Economic and financial relations between Spain and the Cooperation Council for the Arab States of the Gulf: an initial assessment

Aerial view of Etihad Towers and Emirates Palace Hotel in west Abu Dhabi, capital of the United Arab Emirates, one of the most influential countries of the Gulf Cooperation Council
Aerial view of Etihad Towers and Emirates Palace Hotel in west Abu Dhabi, United Arab Emirates. Photo: Figurative Speech / Getty Images

The six member countries of the Cooperation Council for the Arab States of the Gulf have acquired growing importance in global economic and financial relations, while also undertaking ambitious projects to diversify their own economies. This offers Spain attractive opportunities for its own economic development, and to create wealth and employment.

This analysis is the first in a series designed to explore Spain’s economic and financial relations with the six member countries of the Cooperation Council for the Arab States of the Gulf (also known as the Gulf Cooperation Council or GCC). Subsequent analyses will provide insights into the nature of these six economies, their diversification projects, their economic and financial relations with Spain, the potential opportunities for Spanish companies, and the security risks that their investment projects could pose, particularly in sectors that are strategic for Spain. This series of analyses will provide contextualised information and offer a series of recommendations for making the most of the opportunities offered by the Arab states of the Gulf, including the investment potential of their sovereign funds.

The move by Saudi Arabia’s state-owned telecoms firm STC to acquire a 9.9% stake in the Spanish company Telefónica in September 2023 generated a great degree of interest, public debate and some challenges for political decision-makers in Spain with respect to the authorisation of investments from outside the EU, where a foreign government is the ultimate investor. However, both in the arena of public opinion and within the administration, there is a knowledge deficit about these countries, their economic and political trajectories, their increasing openness to the world, their diversification plans and their geopolitical visions of the changing world that surrounds us, in which they aspire to play a bigger role.

Main features of the economies of the members of the Gulf Cooperation Council

The Gulf Cooperation Council consists of the following six countries (by order of GDP): Saudi Arabia, the United Arab Emirates (UAE), Qatar, Kuwait, Oman and Bahrain. Saudi Arabia accounts for more than 50% of the group’s GDP, and the UAE accounts for slightly more than 23%. In other words, the two largest economies account for almost three-quarters of the region’s GDP.

The region saw rapid growth during 2022, particularly in Saudi Arabia, whose GDP rose by 8.7%, making it the fastest-growing G20 economy. Kuwait (at 8.2%) and the UAE (at 7.4%) also recorded very solid rates. The other GCC growth rates were as follows: Bahrain (4.9%), Qatar (4.8%) and Oman (4.3%).

In terms of population, Saudi Arabia is also the most relevant country, with a population of over 36 million in 2022, almost 62% of the region’s total.

Figure 2. Gulf Cooperation Council countries by population, 2022

Population (millions of inhabitants)
Percentage of population
Saudi Arabia36.461.8%
Source: compiled by the authors from World Bank data.

In terms of GDP per capita, Qatar is at the top of the six countries with close to US$110,000, almost 30% higher than the next country, the UAE, with close to US$85,000. Oman comes last with a GDP per capita of less than US$40,000. By way of comparison, Spain’s per capita GDP at current prices in 2022 was slightly over US$50,000, according to the International Monetary Fund (IMF).

All the GCC members scored very highly on the Human Development Index,[2] with scores of 0.8 or more in 2021. The UAE, with a score of 0.911, has the highest rating, outperforming Spain, which had a score of 0.905 in 2021.

Figure 4. Human Development Index, 2021

CountryHuman Development Index
CountryHuman Development Index
Saudi Arabia0.88
Source: compiled by the authors from UN data.

These countries also have very low unemployment rates, with Saudi Arabia recording the highest at over 5% in 2022, although this has since fallen. Some of these countries do not have very large populations, and governments often offer subsidies to their own citizens, a significant proportion of whom are employed in the public sector. Some governments require foreign companies to hire a certain number of local workers, a measure designed to foster the employment of the local population in the private sector.

Figure 5. Unemployment rates, 2022

CountryUnemployment rate in 2022
Saudi Arabia5.6
Source: compiled by the authors from IMF data.

The public finances of these countries are extremely healthy, with the exception of Bahrain, where the public debt-to-GDP ratio stood at almost 120% in 2022, and the public deficit exceeded 6% of GDP. Kuwait’s fiscal position is very notable with a public debt-to-GDP ratio of just over 3%, and a very large fiscal surplus in 2022 of almost 20% of GDP.

In international terms, these economies have solid current account balances as a proportion of GDP, with surpluses ranging from 6.4% for Oman to 36% for Kuwait.

