Middle East: 2021 in brief
With rising oil prices and a stronger global economic environment, the Middle East returned to growth in 2021, with several governments taking the opportunity to implement long-term plans for diversification and modernisation. After a year in which Middle Eastern economies contracted due to the aftermath of COVID-19, the region experienced a positive economic rebound in 2021, with the IMF forecasting in October that the region as a whole would expand by 2.7 per cent.
Looking more closely at the Gulf Cooperation Council (GCC), the World Bank estimated in December that the six-member bloc would record an aggregate growth rate of 2.6 per cent for the year. Bahrain is expected to have grown by 3.5 per cent, followed by Qatar and Oman (3 per cent), the United Arab Emirates (2.7 per cent), Saudi Arabia (2.4 per cent) and Kuwait (2 per cent). A key factor behind this growth was the rise in oil prices.
After starting 2021 at just over USD 50 per barrel, oil prices rose to yearly highs of over USD 85 in October. However, towards the end of the year, prices fell again, as the omicron variant reduced fuel demand, before closing 2021 at around $77 a barrel. However, the earlier increase provided an economic boon to Gulf countries for much of the year.
While higher oil prices helped boost revenues in the region, several governments sought to implement or extend long-term fiscal rationalisation strategies. In April, Oman introduced a 5% value-added tax (VAT), becoming the fourth Gulf country, behind Saudi Arabia, the UAE and Bahrain, to do so, following the GCC's 2018 commitment to implement the surcharge.
The tax is expected to help ease fiscal pressure by generating OR400m ($1 bn) annually, equivalent to around 1.5% of the country's GDP. Meanwhile, Bahrain recently announced that it would double its VAT rate to 10% from 2022; in this it follows Saudi Arabia, which increased its VAT to 15% in 2020. The decision is part of Bahrain's strategy to return the budget to surplus by 2024.
"While the COVID-19 pandemic resulted in the extension of fiscal balance targets beyond 2022, the government's discipline to reduce spending raises expectations that it will reduce the fiscal deficit gap and achieve fiscal balance in the coming years," Yaser Alsharifi, head of strategy at the National Bank of Bahrain's official group, told OBG. "Moreover, amid the trend of economic recovery in 2021 and a higher oil price environment, one could expect a strong economic performance in 2022, which will further support the government's fiscal position."
Several Gulf countries also launched innovative reforms designed to encourage foreign investment and strengthen competitiveness. A leader in this regard was Saudi Arabia, which continued its diversification efforts through a series of initiatives aimed at attracting foreign direct investment (FDI).
FDI had already increased by 33% year-on-year in the first six months of 2021, according to government officials, building on the pandemic-hit performance of $5.5bn in 2020. Then, in October, the country launched its National Investment Strategy, which aims to help the country achieve the ambitious target of attracting $100bn in FDI annually by 2030.
The strategy includes plans to develop special economic zones, a programme to transfer key supply chains to the country and a diversification of financing options for private sector operations. These initiatives are accompanied by efforts to improve the overall business environment, such as a new law allowing specialised foreign professionals to obtain Saudi citizenship and a new platform that facilitates the process of setting up a company for foreign investors.
Elsewhere, the UAE has also implemented a number of striking reforms to improve its global competitiveness. In an effort to encourage foreign investment, in June the country amended laws to allow 100 per cent foreign ownership of Emirati companies in all but a few restricted sectors, up from the previous limit of 49 per cent. This was followed in November by the biggest legal reforms in the country's history, when a series of 40 laws covering trade, online security, copyright, residency, narcotics and other social issues were implemented.
They include measures strengthening personal data rights, copyright for those working in creative industries and online security. Meanwhile, a series of social reforms, such as loosening restrictions on cohabitation before marriage, implementing more protections for women and longer-term visas, are designed to attract skilled migrants to the country.
