Regional overview

Australia’s economic relations with the Gulf States are very positive at the time of reporting.¹ The Gulf States have long been a major destination for Australian commodity and basic food exports such as wheat, barley, live sheep, dairy products, rice, gold and alumina. The region is now also the largest export market for Australian manufactured motor vehicles.²

Although there is considerable variation between the countries of the region, the Department of Foreign Affairs and Trade (DFAT) believes they share many common characteristics that have implications for trade and investment. All Gulf states have young, fast-growing populations and are increasingly seeking ways to liberalise their economies.³ A key focus of economic policy in the Gulf is diversification away from reliance on oil revenues, and a focus on a range of industries including agriculture, downstream hydrocarbon products, metal manufacturing, ship-building, construction materials and services such as transport, finance, education, health, and communications and information technology.⁴

Over one-third of the Gulf region’s population is under the age of 14 (see Table 4.1), and the creation of future employment opportunities is a priority.⁵

Rapid population growth and economic restructuring mean the Gulf countries have a high demand for infrastructure development. DFAT explains that many Gulf countries are increasingly seeking to satisfy the demand for public utility infrastructure through greater private sector involvement (including privatisation and mechanisms such as build-operate-transfer schemes).⁶

The market for sophisticated technologies is growing across the region, reflecting increasing regional wealth, more cosmopolitan consumer preferences and the changing expectations of the region’s youthful population.⁷

Relative unfamiliarity with Australian capabilities in sophisticated manufactures and services by regional consumers, and unfamiliarity with the opportunities the region offers on the part of many Australian businesses, are impediments to closer economic engagement.⁸

Graph 2.1 Gulf States (and Australia’s) GDP

Source DFAT website, <http://www.dfat.gov.au/geo/#A>

There are, however, excellent prospects for further increasing Australia's trade with the Gulf region. Australia's proximity to the Gulf – relative to many major commodity exporters - gives it a competitive edge for the sale of bulk rural and non-rural commodities.⁹

In addition, Australian capabilities in fields such as infrastructure development, high-technology manufacturing, the supply of industrial materials and the provision of sophisticated services place it in a good position to meet a wide range of regional requirements.¹⁰

Graph 2.2 Gulf States (and Australia’s) GDP per capita

Source DFAT website, <http://www.dfat.gov.au/geo/#A>

Australia is becoming increasingly visible as a tourist and investment destination, especially through the growing air links with the Gulf.¹¹ Recent improvements in transport links - for example, the introduction of direct flights from the east and west coasts of Australia to the regional transport hub of Dubai - have improved access to the region for both exporters and investors.¹²

Australian involvement in an increasingly diverse range of business activities in the Gulf countries, from education operations to large-scale building construction, is raising its profile in many fields for which Australia was not previously well known in the region.¹³ Multiplex is a good example.¹⁴

DFAT believes the challenge for Australian business and for the government is to build on existing successes in order to capture more of the substantial market opportunities that the region offers.¹⁵ In order to do this, according to DFAT, Australia should further broaden and deepen its ties with the region beyond the transactional trade which has characterised its commercial relations with the region in the past.¹⁶

Table 2.1 Recent and forecast growth (% change per annum)

Source a DFAT country factsheets, b EIU 2004-05 Forecast summary

Gulf States trade profile

The Gulf States are highly trade-exposed.¹⁷ Their total exports of goods and services accounted for about 60 per cent of their combined GDP in 2003.¹⁸ However, reflecting their generally high trade surpluses, the ratio of imports to GDP is somewhat lower (about 43 per cent in 2003) than the exports to GDP ratio.¹⁹

The Gulf States ’ total exports of goods and services are estimated at USD 217 billion in 2003. Their combined imports of goods and services are estimated at USD 158 billion in 2003.²⁰ In comparison, Australia ’s exports and imports of goods and services are estimated at USD 92 billion and USD 107 billion respectively in 2003.²¹

Petroleum, petroleum related products and gas dominate the region’s export trade. These products account for over 80 per cent of the exports of Kuwait and Saudi Arabia, and between 50 and 80 per cent of the exports of Bahrain, Iran, Oman and Qatar.²² The UAE has the region’s most diversified export profile, largely as a result of its network of free zones. Nevertheless, petroleum, petroleum products and gas accounted for around almost half of the UAE’s exports (excluding re-exports) in 2002.²³