These countries have some of the largest petroleum reserves in the world, with Saudi Arabia having the second largest (after Venezuela), Kuwait occupying sixth position, the UAE seventh and Qatar 14th. Taking all the GCC members together, this region has the largest petroleum reserves in the world. When it comes to natural gas, Qatar has the world’s third largest reserves, accounting for 12.8% of the total, while Saudi Arabia possesses 4.2% and the UAE 3.1%. The abundant wealth generated by hydrocarbons is one of the elements that determines the geopolitical importance of this block of countries, along with its financial capacity to make sizeable investments outside of the home region via its sovereign funds.

This abundant wealth in hydrocarbons means that these countries have pursued economic specialisation in related activities. For example, petroleum exports account for a very high proportion of total exports of goods in these countries. In Bahrain’s case, this has changed recently not due to the sudden diversification of its economy but rather to the fact that the country’s petroleum reserves have almost run out.

Other indicators confirm the region’s heavy economic dependency on hydrocarbons. For instance, petroleum income accounts for a high proportion of GDP by international standards, although the figure has fallen in recent years. The gradual decline in the importance of the hydrocarbon sector thanks to economic diversification is particularly marked in the UAE, which has become the region’s commercial, logistics and financial hub.

Diversification plans and sovereign funds

Faced with their heavy dependence on hydrocarbons, all the GCC countries have embarked on plans to diversify their economies with the aim of reducing this dependence. They have established the goal of gradually replacing the production of petroleum and gas with the production of goods and services that do not depend, either directly or indirectly, on the energy sector. These plans also involve replacing state income from hydrocarbons with other income sources, such as sectors not linked to petroleum or consumption taxes. Despite the progress of the last decade, hydrocarbons still account for a high percentage of exports, of GDP and of state income, with the exception of the UAE, which embarked on the diversification process much earlier. Other key economic activities in GCC countries, such as construction and infrastructure development, are closely tied to the income generated by hydrocarbons.

The GCC countries’ economic diversification plans are contained in ‘national visions’ and ‘national economic development plans’ with specific timeframes (Saudi Arabia, Bahrain and Qatar all have plans titled Vision 2030, the UAE has Vision 2031, Kuwait has Vision 2035 and Oman has presented its Vision 2040). The common objectives of these plans include integrating the private sector into the economic activities of each country, supporting small and medium-sized enterprises (SMEs) as creators of economic value and employment, and establishing national agencies to facilitate the development and funding of SMEs. In addition, free trade zones and special economic zones have been established, operating outside national regulations, with the aim of attracting foreign direct investment (FDI) and acting as poles of innovation which can subsequently be integrated into national economies.

From a financial perspective, the clearest evidence of the commitment to diversification are the sovereign funds created with the income obtained from the sale of hydrocarbons. Six of the 15 largest sovereign funds in the world are owned by Gulf states, and between them they account for more than US$3.4 trillion (more than twice the annual GDP of Spain and almost three times the volume of assets of the world’s largest sovereign fund, the China Investment Corporation).

These sovereign funds play a vital role in the growth and development of the Gulf economies, with two pathways being particularly important in this process. One the one hand, they perform a local development banking function, funding strategic projects and contributing capital to public companies that are key to particular sectors. On the other hand, the international investment activities of these funds is growing in importance due to the ever-expanding volume of resources they manage. These investments are designed with two key objectives in mind: the first is financial profit (a way of diversifying the country’s income through a portfolio of diverse investments across the globe, primarily in developed countries); the second is related to promoting a strategic vision, both political and economic. This involves investment by sovereign funds in high-growth sectors where they often seek synergies with their own economies, for example in the form of joint ventures with local companies or through technology transfers.

As mentioned earlier, recent major investments include the acquisition of 9.9% of the share capital of Telefónica by the Saudi telecoms company STC, whose majority owner is the Public Investment Fund (PIF). However, prior to this operation, other Gulf funds had already acquired significant holdings in other strategic Spanish companies. For example, Mubadala and the Qatar Investment Authority (QIA) are the principal shareholders in the strategic companies Cepsa and Iberdrola, respectively.

Investments of Gulf Cooperation Council states in Spain

In the Spanish case, some conclusions can be drawn regarding the magnitude and composition of FDI by GCC countries in Spain, using the data supplied by the investment register of the Spanish Ministry of Economy, Commerce and Business.

