StanChart forecasts GCC budget deficits to narrow

Standard Chartered economists expect budgets deficits across the GCC to narrow this year and are forecasting a pick-up in consumption in the six-nation economic bloc as governments continue to boost spending on infrastructure amid higher oil prices.

The bank, one of the biggest in the UK, is forecasting 2 per cent GDP growth for the Arabian Gulf region this year. For the UAE, the second biggest regional economy, the lender estimates 2.6 per cent economic growth in 2018 and 3.1 per cent in 2019.

“As far as fiscal policy is concerned, across the GCC and in particular in the UAE, both at the federal and emirates level, we are expecting higher spending,” Bilal Khan, senior economist for the Middle East, North Africa and Pakistan at Standard Chartered said yesterday.

“Despite that, we are expecting fiscal deficits to narrow year-on-year, in large part driven by the increase in oil prices.”

The bank estimates the price of oil to average $61 per barrel in 2018. It is a level which will support the economic agenda of the regional governments to bridge the fiscal gaps, despite a pick-up in spending on infrastructure projects around the region, such as the multi-billion dollar expansion of Dubai Metro and other Expo 2020-related projects in the UAE.

Even though there are signs of increasing improvements in the trajectory of Gulf economies, corporate and business confidence has yet to fully recover from the three-year oil price slump, and property markets continue to face headwinds.

The Purchasing Managers’ Index, a key gauge of the non-oil economy, for the UAE and Saudi Arabia eased in the first quarter of this year. The implementation of VAT, a measure to increase non-oil revenues, in both countries dampened demand for goods and services. Anecdotal evidence, however, suggests that these economies will recover, Mr Khan said.

One of the main risks to economic growth in the region this year is rising interest rates.

The fact that most Gulf states peg their currencies to the US dollar and as a result follow its monetary policy means that majority of the region is to continue raising interest rates along with the US Federal Reserve.

Standard Chartered is forecasting that the Central Bank of the UAE will raise rates four times this year and twice next year, taking the benchmark interest rate to 3.25 per cent by the end of next year.

Higher interest rates may deter businesses and individuals from tapping the debt markets and subdue economic growth at a time when credit growth is already lacklustre.

“Tighter monetary policy at a time that the business cycle is out of sync with the US poses somewhat of a downside risk where non-oil economic outlook is concerned,” Mr Khan said.

In terms of the world economic scenario, the bank expects the global growth story that has seen world GDP recover in the aftermath of low interest rate policy by many of the developed world’s central banks, to remain intact.

Standard Chartered is forecasting global growth of 3.9 per cent this year, the same pace as last year.

David Mann, the global chief economist for the bank, said that so far higher interest rates and the trade row between the US and China have not dented the global economic growth outlook, even though the risks of the dispute escalating and its subsequent impact on the world economy remain.

“Optimism is still very high around the world,” he said.

Across the GCC and in particular in the UAE, both at the federal and emirates level, we expect higher spending BILAL KHAN Mena economist at StanChart