Imports to the region are diversified. The small size of domestic agricultural sectors in the Gulf countries means that demand for imported food products is high.²⁴ The region is already a major market for Australian exports of livestock, meat, dairy produce and grains. The region’s narrow manufacturing base means a large demand for imports of consumer goods, industrial supplies and machinery. Military and other government purchases are also priorities for a number of countries in the region.²⁵

European countries were the most significant import suppliers to the Gulf countries in 2002. Germany was the leading supplier, with France, Italy and the United Kingdom also appearing among the top six suppliers. The United States and Japan were the major non-European import suppliers to the region in 2002.²⁶

Economies of the Gulf States

Bahrain

Source DFAT Country Factsheets, <http://www.dfat.gov.au/geo/#A>

Economic overview

With Oman , it is the only other GCC state with a large indigenous working class. By regional standards, Bahrain ’s economy is relatively diversified; it is a significant regional tourism and financial centre and major aluminium producer. Bahrain has a well respected central bank and transparent legal institutions. ²⁹

Bahrain ’s own oil production is relatively small at 40 000 barrels per day, with reserves to last until 2015. Saudi crude refined in Bahrain therefore accounts for 80 per cent of Bahrain ’s petroleum exports.³⁰

Petroleum production and refining account for about 60% of export receipts, 60% of government revenues, and 30% of GDP. With its highly developed communication and transport facilities, Bahrain is home to numerous multinational firms with business in the Gulf. Bahrain is dependent on Saudi Arabia for oil granted as aid. A large share of exports consists of petroleum products made from refining imported crude.

Unemployment, especially among the young, and the depletion of oil and underground water resources are major long-term economic problems.³¹

Islamic Republic of Iran

Source DFAT Country Factsheets, <http://www.dfat.gov.au/geo/#A>

Economic overview

With a large and fast growing population (65.5 million in 2002) the world’s fourth largest conventional oil reserves and the world’s second largest gas reserves, DFAT argues Iran is a significant regional economy.³²

The economy is heavily dependent on hydrocarbon exports and economic growth is strongly influenced by oil market developments. Oil sales account for more than a third of the government’s total income. A key goal of Iranian economic policy over the last 20 years or so has been diversification of the economy away from dependence on oil.³³

In recent years economic growth has not kept pace with labour force growth, leading to an unemployment rate which, on unofficial estimates, exceeds 30% (the official estimate is 16%).³⁶ Increasing the economy’s growth rate in order to reduce unemployment is a high priority but, to date, economic reform has proceeded at only a modest pace.³⁷

Trade

DFAT explains that Iran has traditionally been one of Australia’s leading wheat export destinations, and has also attracted interest from a range of Australian exporters and investors.³⁸ Other Australian agricultural exports to Iran include barley, animal oils and fats, meat and butter. Coking coal is Australia’s major non-agricultural export to Iran. Australian expertise in agriculture, mining and civil engineering has wide application in Iran.³⁹

Australia’s exports to Iran fell by 57% to AUD263 million in 2003 largely as a result of a drought related fall in wheat exports and the impact of a stronger Australian dollar. Australia’s imports from Iran rose 29 percent to AUD 53million in 2003. Pistachios and carpets have traditionally dominated Australia’s imports from Iran. Technical factors have long limited Australia’s ability to import Iranian crude oil, but a modest quantity of Iranian crude oil was imported in 2003.⁴⁰

Kuwait

Source DFAT Country Factsheets <http://www.dfat.gov.au/geo/#A>

Economic overview

Kuwait’s economic significance derives from having over 9% of the world’s conventional oil reserves, the fourth largest behind Saudi Arabia, Iraq and the United Arab Emirates.⁴²

Kuwait’s non-oil economy suffers from a low-growth, low diversification economic path. More than 75% of GDP is generated by the state sector, and even in Kuwait’s non-oil economy, the public sector accounts for 45% of activity.⁴³

The EIU estimates real GDP growth of 4.2% in 2003, easing to around 1% in 2004 and 2005.⁴⁵

Oman

Source DFAT Country Factsheets <http://www.dfat.gov.au/geo/#A>

Economic overview

As in most Gulf countries, hydrocarbons form the most important sector of the Omani economy, with crude oil accounting for over 30% of GDP in real terms since 1980.⁴⁶

However, in contrast to neighbouring states such as Saudi Arabia and the UAE, Oman's oil resources are relatively limited and difficult to extract. Indeed, problems within the complex fields have seen production fall sharply since 2001, with further declines anticipated in 2004 and 2005.⁴⁷