First, in terms of the stock of investments in 2021, the UAE is the main investor, with €5,635 million, followed by Qatar with €3,357 million. It is notable that, despite being the largest economy in the region by some margin, Saudi Arabia is only the third largest investor, with a stock of €1,009 million. In any case, it should be noted that these figures only reflect FDI: those investments in which at least 10% of the share capital of the company is acquired.[3] With respect to the proportion of public and private investment, more than 86% comes from the public sector, which reflects the importance of sovereign funds in these countries.

Figure 13. Investment stock, 2021

Investment stock in 2021Saudi ArabiaBahrainUAEKuwaitOmanQatarTotal
Public investment690344,592482123,3309,140
Private investment319221,043330281,445
Source: compiled by the authors.

At the same time, there is a degree of volatility in investment flows, particularly in the case of Qatar, where there were significant flows in 2016, 2018 and 2020, but far lower ones in the other years. However, the Gulf states are not among the leading investors in Spain, at least in terms of FDI, with UAE in 17th position and Saudi Arabia in 32nd.

Figure 14. Investment flows, 2014-23

Investment flows201420152016201720182019202020212022Jan-Jun 2023
Saudi Arabia17445469153812184780
Source: compiled by the authors.

In regional and sectoral terms:

  • The Madrid region receives more than 80% of the UAE’s public investment flows, more than half of which are concentrated in the coke and petroleum refining sector.
  • The region of Catalonia receives more than 90% of the investment flows from the Qatari public sector, focused primarily on the accommodation services sector.
  • The region of Murcia is the recipient of more than 90% of Saudi Arabia’s public investment, which is allocated to the manufacture of rubber and plastic products.
  • Public investment flows from Kuwait are divided between the regions of Madrid and Cantabria, and are focused on the supply of electricity, and of gas, steam and air conditioning.

Climate for business and project opportunities for Spanish companies in the Gulf Cooperation Council states

The countries of the GCC, particularly Saudi Arabia and the UAE, compete with each other for foreign investment. The UAE is one of the most dynamic countries in the region, particularly in the emirates of Dubai and Abu Dhabi. The UAE’s economic diversification began earlier than in any other GCC country, transforming it into both an air hub (Dubai International Airport is the world’s busiest in terms of international passenger traffic) and a port hub (40% of the UAE’s imports are re-exported, with the country handling 2.4% of global trade, compared with a figure of 1.8% for Spain, and Spain exporting more to the UAE than to India or Australia). In addition, the country has benefited from the ‘headquarters effect’ (UAE has more than 40 multi-disciplinary free-trade zones). The UAE is also home to the Dubai International Financial Center (DIFC), the Middle East’s leading financial centre, which acts as a safe haven where national regulations do not apply.

The early success of the UAE and the relatively new desire of Saudi Arabia, particularly since 2016, to compete with its neighbour, explain some of the legislation recently adopted by the latter. For example, from 2024, foreign companies that want to enter into contracts with the Saudi authorities must have their main Middle East office on Saudi territory. Another issue is that the GCC customs union does not operate fully, with some national authorities imposing non-tariff barriers on the entrance of goods from other GCC states.

Conducting business in these countries is far easier for those with contacts at the highest political levels. While the Saudi government has created the Ministry of Investment (MISA), designed to support foreign investors, and Oman recently opened its Invest in Omanoffice, political and personal contacts remain key when doing business. This means that larger Spanish companies, with greater institutional capacity to establish and maintain contacts, are better placed to win project tenders in these countries.

Spanish companies arrived in the region more recently than those of its European partners, although Spain’s exports to the region have grown steadily since the turn of the century. Spanish companies have benefited from major infrastructure, energy, defence, desalination and water resource management projects, among others. In the case of Saudi Arabia, for example, the construction, operation and maintenance of the high-speed Haramain trainline between Mecca and Medina is the responsibility of a consortium of Spanish companies, as is the construction of three metro lines in the capital, Riyadh. These countries also have a keen interest in opening up to international tourism, a sector in which Spain is a global power, and where there are major opportunities for Spanish companies.

In terms of legal security and country risk, this varies from state to state (see Figure 15 below), although Saudi Arabia, the UAE and Kuwait, followed by Qatar, have good scores, according to the Organisation for Economic Co-operation and Development (OECD).

Figure 15. Risk classification of Gulf Cooperation Council states, according to OECD

Saudi Arabia2
Note: Lowest risk receives a score of 1, highest is 7. Source: compiled by the authors from OECD data.

