Too Big to Ignore: What makes Saudi Arabia the economic juggernaut of the GCC?
by Sunil Kumar Singh
With Saudi Arabia being the largest economy in the Gulf Cooperation Council (46 percent of GCC non-oil GDP), developments in the Kingdom tend to have economic and financial influence on countries in the region.
The question of how growth in the largest GCC economy impacts other countries in the region is quantified in a new working paper released by the International Monetary Fund (IMF) in December. The paper also identifies the growth spillovers from Saudi Arabia to other neighboring countries.
“A one percentage point change in Saudi Arabia’s growth is associated with about 0.6 percentage point change in growth on average in the region, controlling for other factors,” the IMF working paper added.
Here are other macroeconomic and external factors—as described by the paper —that highlight Saudi Arabia’s role in the Gulf region.
GCC countries depend heavily on imports from Saudi Arabia. The Kingdom’s exports to the GCC were more than $12 billion in 2016; this includes transport equipment, machinery, electronics, and metals.
Bahrain’s dependence on GCC countries for its exports, mainly from Saudi Arabia, is quite significant (over 20 percent of non-oil GDP), the IMF added. Bahrain relies heavily on the Saudi market, with more than a quarter of its total non-oil exports going to its closest ally and neighbor in 2016.
Therefore, developments in Saudi Arabia can, and usually have, significant impact on Bahrain.
Oman and Kuwait also rely on the Saudi market— albeit to a lesser extent— with 11 percent and 9 percent of their non-oil exports, respectively, being destined for Saudi Arabia.
Meanwhile, Saudi Arabia’s share in UAE’s total non-oil exports is low (about 3 percent), the IMF working paper said.
A number of GCC countries also depend on Saudi visitors for tourism. Bahrain relies significantly on visitors from the Kingdom. Saudi tourists represented about 90 percent of Bahrain’s total tourist arrivals in 2016 and 5 percent of its non-oil GDP in 2014, according to the paper.
Foreign Direct Investments
Intra-GCC FDI is mostly driven by Saudi Arabia, the IMF report added. The stock of inward FDI in Saudi Arabia from other GCC countries accounted for more than $35 billion in 2015 (about 10 percent of non-oil GDP), with most of this investment coming from Kuwait and UAE.
Saudi Arabia is also the major source for inward FDI in Bahrain together with Kuwait.
Both UAE and Qatar have exposure to the Saudi equity market through their portfolio investments of $9 billion (3.2 percent of non-oil GDP) and $6 billion (6 percent of non-oil GDP), respectively.
“This exposure of GCC countries to Saudi Arabia implies that any shocks to the Saudi economy – either financial or non-financial– could potentially have implications for both Qatar and the UAE.” the IMF working paper said, citing 2015 figures.
Equity market movements in Saudi Arabia have significant implications for other GCC countries, while there is no evidence of co-movements in bonds markets, the paper noted.
Changes in the liquidity position of banks in Saudi Arabia could bring about changes in holdings of foreign assets by resident banks, resulting in liquidity changes in other GCC countries, the paper said. This is particularly relevant in countries with banking systems dependent significantly on foreign funding (non-resident deposits and wholesale funding) for credit operations.