Before oil was discovered, agriculture was the mainstay of the economy and the sector still plays an important role in employment. However, its contribution to GDP is small, and water-resource problems place the future of this sector in doubt. Agricultural activity is centred along the Batinah coast in northern Oman and in the south around Salalah.⁵⁰

In 1994 DFAT explains, Oman offered the Gulf’s first build, operate, transfer project (BOT), the Manah power station. Currently, it is extending BOT type arrangements to other infrastructure areas, and privatising ports telecommunications, airports, utilities, banking, insurance and power generation. Further, it is developing a strong regulatory framework in the electricity sector, allowing competition between generators.⁵¹

Qatar

Source DFAT Country Factsheets <http://www.dfat.gov.au/geo/#A>

Economic overview

Qatar is the smallest Gulf country. Oil and gas dominate Qatar ’s economy. Qatar shares the world’s largest gas field with Iran , and has spent US$25 billion since 1987 on an investment program to develop this gas field and associated downstream industries. LNG sales are set to rise from 5.7 million tonnes in 1999 to 18.3 million tonnes in 2003 according to DFAT, with the LNG sector’s share in GDP projected to rise from 8 per cent in 1998 to 18 percent in 2003.⁵²

In 2002 the contribution of the oil and gas sector to nominal GDP reached 60%. However, figures for the oil sector’s direct contribution to GDP show only part of the picture, as government spending of oil revenue on infrastructure projects and civil service salaries determines the buoyancy of the small, local economy.⁵⁴ Qatar’s oil is produced from seven offshore fields and one onshore field.⁵⁵

DFAT believes the importance of natural gas to the Qatari economy has been rising. Qatar has the world’s third largest gas reserves, after Russia and Iran. In energy terms, these reserves are equivalent to over 150 billion barrels of oil and are expected to last more than 300 years at the current and anticipated rate of production. Crude oil is only expected to last around 20 years. Gas has become an increasingly important source of export revenue, and has also provided the fuel or feedstock for a string of petrochemicals projects.⁵⁶

Saudi Arabia

Source DFAT Country Factsheets <http://www.dfat.gov.au/geo/#A>

Economic overview

With a population of almost 22 million, and over 25 percent of the world’s conventional oil reserves, Saudi Arabia is the Gulf region’s largest economy (see Graphs 2.1 and 2.2). In 2002 it had a GDP equivalent of about AUD 132 billion. Although efforts have been made to diversify Saudi Arabia’s economy, it remains heavily dependent on the oil sector and will continue to be so for the foreseeable future.⁵⁷ Private non-oil sector contribution to GDP has increased over the past decade, but oil and oil derivatives still account for 90-95% of Saudi export earnings, 75% of budget revenues and about 30-35% of GDP.⁵⁸

On 1 January 2003 the GCC member states implemented a customs union. A 5% duty is imposed on most imports. Some 417 tariff lines (mainly food, animals and medicines) attract a zero duty rate. Member states may each also nominate a list of ‘protected commodities’ on which they can charge duty rates of 12 or 20%. Saudi Arabia has listed 839 protected commodities.⁶⁰

United Arab Emirates

Source DFAT Country Factsheets , <http://www.dfat.gov.au/geo/#A>

Economic overview

The UAE has the world's third largest conventional oil reserves and fifth largest natural gas reserves and is a major player in world energy markets. It is the Middle East’s third largest economy, with GDP equivalent to around AUD 130 billion in 2002, and has one of the worlds highest per capita incomes (equivalent to about AUD 35,000 in 2002).⁶¹ Its population was estimated at 3.5 million in 2002, with about 80 per cent being expatriate (predominantly South Asian).⁶²

In the medium term, the UAE economy will continue to rely on its huge oil and gas reserves. This dependence on crude oil - which accounted for 28% of GDP in 2002, 39% of exports in 2001 and the bulk of government revenue - will see it remain exposed to fluctuations in the global oil market.⁶⁴

With only modest oil reserves, Dubai Emirate has undertaken a range of diversification efforts to establish itself as a tourism, ICT, re-export and financial hub. Taking full advantage of its position near the head of the Gulf, it has become the key regional entrepot.⁶⁵ Dubai has developed prestige hotels, massive port facilities and a range of free trade zones to attract both manufacturing and services industries (See Chapters 4 and 5 for examples).⁶⁶

The UAE maintains a relatively open trade system. In contrast to other GCC members, the UAE imposes few, if any, tariffs.⁶⁷ In general, foreign companies are limited to 49 per cent ownership, except in the free trade zones where 100 per cent ownership is possible.⁶⁸