The latest report from rating agency Moody’s revealed that despite ambitions to diversify Gulf economies away from fossil fuels, results have been “limited” and efforts will be limited by falling oil prices.
Time is running out for the Gulf economies to end their over-reliance on fossil fuels, as more countries around the world dedicate resources to accelerating their transition to green energy and a low-cost future. carbon emission.
But a report released Monday by rating agency Moody’s found that despite the Gulf Cooperation Council (GCC) states announcing ambitious plans to end their crude habits, efforts to diversify economically have failed. have given “limited” results, and further progress may be held back by lower oil prices and too many plans targeting the same non-oil sectors.
“Although we expect the diversification momentum to accelerate, it will be hampered by reduced availability of resources to finance diversification projects in a lower oil price environment and by intra-GCC competition in a lower oil price environment. relatively narrow range of targeted sectors, ”Moody’s said.
The rating agency also said that plans to expand hydrocarbon capacity in the region, combined with “government commitments to zero or very low taxes,” do not bode well for the Gulf to significantly reduce its heavy reliance on fossil fuel income.
The link between taxes and overdependence
Despite the variations between the GCC countries, the group stands out on a global scale by its excessive dependence on hydrocarbons when it comes to generating income and filling state coffers.
Oil and gas production accounted for up to 45% of Kuwait’s economic output in 2019, about 35% of that of Qatar and Oman, and almost a quarter of that of Saudi Arabia and the United States. United Arab Emirates, ”the report notes. Bahrain was the only GCC country where hydrocarbons made up less than 15% of gross domestic product (GDP) before the pandemic.
Hydrocarbons also generated the lion’s share of government revenue, with Bahrain and the United Arab Emirates drawing more than 50% of government revenue from oil and gas, and Kuwait, Qatar and Oman showing the highest level of dependency.
“This is in part a consequence of the longstanding commitment of GCC governments to a zero or very low tax environment, which is part of the implicit social contract between leaders and citizens, but also reflects the desire to ‘Encourage non-oil sector growth and development,’ Moody’s said.
As the report notes, the main difference between GCC states and other heavily oil and gas dependent countries “is the effective absence of direct taxes,” including personal income taxes and property taxes. .
Only Oman has touched the specter of a personal income tax, saying it was studying the introduction of a tax, but that it would apply only to the richest. Saudi Arabia’s de facto ruler Mohammed bin Salman said in a recent interview that there would be no personal income tax introduced into the kingdom.
Four GCC states have implemented value added taxes, or VAT, however, with Oman being the latest to introduce the tax in April.
One of the main hurdles that Gulf diversification efforts may face is plans to further expand oil and gas production, which Moody’s attributes to a desire to develop downstream industries like petrochemicals and plastics. .
The report also notes that such plans may reflect the anticipation that as the sun sets over fossil fuels, countries facing higher production costs and more onerous regulatory hurdles compared to GCC states will leave one more behind. large slice of the oil pie remaining in the Gulf.
Given plans for oil and gas expansion and the lack of political will to raise more taxes, Moody’s predicts that if oil prices average around $ 55 a barrel, hydrocarbon production is expected. “Remain the main contributor to the GDP of sovereign GCC countries, the main source of government revenue. and, therefore, the main driver of fiscal soundness at least over the next decade ”.