GCC on track to post current account surplus as oil rises
dubai — With the average price of Brent oil expected to rise from $52 in 2017 to $57 per barrel by 2020, the GCC countries are on track to significantly narrow their fiscal deficits and improve the current account position — from a $43 billion deficit to a surplus.
Analysts at the Institute of International Finance, predicted in their latest regional economic outlook report that as oil prices rise and non-oil revenue increase significantly, the consolidated fiscal deficit of the GCC is expected to narrow from 11 per cent of GDP in 2016 to six per cent in 2017 and two per cent by 2020.
“The current account of the GCC countries is projected to shift from a deficit of $43 billion in 2016 to small surpluses in 2017-2020,” said Garbis Iradian, chief economist at the Washington-based association of world’s leading banks and financial institutions.
He said the GCC banking systems are still well positioned to cope with low oil prices, although bank liquidity has declined, market interest rates are rising, and profitability of banks is declining. “GCC banks have enhanced their risk management and implemented countercyclical capital buffers and loan loss provisions to limit systematic financial sector risks,” said Iradian.
GCC’s non-oil growth, however, is expected to pick up slightly to 2.1 per cent in 2017 and 2.3 per cent in 2018 as fiscal consolidation eases and global trade improves. “Headwinds from tight financial conditions and a real exchange rate appreciation continue to pose challenges for non-oil activity.”
The IIF, however, did not expect a change in the exchange rate regime in the GCC, Jordan, Iraq, and Lebanon. “These countries will maintain their currencies pegged to the dollar at least for the next few years, supported by adequate foreign currency assets.”
The IIF forecast that the flexibility of the labor market in the GCC, combined with implementation of structural reforms, would improve competitiveness without the need for currency adjustment.
“In addition to achieving macroeconomic stability, further progress in reforms will be needed to strengthen the business climate and competitiveness to bolster private sector growth, diversification, and job creation,” said the report.
Needed reforms include simplifying procedures for starting a business, streamlining business regulation, expanded access to finance SMEs, and vocational training programs tailored to the female labour force participation could substantially boost the region’s economic potential.
The report cautioned that despite prospects of an upswing in oil prices, risks are still tilted to the downside.
“Acceleration in the growth of oil supply from unconventional sources (particularly in the United States) or failure to extend the Opec and non-Opec agreement beyond March 2018 could reduce oil prices to around $40 a barrel and/or induce GCC countries to cut back supply,” said IIF.
Other risks include faster-thanexpected US monetary tightening, collapse of the nuclear deal with Iran, and slower implementation of reforms, which would undermine tourism, private investment, and macroeconomic stability, said the IIF.
The International Monetary Fund, 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.
According to Middle East Economy Watch report from PwC, while the economic and fiscal outturns for the first half of the year are less than anticipated, momentum is building in key parts of the GCC. These signs suggest that stronger economic growth could return in 2018, so long as oil prices maintain or exceed current price levels.
— issacjohn@khaleejtimes.com