Trade in goods

In terms of goods exports, according to statistics from World Trade Integrated Solutions, the main commercial partners of GCC states in 2021 were:

  • Saudi Arabia: the UAE (5.15%), China (3.83%), India (3.19%), Egypt (2.72%) and the US (1.73%).
  • Bahrain: Saudi Arabia (13.52%), the UAE (8.92%), the US (7.34%), Egypt (4.01%) and Oman (3.13%).
  • UAE: Saudi Arabia (6.25%), India (5.64%), Iraq (3.35%), Hong Kong (2.52%) and Oman (2.38%).
  • Kuwait: the UAE (1.27%), Saudi Arabia (1.15%), China (1.13%), India (1.11%) and Iraq (0.8%).
  • Oman: the UAE (8.62%), Saudi Arabia (3.88%), the US (3.82%), India (2.97%) and China (2.29%).
  • Qatar: China (15.45%), Japan (13.58%), India (12.84%), South Korea (12.83%) and Singapore (6.13%).

These figures show that, whatever the possible rivalries, the economies of Saudi Arabia, Bahrain, the UAE and Oman are highly integrated when it comes to trade. By contrast, Qatar is very exposed to the Asian continent and is less integrated with the rest of the Gulf region when it comes to exports. No EU country is among the five main destinations for exports from the Arab Gulf states.

In terms of the import of goods, the main trade partners in 2021 were:

  • Saudi Arabia: China (19.80%), the US (10.62%), the UAE (8.17%), India (5.29%) and Germany (4.91%).
  • Bahrain: Brazil (14.13%), China (13.02%), the UAE (7.39%), Australia (7.24%) and Saudi Arabia (6.84%).
  • UAE: China (14.90%), India (6.01%), the US (4.86%), Japan (3.12%) and Turkey (2.76%).
  • Kuwait: China (17.98%), the UAE (11.89%), the US (7.99%), Japan (5.76%) and Saudi Arabia (5.32%).
  • Oman: Saudi Arabia (35.56%), China (6.98%), India (6.56%), Qatar (6.42%) and Brazil (4.86%).
  • Qatar: China (16.26%), the US (11.84%), India (6.35%), Germany (5.78%) and the UK (5.65%).

In terms of imports, China is the main trade partner for four of the six Gulf economies. The exceptions are Bahrain, for whom Brazil is the main source of imports, and Oman, with its large trade integration with Saudi Arabia. The only EU country to appear in this ranking is Germany, which is the fourth biggest source of imported goods for Qatar.

With respect to Spain, in 2022, according to data from the State Secretariat for Trade, Saudi Arabia was the Gulf country with which Spain had the highest volume of goods trade, with a negative balance of more than €2,150 million and a coverage ratio of 58%. The coverage ratios in the trade in goods are also below 60% in the cases of Bahrain, Oman and Qatar. These low ratios are due primarily to the import of gas and petroleum by Spain. However, Spain has coverage ratios of over 100% with the UAE and Kuwait, indicating that the volume of exports of goods from Spain to those countries exceeds the volume of imports.

Figure 16. Goods trade between the Gulf Cooperation Council and Spain, 2022

Goods exports (2022, € million)
Goods imports (2022, € million)Goods trade balance (2022, € million)Coverage ratio
Saudi Arabia2,965.35,116.2-2,150.958%
Source: compiled by the authors.

Policy and economic diplomacy recommendations

Spain has numerous strengths on which to build when it comes to developing its economic and political relations with the Arab Gulf states. It conveys an image of closeness and historical-cultural affinity among the elites and populations of these Arab countries, in addition to being an attractive country as a tourist, cultural and sports destination. The fact that Spain is a monarchy also contributes to the image of proximity and stability. Factors that play in Spain’s favour include its highly internationalised economy, its possession of leading companies in sectors that are of great interest to the GCC states, the absence of historical disputes with these countries and the adoption of international positions that are viewed positively (such as support for a two-state solution in the Palestinian-Israeli conflict).

Although Spain already has a significant and rising business presence and export profile in the region (Spanish exports to GCC states rose from €4,716 million in 2021 to €6,280 million in 2022), there is a huge potential to intensify economic and trade relations between Spain and the GCC, and to exploit the opportunities these countries offer. To do this, Spain needs to establish an integrated strategy towards the Arab Gulf states, prioritising economic diplomacy in the region and backed by the necessary resources for diplomatic representation in these countries. This would also entail stepping up the number of high-level official visits and the holding of specialised forums, as other European countries do, with important returns for their economies. It would also be desirable to reach bilateral agreements, with the aim of strengthening cooperation in strategic areas.

