According to the World Bank, oil prices will stay lower for longer than previously expected. Three major companies – Mubadala, Aabar and Etisalat – are reported to be tapping foreign capital markets for new funds, as domestic funding dries up. Etihad Rail’s ambitious second phase has been put on hold, while Saudi Arabia has cut its infrastructure budget by two-thirds. Once, headlines proclaimed an era of infrastructure megaprojects across the Gulf. Now, Gulf states are retreating as the oil price dips.
The Gulf must now move its growth model away from oil-funded, state-financed projects towards liberalisation and private sector-driven growth. This means more foreign direct investment, private sector liberalisation and new sovereign debt issuance.
Foreign direct investment has never been the preferred tool for Gulf states to fuel their infrastructure drives, but it has a number of benefits that are attractive for current markets. Foreign companies train workforces and introduce new, more efficient organisational processes – that’s the thinking behind offset agreements with defence companies.
It is easy to see how individual economic sectors could produce attractive returns for foreign investors. Dubai has taken moves on this front already – the law to encourage public-private partnerships should encourage investors, while the emirate’s real estate industry is a major draw for the global elite, and free zones are good places for foreign companies to locate. Plans to issue federal bonds should also be encouraged. Sovereign debt issuance is the ideal tool for funding state infrastructure projects that will generate economic returns. It would also help to build a yield curve, which would allow domestic companies to price their own issues. Some negotiations may be needed to bring Abu Dhabi’s and Dubai’s outstanding debt under a new, federal debt-management framework. But the country has an enviable net debt-to-GDP ratio of zero: that is an economic opportunity. There is no need to slow the country’s diversification drive, and its future growth, by cutting infrastructure spending while the state remains debt-free.
Government departments could do more to boost entrepreneurship and encourage small businesses. Foreign ownership restrictions should be reviewed, while gentler onshore regulation would help SMEs. Low oil prices are more of an opportunity to bring about these economic changes than a challenge.