In particular, the emphasis on social factors has been a key focus for the country. A broad-based reform package was implemented last year that included the first paid parental leave provision in the MENA region in the private sector, available to both male and female employees, while labour legislation was amended to ensure equal pay for work of equal value. These measures were capped by the December announcement that UAE government entities would switch to a four-and-a-half day week from 1 January 2022, with many private companies quickly following suit.
The change extended the weekend to run from Friday afternoon to Sunday, instead of the previous Friday-Saturday schedule. This brings the country in line with most of the world's developed economies and, according to the government, is designed to "enhance its global competitiveness in economic and commercial sectors, and keep up with global developments".
These attempts to encourage investment in the UAE come as Dubai hosts Expo 2020, which opened in October and runs until 31 March. More than 190 countries are represented at the event, with more than 7 million foreign tourists visiting the country between its launch and the end.
While attracting foreign investment remains a key objective for all Gulf countries, some, including Qatar, have also focused on increasing self-reliance in certain areas. "The blockade made us realise that we were too dependent on others in various fields," Ziyad Eissa, chief executive officer of S'hail Holding Group, told OBG. "Good relations with neighbours are important, but Qatar needed a plan to operate independently in any scenario, and we quickly developed the necessary capabilities to maintain operations in all sectors, including primary and industrial."
In addition to efforts to improve food security by investing in high-tech agricultural solutions, Qatar has also established major industrial recycling facilities nationwide. Recycling is seen as key to reducing the carbon footprint of heavy industry, which accounts for approximately 27 per cent of global emissions. "By the end of 2022, we expect Qatar to become the first country in the world to recycle 100 per cent of its domestic solid metal waste locally, including lead, copper, aluminium, steel, brass and zinc," said Eissa.
Although the region is home to some of the world's largest hydrocarbon exporting countries, several markets in the Middle East have sought to capitalise on the shift to renewables through 2021. Indeed, the UAE has set a target of net zero emissions by 2050, while Saudi Arabia and Bahrain hope to achieve this goal by 2060. To reach its target, the UAE aims to increase the contribution of renewables to its energy mix from the current level of 13% to 31% by 2025.
Throughout 2021, the country continued to make progress on the Al-Dhafra Solar Plant. Once completed later this year, it will become the largest single-site solar plant in the world, capable of providing enough electricity for 160,000 homes and mitigating 2.4 million tonnes of carbon emissions per year. To further help meet its targets, the country has also invested in carbon capture and storage (CCS) technology, which works by capturing and then storing carbon emissions from major industrial projects before they are released into the atmosphere. Although the technology is still at a nascent stage and does not yet exist at scale, the UAE is taking a leading role in its development, along with Qatar and Saudi Arabia.
In addition to the country's first CSS project, a facility processing emissions from a steel mill in Mussafah, Abu Dhabi, the National Oil Company of Abu Dhabi recently signed a memorandum of understanding with French energy company Total to jointly explore the development of CSS technology. This has been complemented by the development of green hydrogen. Created by splitting water through a process called electrolysis, it is considered the most environmentally friendly fuel of the future.
A world leader in this field, the UAE is developing seven hydrogen projects and aims to capture 25% of global demand by 2030. Meanwhile, in Saudi Arabia, April saw the launch of the 300 MW Sakaka solar power plant, the country's first utility-scale renewable energy project. This was followed in August by the announcement that Saudi energy company ACWA Power had finalised financing for the 1.5 GW Sudair solar plant, which is expected to be one of the largest in the world once completed.
This is part of the country's plans to invest some SR380 billion ($101 billion) in renewable energy projects by 2030. The measures reflect a broader trend in the Middle East towards low-carbon energy solutions. While Qatar itself has yet to announce a target date for net-zero emissions, in October state-owned Qatar Petroleum said it had changed its name to Qatar Energy, as part of an attempt to better reflect the company's renewables-focused strategy. While it will continue to export gas for decades to come, the company's new strategy will focus on energy efficiency technologies such as CSS.