What can we look forward to in 2022? We discuss our observations from 2021 and highlight some of the key themes and developments we expect to see in the region this year.
While hopes that the pandemic would be behind us by now were premature, 2021 nevertheless marked the year of economic recovery. The IMF projects the global economy will grow 6 percent in 2021, with economic output returning and exceeding pre-COVID-19 levels.
However, the recovery was uneven, driven by the emergence of variants that resulted in new waves of infections across many nations, as well as vaccine access. Advanced economies, including the GCC economies, were successful in rapidly vaccinating their populations, with booster campaigns already underway in many at the time of writing. This enabled a fairly quick return to normality in these regions while other countries struggled. While most countries lifted the more stringent travel restrictions that were in place in 2020, some remained, including pre-flight testing, quarantine and social distancing requirements.
We look towards 2022 with the hope that the recovery is consolidated and set out here the top five themes we think will shape the GCC economies in 2022.
1. From pandemic to endemic
COVID-19 is here to stay and likely to become ‘endemic’, becoming a feature of the landscape of infectious diseases. This means changing the way governments manage COVID-19.
With this in mind, defining what is an acceptable level of risk in terms of new infections and active cases, and putting in place protocols to reduce death and transmission is going to be critical. Vaccines are key to this new normal.
The GCC nations led the way with 168 doses on average per 100 people, compared to 117 globally, as of December 2021. Booster shots will soon become the norm for international travel: the UAE has imposed a ban on foreign travel for citizens without booster jabs. Similarly, the EU is likely to impose booster shots as a requirement for unrestricted travel across member nations. Continued improvements to vaccine technology that are better equipped to respond to variants and availability of boosters will reduce the risk of future variants significantly disrupting economic activity.
The scaling up of effective treatments, and improvement in testing and treatment capacity all facilitate the shift from a suppression-driven response towards a protection-driven response.
Figure 1 - COVID-19 vaccine doses administered per 100 people
Source: Our world in data, data refers to all doses including boosters
The shift towards managing COVID-19 as an endemic illness should continue to support recovery as restrictions on travel and economic activity become less disruptive. The IMF anticipates 4.1 percent growth across the GCC in 2022, ensuring that we return to (and possibly exceed) pre-COVID-19 levels of economic activity this year.
2. Driving inflation and monetary tightening
The sharp rise in inflation experienced in emerging and advanced economies (especially so in the US and Europe), has been driven by:
Supply-side factors including supply chain disruptions, soaring energy costs and labour shortages
Rebounding commodity prices, for instance, oil prices jumped by 50 percent over 2021, while copper prices rose by 25 percent; and
The recovery-induced increase in consumer demand.
Inflation in the region accelerated in 2021 but remains manageable.1 We witnessed increasing import prices, partly due to a weakening dollar, but headline inflation remains moderate, indicating lower non-tradable inflation.2
Many of these factors are transitory and their effects are likely to fade as the world adjusts to the new normal. There is still a possibility that further new variants may emerge, resulting in some disruptions to the supply chain causing short-term increases in inflation, but these disruptions are likely to become less frequent and severe.
Policymakers have signalled the unwinding of accommodative monetary policy to address inflation risks – the US Federal Open Market Committee (FOMC) in December, for example, decided to accelerate the tapering of asset purchases, and markets are predicting multiple rate hikes by the end of 2022. Other central banks have also begun interest rate hiking cycles (UK, Russia, Brazil, Turkey and others).
This anticipated global monetary tightening will have an impact on the growth outlook in the GCC. We expect some inflationary risks (largely supply-side driven), however government spending is expected to ease in the region in 2022, which should put less upward pressure on inflation. But a more aggressive stance on monetary policy in advanced economies could cause financial conditions to tighten locally, especially since the currencies of major GCC economies are pegged to the dollar or other global currencies.
Central bank action and risks to financial stability must be carefully monitored and managed as loose monetary policy is unwound. A sudden rise could cause a shock to the economy leading to a recession.
3. Taxation expands
In October 2021, Saudi Arabia, the UAE and three other GCC member states signed the global tax accord on a 15 percent minimum income tax rate for multinationals. In total, 136 countries and jurisdictions, accounting for in excess of 90 percent of global GDP, are signatories to the accord. The corporate income tax rate will apply on profits of corporations (with annual revenue upwards of EUR 750 million) that are either subject to a lower tax rate or not subject to income taxes, at present.
