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Major investments in emerging sectors have become the backbone of policymaking in GCC countries although oil would continue to remain a major component of the GDP.
In recent years the GCC economies have made conscious efforts to diversify away from their dependence on oil.
They have also started the process of liberalisation by opening up the economy selectively in order to encourage FDI, which will act as a catalyst for sectors such as infrastructure, tourism, media, shipping, financials, commercial services, telecom and general industrials.
Restrictions on foreign investment in the GCC region are being relaxed with the expansion of free trade zones.
In addition to changing the structure of non-hydrocarbon industries in their domestic markets, GCC countries have also been investing their oil revenues into global assets ranging from low-yielding government bonds to high-yielding equities and alternatives. But, how successful have they been in the process of diversifying away from oil?
Bahrain has successfully diversified its economic base as part of a strategic initiative that goes back in the early 70s which over the years has transformed Bahrain as one of the most liberal economies in the region.
A key objective of Bahrain has been to work on diversifying the economy and reducing dependence on oil. Bahrain has made a number of significant initiatives to develop the financial sector which has made it the centre of choice for many international and regional financial institutions
It is perhaps the first GCC country to realise the importance of the private sector as an "engine of growth" for the economy.
The country's infrastructure is forging ahead with the government already having roped in private enterprise to invest in key sectors like housing and power.
A milestone in Bahrain's history was the privatisation of the Hidd Power and Water Station - the biggest privatisation project in the country to date. The station was sold to a consortium of three international firms for BD279 million ($738 million).
The UAE has been very successful in its efforts towards reducing its reliance on oil, which is expected to decrease from 37 per cent of GDP in 2006 to less than 30 per cent of GDP by 2010.
The UAE's booming economy, increasing lure as a tourist destination and rapid increase in expatriates continue to drive the demand for real estate. The government through the promotion of free trade zones, tax holidays and other reforms is trying to increase FDI in non-oil sectors.
The Saudi government has planned infrastructure expenditure of over $300 billion over the next three years in sectors such as construction, transportation, petrochemicals and refining. It is forecast that Saudi Arabia's non-oil sector will contribute 49 per cent of its GDP by 2010 (up from 45.9 per cent in 2006).
Saudi's focus on the financial sector is reflected in its plan to construct a financial district in Riyadh by 2010, at a cost of $6.7 billion. Saudi Arabia also plans to develop six economic cities which will generate employment and spur economic growth and development in the Kingdom.
Qatar has a high investment to GDP ratio (almost 40 per cent) which is expected to grow even faster in the coming years. The country is increasing its focus on the non-hydrocarbon sectors with about $65-70 billion worth of investments expected in non-hydrocarbons in the next 5-7 years. Qatar's dependence on oil and gas is expected to decline to 55 per cent of its GDP by 2010 (from the current 62 per cent).
Growth of the non-oil sector has not been uniform across the GCC. Countries such as the UAE, which embarked on large-scale diversification before the current boom, have benefited the most. The Gulf's domestic investments have been rising consistently and are expected to reach about 50 per cent of non-oil GDP in 2007. Direct foreign investment inflows more than tripled since 2003.
Key sectors contributing to non-oil economic growth are construction and real estate, manufacturing, financial services, trade, tourism and other services.
The increased emphasis on diversification of income streams, away from oil, by countries in the GCC region has led to massive spending plans in infrastructure development in the region.
The spurt in infrastructure investment is also a function of the changing demographic characteristics in the region. Population growth has been rising at three per cent during 2000-2006, helping the buoyant economic growth percolate down to consumers. Accordingly total consumption expenditure has been growing at about 15 per cent in the past three years.
The GCC is a FDI hub attracting 54 per cent of overall FDI in West Asia. In 2006, total FDI inflows in the GCC region grew by 23.1 per cent to touch $32.4 billion from $26.3 billion in 2005. Saudi Arabia and UAE have emerged as the top destinations for FDI flows in the region, together accounting for 82.2 per cent of total FDI inflows.
According to the Unctad, the GCC countries attracted 54 per cent of total FDI inflows to West Asia in 2006. Saudi Arabia was the second largest recipient in West Asia, with inflows of $18.3 billion. UAE was the third largest, with inflows of $8.4 billion, going mainly to the country's free trade zones.
In the medium-term, there exists no immediate threat to the region's investment spending as demand for hydrocarbons remains robust driven by demand from emerging markets like China and India.