In order to develop a successful strategy towards the GCC countries, both to increase Spain’s presence in the region and to attract investment, it is essential to draw on advice and knowledge in cultural and business matters. This means that Spanish government and business actors need to be aware of the importance of cultural sensitivity and pay attention to detail and the importance of gestures and symbols. One issue that is key to making the most of business opportunities is the need to invest time in establishing relationships of trust at a personal level. This makes it clear that intentions are serious at the outset and helps mitigate conflicts and misunderstandings, should these arise. Spanish authorities and companies could draw on the growing presence of well-educated Spanish-Arab citizens, with a knowledge of languages and cultural sensitivity, to act as a bridge between Spain and the Arab Gulf countries. At the same time, the Spanish communities in those countries are growing due to the employment opportunities that exist there, and these could also be an asset when it comes to strengthening economic ties, given the fact that Spanish citizens hold important positions in local bodies and companies.

At the same time, it is essential to have detailed, high-quality statistics on foreign investments, particularly in a geopolitically sensitive situation such as the current one. For example, this analysis could not have been completed without data taken from the investment register of the Spanish Ministry of Economy, Commerce and Business. These data make it possible to detect trends and to draw relevant conclusions. Without it, it would be impossible to identify the true purpose of foreign investment in Spain.

The economic and geopolitical importance of the Arab Gulf states has been clearly demonstrated, and they have promising long-term economic prospects. Winning projects in this region is particularly attractive to Spanish companies. Spain’s ambassadors to these countries, as well as economic and trade advisors and attachés, perform laudable economic and commercial work. However, it is important to continue to promote economic diplomacy via two pathways. First, it would be advisable that Spain strengthen its embassies and economic and trade offices throughout the region, and particularly in Saudi Arabia, the largest country in the region and which is increasingly opening up to the outside world. Secondly, it is crucial to promote high-level visits by members of the Spanish government and the royal family with the aim of strengthening bilateral relations at both the economic and the political levels. Several European and Asian countries that have held business rounds, with the participation of companies and relevant ministers, have achieved notable successes.

Attracting investment from the GCC should be an objective for Spain, so long as this pursues profitability purposes rather than taking control of strategic aspects. The existence of Invest in Spain as a one-stop shop for the attraction of foreign investment is positive. However, there needs to be further institutional consolidation in Spain, so that foreign investors are clear as to who they should refer to.

The six members of the Cooperation Council for the Arab States of the Gulf have acquired growing importance in global economic and financial relations. They have massive financial resources, created with the income derived from the sale of hydrocarbons. Six of the 15 largest sovereign funds in the world are owned by Arab Gulf states, and between them they account for more than US$3.4 trillion (more than twice the annual GDP of Spain). Moreover, the GCC states are characterised by relative geopolitical stability, creating a favourable investment climate.

The growing importance of the Arab Gulf states in global economic and financial relations offers Spain interesting opportunities for its own economic development, and to create wealth and employment. In order to take advantage of these opportunities it is necessary to overcome the existing knowledge deficit among the Spanish public and within the administration regarding the economic and political trajectories of these countries, their diversification plans, their increasing openness to the world and their geopolitical visions of the changing world that surrounds us.

Spain has numerous strengths on which to build when it comes to developing its economic and political relations with the Arab Gulf states, including historical ties with the Arab world and a closer cultural affinity than other European country. Although Spain’s business presence and export profiles have grown considerably over the past 20 years, there is a huge potential to intensify relations between Spain and the GCC, and to exploit the economic opportunities these countries offer. Achieving the full benefit from such opportunities requires economic diplomacy to be supported by strengthening the competent bodies and institutions, including Spain’s embassies and its economic and trade offices in those countries. There also needs to be an ambitious strategic plan to promote high-level visits between Spain and the Arab Gulf states, as well as for the Spanish government and business representatives to have the necessary advice and knowledge in cultural aspects and on how to do business.

[1] The authors would like to thank the following for their time and for their contributions to an earlier version of this study: Javier Carbajosa Sánchez, Laura Cerezo Morillas, Ana de Vicente Lancho, Blanca Fernández Barjau, Miguel Hernando de Larramendi, Álvaro Martín-Aceña Hernández, Belén Moraleda García, Miguel José Moro Aguilar, José Vicente Pérez López, Eduardo Prieto Kessler, Carlos Rebato Barredo and Andrés Salinero Barbolla.

[2] The Human Development Index is calculated by the United Nations Development Programme (UNDP) which takes into account three factors: (1) life expectancy; (2) education; and (3) per capita income. 0 is the minimum value and 1 is the maximum.

[3] As a result, the data for 2023 will not include the STC investment in Telefónica because, at 9.9% of the capital, it is below the FDI threshold of 10%.