Optimism on economy, well-founded or wishful thinking

A recent survey of top management in the region shows nearly three-quarters of Chief Executive Officers (CEO) hold a positive business outlook for the next 12 months and are confident that challenging global, regional and local environments will be successfully managed.

This optimism is reflected in robust spending plans outlined by private sector companies in the region, with two-thirds of the polled CEOs confirming that will either likely or very likely make a significant capital investment during the year.

The 2019 edition of the ‘Business Barometer: Gulf CEO Survey’ conducted by Oxford Business Group, a global research and advisory firm, revealed that top executives in the region remain largely upbeat about the economic outlook. Response to the survey came from a cross section of economic sectors, with 80 percent respondents being from the private sector and comprising 45 percent from local firms, 15 percent from regional businesses and 40 percent from international companies,

The survey showed that an overwhelming 72 percent of the CEOs viewed local business conditions as positive or very positive for the coming 12 months. Majority of business leaders also found the level of transparency in place for conducting business as good, with 71 percent describing it as high or very high. In addition, 80 percent of those surveyed said that the prevailing business and personal tax environment was competitive or very competitive on a global scale.

The upbeat sentiment among C-suite personnel could be well-founded, or it could just be wishful thinking prompted by the need to toe a politically-correct line on the economy, or to assure owners and shareholders of their management prowess. Governments in the region will be crossing their fingers and hoping it is the former.

Faced with the prospect of falling oil revenues, growing budget deficits and sluggish growth, governments in the six-nation Gulf Cooperation Council (GCC) bloc have been looking at diversifying the economy and increasingly turning to the private sector to spur future economic growth and development, as well as find employment for the millions of young nationals joining the labor pool each year.

International entities such as the World Bank and the International Monetary Fund have for long been urging governments in the region to diversify the economy, and warning that reliance on a single commodity to propel wider economic prosperity in the future was not a viable option. With the growing awareness that depending on hydrocarbon revenues, which had seen their countries achieve rapid growth and development in the past, was fast becoming untenable, governments in the region appear to have heeded the warnings.

A strong wake-up call for economic diversification came to the region in mid-2014 when a precipitous fall in oil prices led to a choke-hold on the free-wheeling, oil revenue based, spending of governments. Drop in oil revenues led to the shelving or trimming of several projects and programs; the slashing of subsidies on fuel and utilities; and the introduction of much-needed fiscal, economic and administrative reforms.. In order to overcome consecutive annual budget deficits and tide over immediate expenses, the GCC states also had to dip into their stashed-away sovereign wealth funds, as well as issue bonds on international debt markets.

Realization that sovereign wealth funds worth hundreds of billions of dollars could be easily depleted without continued replenishment from surplus oil revenues, and growing awareness that relying solely on an oil income that is subject to the vagaries of international market trends, was not long-term sustainable approaches, GCC governments began rolling out plans to diversify their economies away from its over-dependence on hydrocarbon revenues.

Diversification is also key to the strategic long-term visions that leaders in the region have envisioned for their countries, including the New Kuwait 2035 vision endorsed by His Highness the Amir of Kuwait Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, and the Saudi Vision 2030 espoused by His Highness the Crown Prince Mohammad bin Salman al Saud of Saudi Arabia.

Though the pace in implementation of diversification plans and economic reforms has varied among the states, with some countries going way ahead of other laggards, the sense that diversification is imperative has been acknowledged by governments in all six states of the bloc.

However, expanding the economy from its public-sector dominated oil-driven model into non-oil streams is easier said than done. It requires wholehearted buy-in from the private sector through investments, expertise, competition and by providing employment opportunities for citizens. But, the private sector, wary of government schemes from past experiences and heedful  of geo-political instability prevailing in the region, is rather reluctant to invest locally. In addition, many risk-averse banks in the region are generally not keen on lending to the private sector, which in turn limits the ability of companies to invest in new ventures.

Despite some projects being highlighted as examples of highly successful private sector involvement in recent years, they are in fact public-private-partnerships that involve government-guaranteed loans, subsidized raw material  and 100 percent buy-back by the state. Many of these projects are  also in the energy and utilities sector that was previously dominated by the state. In most cases, the only private sector involvement in these projects is that of a middle-man.

Also, expecting the private sector to pick up the tab for governments’ overindulgence over the years and pamper citizens by offering them public sector wages to work in private firms is not a realistic option. Moreover, many citizens who feel entitled to high-salary, life-long public sector jobs with all its perks and privileges, are not keen to accept private sector work that entails work in a competitive and challenging environment, especially at a lower pay scale and with fewer privileges.

Governments are understandably keen for the private sector to take on the burden of providing employment opportunities to young nationals, but the sector’s requirement of expertise and competency runs counter to abilities and skills offered by national manpower. This shortage of qualified national manpower was also reflected in the ‘Business Barometer CEO Survey’, which revealed that skill gaps exist across all sectors of the economy, including in leadership, engineering and research and development, as well as in information, communication and telecommunication technologies.

Finding suitable employment opportunities for the region’s growing youth demographic has been a major stumbling block in the government efforts to diversify economies. Bridging the skills gap would require governments to reform the educational system so that graduates are equipped with the necessary skills to meet market demands. But despite billions of dollars being invested over the last two decades in human resource development schemes, outcomes in the region have been less than desirable.

For instance, a recent State Audit Bureau report in Kuwait was highly critical of a scheme run by the country’s Ministry of Education in collaboration with the World Bank for failing to achieve its objective of improving the quality of school education in Kuwait. The Bureau blamed the Education Ministry for failing to properly implement, supervise and follow-up on the recommendations made by the program.

Obviously, some GCC governments need to redraw their diversification plans with a new emphasis on encouraging private sector investments from local, regional and international sources, in ‘real’ non-oil sector projects. Governments also need to implement, without any backtracking or diluting, the necessary reforms and initiatives needed to ensure sustainable long-term growth and continued prosperity for people in their countries.

In order for economic diversification and private sector participation to have any genuine chance of succeeding, many GCC citizens will have to forego deeply entrenched cultural narratives. They need to understand that expecting oil revenues to continue trickling down from state coffers to individual bank accounts is no longer feasible. In addition, their sense of entitlement to well-salaried public sector jobs, free health, housing and education, generous state subsidies and negligible tax burdens forever, needs to be revisited, if governments plan for a sustainable future for the region are to be realized.

The Times Report