluses this year. Conversely, oil importers (Egypt, Jordan, Lebanon and Palestine) suffer from the rise in prices which are a major source of strain on their fiscal position. 

It can’t be determined if this third boom will be prolonged, or followed by a sharp decline. However, governments in the region have often demonstrated pro-cyclical fiscal policy. The IMF’s latest April 2022 forecasts see a 5% spending increase in 2022, driven by Qatar and the UAE,  while Saudi Arabia and Oman, are both showing modest 4% year-on-year increases in expenditure, according to their Q1 outturns.

Richard Boxshall, Middle East Chief Economist at PwC Middle East, commented: “We have high hopes that the surge in oil prices will support the recovery of oil exporters’ countries, diversify the GCC economies and encourage the investment in other forms of energy ”.

Adding: “If spending is indeed controlled, the region will have a major surplus to direct to other purposes. Oman and Saudi Arabia have given the clearest indications of how they intend to use the funds. Oman’s government was directed to reduce debt, which peaked at $55bn of GDP last year. While Saudi Arabia developed the national debt management plan, giving the priority on rebuilding reserves and flowing the rest to the Public Investment Fund and the National Development Fund to finance local development projects.”

Hydrogen or hot air?

Over the last two years, dozens of projects have been proposed across the region for the development of hydrogen production and export. The UAE, Saudi Arabia and Oman have so far been the most aggressive in advancing hydrogen, as seen in Saudi Arabia’s NEOM hydrogen project, the formation of the UAE’s Abu Dhabi Hydrogen Alliance and green hydrogen plant in Dubai, and various projects in Oman including a 3.5GW plant in Duqm. Other countries in the region - Egypt, Jordan, Kuwait and Libya - are also waking up to the hydrogen race with major hydrogen projects being planned or under development.  

Stephen Anderson, Middle East Strategy and Markets Leader, commented: “The region is in a unique position to take advantage of the current situation and accelerate its energy transition, particularly hydrogen. The global community has begun to take net-zero targets more seriously, and if the Middle East can proactively lead this transformation, then the 2030s are likely to be a boom decade for hydrogen in our region. A recent global study by Strategy& projected that global demand for hydrogen could reach 530m tons/year in 2050, and identified the GCC as the region with the strongest export potential.”

Adding: “At PwC Middle East, we work towards achieving our net-zero goals to build trust and solve important problems for our clients and the communities we operate in. We invest in new ways of delivering transformation in the operating environment, including technological disruption, climate change and fractured geopolitics, adding to our global strategy, The New Equation.”