While the GCC is widely known as a low-tax region, corporate income taxes are not a completely alien concept. For instance, Saudi Arabia applies a 20 percent tax on a foreign share in a resident corporation, while a 2.5 percent zakat is applicable to the local’s (or GCC shareholder’s) share. In Qatar, wholly or partially foreign-owned entities are subject to income taxes on Qatar-sourced income, at a rate of 10 percent.3 As signatories to the accord, Saudi Arabia, the UAE, Qatar, Bahrain and Oman are likely to implement or expand existing taxes to comply with the agreement.
The introduction of corporate income tax (CIT) marks a continuation in the shift away from reliance on hydrocarbon revenues towards taxes to fund government spending. The introduction of VAT in most GCC member nations marked the first important step in this direction.4
These are significant changes that should be managed prudently. In the absence of mitigations, CIT may have some negative economic impacts by dampening incentives to invest in business expansion and improve profitability.5 Introducing CIT could have significant ramifications for countries like the UAE, for whom a zero income tax environment has been a draw for foreign capital.6 A broad-based tax risks undermining its competitiveness and attractiveness to international investors. That said, the shift towards CIT is also an opportunity to modernise tax systems. It offers additional policy levers to the government, such as tax incentives to attract investments in certain sectors, or in the future, scope to introduce tax cuts as stimulus measures.
We recommend that policymakers undertake detailed analysis to understand the impacts of CIT on business and investment, and design an optimal policy response that mitigates most, if not all, negative effects. These reforms present an opportunity to engage in business environment reforms to mitigate the cost of doing business through non-tax measures.
4. ESG will take centre stage in policymaking
The 2021 UN Climate Change Conference (COP26) reaffirmed the need to take urgent action to combat climate change. GCC policymakers are starting to get serious about tackling climate change. To begin with, public commitments to net zero objectives were announced – UAE, KSA and Bahrain have committed to achieving net zero by 2050, 2060 and 2060, respectively. The region will also host the next two UN Climate Change Conferences – Egypt for COP27 and the UAE for COP28. The first-ever carbon-neutral FIFA World Cup will also be held in Qatar this year.
Most public interventions have been in the form of direct investment in the funding of “direct” measures. For example, the SAR$700bn Saudi Green Initiative envisages initiatives from new renewable energy projects, to afforestation schemes.
However, fiscal policies remain an untapped lever in the fight against climate change. Green public fiscal management (PFM) can support climate change strategies, by gradually adapting existing PFM practices to make them environment and climate-sensitive. Green PFM practices are gaining traction – while still nascent, most OECD countries are exploring and developing their green budgeting approaches.
We expect additional concerted efforts to incorporate climate commitments in domestic expenditure and tax policies from governments across the GCC. Carbon pricing is one potential example. Implemented through a tax or emissions trading scheme, carbon pricing is one of the key weapons in the policy arsenal to reduce energy consumption, direct energy generation towards cleaner sources and improve energy efficiency. Countries also stand to benefit from significant government revenues – a study by WEF and PwC shows that GCC countries could generate revenues of around 2.5 percent of GDP through an international carbon price floor (ICPF).7 These revenues can be invested into funding renewable and other climate adaptation projects or can help mitigate the impact of higher energy prices through targeted assistance of the most affected households. The roadmap could also include other fiscal measures and tax incentives such as tax reductions for energy-efficient products, carbon tax systems, and more.
According to the IMF, governments should be looking to implement fiscal reforms “geared towards economic diversification and inclusive growth…and addressing intensifying vulnerabilities from climate change”. GCC nations should therefore ensure that this forms a significant part of their post-pandemic recovery plans.
These policies will also help complement growing private sector initiatives. For example, energy major, Saudi Aramco, has committed to achieving net-zero for Scope 1 and Scope 2 greenhouse gas emissions across its operations by 2050, while ACWA Power has pledged to end investment in non-renewable schemes to achieve net zero by 2050.
The impact of global ESG policies and technological change on the region should also be monitored closely, as they will have an impact on the regional economy. The broader change in global consumption patterns and energy demand in the transition to net zero, such as tax incentives to boost electric vehicle usage and the growth in renewable energy capacity abroad, will have an indirect impact on economies here (e.g. through fuel exports). The EU carbon border tax - although not coming into effect until 2026 - is a tangible example of trade partners increasing scrutiny over the carbon intensity of products imported from elsewhere, including the GCC. Reducing the carbon footprint of economic activity in the region therefore not only benefits the environment, but would also enhance export competitiveness. Policymakers should ensure that their economies are able to adapt to these changes and remain globally competitive.
