The Gulf economies, which have seen increased investments for one percentage of real output growth, could save 354mn barrels of oil equivalent in fossil fuel consumption, reduce emissions by 136mn tonnes of carbon dioxide and create 22,000 new jobs if they can achieve various renewable deployment targets by 2030, according to Standard and Poor’s, a global credit rating agency.
In its recent report, the rating agency noted that the cost of creating and maintaining this new economic activity is becoming more expensive for the Gulf governments. “When estimating how much investment it takes to generate one percentage point of economic growth (the incremental capital output ratio, or ICOR), it seems that the productivity of investment is declining,” S&P said.
Using a five-year rolling average ICOR to smooth out fluctuations, investment effectiveness appears to have fallen — in the five years to 2013 it took 6% of GDP (gross domestic product) in investment spending to generate one percentage point of real output growth. Over the five years to 2018, this had climbed to 11%.
For Qatar, it went up from less than 4% (2009-13) to about 12% (2014-18).
Attracting foreign investment and reducing the cost burden of non-oil growth is, therefore, a stated target of regional diversification plans. Without such investment, governments could incur higher expenditures and greater fiscal strain to diversify, it said.
Changing global sentiment away from “brown” investments could reduce the attractiveness of the region and potentially risk the pace at which new economic sectors develop, it said, adding this also risks reinforcing carbon-emitting activity as the most effective deployment of domestic capital. S&P found that the Gulf nations have started to view renewables, particularly solar, as a significant opportunity to pursue green diversification that is also growth-accretive.
According to IRENA (the International Renewable Energy Agency), close to 60% of the Gulf region’s land surface area has excellent suitability for solar photovoltaic deployment. Still, even if these targets are met and domestic consumption of fossil fuels in the region reduces, “we expect hydrocarbon exports will remain very material and the main source of funding for regional investment,” it added.
Since 2012, the Gulf economies have made some progress in diversifying away from oil. Despite the challenges of measuring oil versus non-oil GDP, “we estimate that the non-oil private sector’s share in Gulf economies’ real GDP will reach an average of 36.8% by 2022, up from 29.2% in 2012.”
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