Economic growth prospects of the oil exporting countries from the region, particularly the GCC countries are projected to improve in 2018, according to Middle East Economy Watch report from PwC.
The report, like other similar studies agree that the GDP growth across the region remained subdued in 2017 despite efforts to boost the non-oil private sector economic activities amid fiscal consolidation.
Although 2017 showed signs of improvement in GDP growth compared to 2016, this was less than anticipated at the start of the year due to the oil market. Brent crude oil has averaged $52/barrel (Dh190.84) so far this year, lower than about $58/barrel expected at the start of the year. This, according to PwC was due to inadequate compliance with cuts, at least until August plus revivals in production in Libya, Nigeria and US shale.
“While the economic and fiscal out-turns for the first half of the year are less than anticipated, momentum is building in key parts of the region. These signs suggest that stronger economic growth could return in 2018, so long as oil prices maintain or exceed current price levels,” said Richard Boxshall, Senior Economist at PwC Middle East.
The International Monetary Fund (IMF) in its latest Global Economic Outlook has projected stronger growth outlook for the region’s oil exporting countries although prolonged low oil prices are expected to remain a drag on GDP growth of oil exporters.
While the IMF has welcomed the fiscal reforms across the GCC, it expects the impact of low oil prices on region’s economic growth linger for longer. “Prolonged slump in oil prices are weighing on the economic growth outlook across the Middle East. Oil exporters are hard hit with long term implications for their growth outlook,” said Gian Maria Milesi-Ferretti, Deputy Director of Research Department of the IMF.
The latest IMF forecast for 2018 showed the regional GDP growth rebounding to 3.3 per cent, largely driven by turnaround in key regional economies such as the UAE, Saudi Arabia and Kuwait.
While Saudi Arabia’s real GDP growth is forecast to be flat at 0.1 per cent, down from 1.7 per cent last year. Next year Saudi’s GDP is likely to see a marginal improvement largely driven by non-oil sector growth.
Saudi Arabia’s real GDP growth is expected to be close to zero (0.1 per cent) as oil GDP declines in line with Saudi Arabia’s commitments under the Opec agreement. However, the IMF expects to strengthen over the medium-term as structural reforms are implemented. Non-oil growth in Saudi is projected to pick up to 1.7 per cent in 2017 with further uptick in 2018 with a projected overall GDP growth of 1.1 per cent.
The UAE’s economic growth, which faced a persistent slowdown from 2015, is expected to bounce back in 2018, according to the IMF. The IMF has projected a 1.3 per cent growth in the UAE’s real GDP in 2017, which it expects to surge to 3.4 per cent in 2018.
The fiscal adjustment programmes across the GCC have seen deficits declining, but PwC analysts said, faster decline in deficits are important to achieve stronger growth.
Data for the first half of the year shows that Oman and Qatar deficits are down by about a third compared with the first part of 2016, and is less than anticipated. And although the Saudi data shows more improvement, cutting the deficit in the first half of the year by more than 50 per cent, the Saudi government pledging to repay various public sector benefits and bonuses could increase expenditure in the second half, leading to larger deficits than anticipated for the year as a whole.
Factbox: Pegs likely to stay
The lower for longer oil price environment has prompted renewed debate in the suitability of the GCC currency pegs. Since the mid-1980s, the Gulf currencies have all been pegged at fixed rates to the US dollar, with the exception of Kuwait which pegs to a basket of currencies.
The pegs compel central banks (including Kuwait’s) to broadly match US interest rates, even if business cycles are not aligned, as is currently the case, and so the rates don’t necessarily suit the Gulf’s economic needs and can create pressure on the pegs.
While external pressure remains within comfortable boundaries, it is also up for debate whether they remain economically suitable. Devaluations, either one-off moves or free-float regimes, would not do much to boost competitiveness in most Gulf countries. This is because of the current paucity of non-commodity exports, except in a few cases — for example Dubai’s tourism sector.
Richard Boxshall, Senior Economist at PwC Middle East, added: “A change in the currency regime is only likely to make good economic sense if and when commodities play a much smaller role in the Gulf economies as a result of successful diversification efforts. For most countries, this remains a fairly distant goal,” said Boxshall.