5. Capital markets deepening (and boosting foreign investment)
Unlike counterparts elsewhere that have access to diversified sources of funding, Middle East businesses are highly dependent on bank funding for capital. While the average dependence of businesses on loans as a source of funding is less than 40 percent for high-income countries, the corresponding number for GCC member nations varies from 50 to 78 percent.
Figure 2 - Sources of funding
Source: World Bank Global Financial Development Database, figures based on latest available data for each country
Across 2021, we witnessed policymakers in the GCC striving to encourage equity trading as part of a broader policy priority to deepen and widen access to capital markets. Examples included:
Listing GREs to address thin markets and improve liquidity – Dubai announced in 2021 that several GREs would be listed on the Dubai Financial Market (DFM)8 to increase market liquidity. Similarly, Abu Dhabi’s Fertiglobe completed a landmark IPO worth US$ 795 million and ADNOC Drilling in October 2021. Saudi Arabia’s Tadawul also witnessed major IPOs including ACWA Power and STC’s internet services unit.
Lowering participation / listing costs – DFM introduced incentives to encourage new IPOs and listings from the private sector. Measures include providing financial support for the cost of IPOs on DFM’s main market and listing on the second market, and three-year waiver in listing fees, and participation in DFM’s international roadshows.
The trend is expected to continue strongly in 2022 with Saudi’s Tadawul exchange already reporting 50 applications for fresh IPOs during the year. The development of capital markets is a critical component of the GCC economies’ diversification strategy – the financial sector is a major job creator and more developed financial markets can better mobilise both domestic and foreign capital and savings to help non-oil businesses grow.
Historically, GCC governments have been a major supplier of capital abroad, but in recent times they have, in turn, shifted gears to attract foreign investment and capital. This boost to financial markets will be accompanied by coordinated efforts to attract international capital, for example:
Liberalising foreign investment – the UAE added more sectors to its list of 100 percent foreign ownership industries.
Introducing business environment reforms – Oman recently announced fee reductions for government services; while the UAE shifted its work week from Monday to Friday to align economic activity to global norms.
Enhancing visa regimes – premium residency or golden visa programmes are likely to be further expanded.
Liberalising markets to improve competition – the UAE is looking to address sales monopolies for local companies, which will enable foreign businesses to distribute their goods themselves and flexibility to change local partners.
Other areas that require attention and provide an opportunity to attract investment and foster entrepreneurship in the region include – opening more sectors to foreign investors; strengthening investor protection (for instance, clarifying the existing legislative framework on foreign investment rules); improved regulatory certainty and transparency; reducing the administrative procedures required to establish businesses, and; simplifying the investment approval process.
Looking ahead
We approach 2022 with cautious optimism. This will hopefully be the year when recovery is consolidated, which will depend on how COVID-19 is managed and global responses to the threat from inflation. With the introduction of corporate income taxes and the fulfillment of ESG commitments, as well as endeavours to develop capital markets and attract foreign investment, a year of major transformational change is expected in the region.
1) The IMF expects inflation to be just under 3 percent in 2021.
2) Non-tradable inflation refers to price growth for goods and services not sold on the international market.
3) UAE and Bahrain have no corporate tax. However, in the UAE, limited corporate income taxes apply to the branches of foreign banks, levied at the emirate level. Both the UAE and Bahrain also apply income taxes on hydrocarbon-related businesses.
4) Saudi Arabia increased its standard VAT rate from 5 percent to 15 percent in July 2020, while Bahrain recently doubled VAT from 5 to 10 percent. Oman also implemented its VAT regime in April 2021.
5) The short-term impacts may be larger where the corporate income tax is being introduced for the first time, as businesses (apart from multinationals) may not be accustomed to paying taxes, and there will be one-off compliance costs as companies understand and apply the new requirements.
6) Another driving factor to comply with the OECD accord is that groups with significant presence in low tax jurisdictions, including the UAE, may lose double tax treaty benefits / overseas tax deductions on intra-group transactions. This is likely to result in the expansion of these taxes in low-tax jurisdictions to avoid losing these benefits.
7) WEF in collaboration with PwC, Increasing Climate Ambition: Analysis of an International Carbon Price Floor, November 2021
8) These GREs include DEWA, Salik, Empower and Tecom.
