IMF predicts risks of rollover for GCC

Kuwait fiscal breakeven oil price below $50/bbl

KUWAIT: Finer details and forecasts of the MENA region were released in IMF’s Regional Economic Outlook on 19th October 2016, and the agency now forecasts GCC real GDP to grow by 1.7 percent in 2016 & 2.3 percent in 2017. Economic growth in the GCC region is projected to be relatively slower, despite the increase in hydrocarbon output, as fiscal tightening and declining liquidity in the financial sector are expected to drag growth down from 3.4 percent in 2015. GCC non-oil GDP growth in 2016 slower than earlier expected: Higher oil and gas production led to an upgrade of 80bps to the real oil-GDP growth forecast for 2016 (1.8 percent) as compared to IMF’s April-16 update for the region. Real non-oil GDP on the other hand is expected to come in slower than earlier expected by 70bps (1.8 percent) for 2016, while the corresponding estimate for 2017 was expanded by 10bps. Fiscal consolidation, credit constraints due to slowing deposit growth are expected to contribute to the drop in non-oil GDP in the current year.

Kuwait fiscal breakeven

Kuwait’s fiscal breakeven oil price was lowered from IMF’s earlier update and is now estimated at close to over $47/bbl, the lowest in the GCC, and closest to YTD average oil prices. Estimates for Saudi Arabia were raised, in particular for 2016, by $13/bbl, as an oil price of $79.7/bbl is now required to balance its fiscal budget. Non-oil fiscal balance for the GCC region in 2016 is expected to improve by 8.6 percent points of non-oil GDP as compared to 2015. KAMCO expects the rollover of risks to give more leeway to the GCC: Though we remain optimistic about the measures taken so far by the GCC states, with some of the measures already showing desired results, the deferral of global risks leaves more room for employing additional initiatives to boost non-oil private sector growth. Funding gaps would need to plugged in by tapping into international markets if need be, while credit outlay to high priority projects would still be needed, to steer through this period of transition.

Production target

Oil production estimates for the GCC was raised yet again by the IMF for 2016, while keeping estimates for 2017 unchanged. Production, is now expected to grow to 18.04 mb/d from the earlier estimate of 18.01 mb/d for 2016. Key driver for the increase in forecast was the production estimate of Saudi Arabia, which was increased from 10.22 mb/d to 10.30 mb/d. Nevertheless, this increase comes against the backdrop of OPEC agreeing to cut production by as much as 700,000 mb/d in Sept16, its first major agreement since the oil bear market began in 2014. Saudi Arabia in September also announced that it would reduce production if other fellow OPEC members would freeze its own production. Russia also agreed to support the effort to reduce the global glut of an estimated 1.0 -1.5 mb/d. Finer details of the production cutback would be worked out at the next OPEC meeting in Vienna on 30 Nov-16. The extent of production cut from Saudi Arabia will be of paramount interest at the event. Furthermore, the signaling impact on non-OPEC players, and which non-OPEC players would be first to undertake the necessary action, would

Current account deficit

The partial recovery in oil prices recently also meant that the deficit in current account balance to GDP ratio for the full year would be lower as compared to April-16 estimates, by the IMF. The current account deficit estimate for 2016 is now pegged at -3.7 percent of GDP as against -7.0 percent of GDP estimated in IMF’s previous update. The absolute value of deficits is also expected to decline by 44 percent in 2016, as compared to earlier estimates of $91 billion. Saudi Arabia alone is expected to contribute to about 83 percent of the deficit in 2016, as the IMF expects the country to report current deficit of 6.6 percent of GDP for the year.

Fiscal balance to GDP ratio

The most recent estimates of the fiscal balance to GDP ratio for the GCC region also shows improvement from earlier estimates for the current year and 2017. The fiscal deficit of the GCC is expected to be 9.8 percent of 2016 GDP, lower than the 12.3 percent deficit of GDP estimated in IMF’s previous update. The agency expects an improvement for 2017 as well, as the deficit is expected to lower at 6.9 percent of GDP, as compared to the earlier estimate of 10.8 percent of GDP. Saudi Arabia’s fiscal deficit to GDP ratio in 2016 was kept constant at 13.5 percent as against their previous update, but the corresponding figure for 2017 is expected to dip below double digits at 9.5 percent of GDP for the year, compared to a previous deficit estimate of 10.8 percent. The IMF continued to reiterate the need for further policy priorities other than the ones recently announced, which would be needed along with a well -defined medium-term fiscal framework for the region. Further policy initiatives in terms of additional streamlining of current expenditures, including the public sector wage bill, increasing the efficiency of public investment and additional energy price reforms were advised by the agency as well. Fiscal consolidation would also continue to require a mix of spending cuts and pro revenue measures.

Energy price reforms

GCC states have implemented energy price reforms in varying degrees as means of curtailing their state spending. The reforms in the form of higher price is also expected to contribute to a slowing down of energy consumption in the region, and is also expected to provide fiscal adjustment support, as per the IMF. Data from the IMF also suggests that the implicit energy costs for the GCC is expected to drop from 6.7 percent of GDP in 2014 to 3.4 percent of GDP in 2016, as a result of the reduction in subsidies and higher revenues from the domestic sale of energy products.

Risks to rollover

Though the twin deficits in the GCC have shown some signs of alleviating in 2016 and 2017, we expect this to be only partially contributed by spending cuts and measures adopted so far to increase revenues. Significant global risks in terms of waning global trade activity, a slowdown in China, tighter liquidity conditions from a potential near term interest rate hike in the US, and the impact of Brexit have been rolled over to 2017 and beyond. Nevertheless, KAMCO Research remains optimistic about the avenues available to GCC states and the ability to successfully boost their non-oil economies, as some of the measures have already started showing positive results. However, the implementation of ongoing measures and the introduction of new initiatives would be needed to further boost the private sector non-oil growth. Deficit funding measures such as international bond issuances, along with healthy credit growth backed by conventional or alternative funding for high priority projects, would be incrementally positive in our view.

To understand the impact of past measures in boosting the non-oil sector in the GCC, we looked at the nonoil fiscal balances data of the region published by IMF over the long term, which included forecasts for the current year and the next year. Data suggested that the non-oil fiscal balance to non-oil GDP ratio worsened from the average estimate of 2000 -2012 until 2014 from 43.1 percent to 56.8 percent of non-oil GDP. Nevertheless, deficit reduction measures in the region brought down the deficit figure in the non-oil sector to 45.5 percent of non-oil GDP in 2015. The IMF further estimates the average non-oil deficit to fall by about 20 percent of non-oil GDP over 2014 to 2017.