The Middle East’s financial landscape is witnessing a transformative shift towards green finance, playing a pivotal role in bolstering economic diversification and resilience, despite the region facing challenges such as oil output reductions and geopolitical unrest. A recent economic report has highlighted the robustness of the non-oil sectors in key Middle Eastern economies, projecting a strong performance for the non-oil gross domestic product (GDP) in 2023, accompanied by promising Purchasing Manager Indices (PMI) for nations like Saudi Arabia and the UAE at the outset of 2024.
Amidst these developments, the emerging potential of green finance is underscored for its capacity to foster economic diversification, job creation, and attract foreign direct investment (FDI) throughout the region. Three core themes are brought to light in the report:
- Oil Output Reductions and Non-Oil Sector Resilience: Despite the Organization of the Petroleum Exporting Countries and allies (OPEC+) deciding to extend oil production cuts into the second quarter of 2024, the non-oil sector in the Middle East is showing signs of robustness. These production cuts are anticipated to result in a contraction of the Middle East’s oil sector in 2024. For instance, Saudi Arabia has put a hold on increasing its oil production capacity, instead opting to channel more investments into alternative energy projects, including gas and renewable energy initiatives.
- As part of this trend, Qatar is also expanding its liquefied natural gas (LNG) capabilities with the North Field West project, solidifying its position in the global LNG marketplace and tapping into the growing appeal of gas due to its lower carbon emissions compared to oil.
- Alternative Trade Corridors: Recent disruptions in Red Sea trade have sparked discussions on alternative trade routes such as the India-Middle East-Europe Economic Corridor (IMEC) and Iraq’s Development Road. Yet, the fruition of these proposals is dependent on the resolution of ongoing regional conflicts.
- The Rise of Green Financing: The Middle East is experiencing a surge in green financing, especially after the successful COP28 and the establishment of green finance frameworks. The issuance of green bonds and sukuk in the region has doubled to $24 billion in 2023, with the UAE and Saudi Arabia leading the way. Oman has introduced a sustainable finance framework, and Qatar is prepping for its first green bond issuance, reflecting a strong regional commitment to sustainability and economic diversification. Moreover, Saudi Arabia is considering a sovereign green bond issuance, following significant funds raised by the Public Investment Fund (PIF).
The report suggests that the region’s burgeoning focus on sustainability, in alignment with net-zero ambitions and the need for economic diversification, is driving growth in green finance. This growth not only signals a shift in focus but also has the potential to significantly enhance the Middle East’s attractiveness to international investors.