GCC growth may be flat this year and next

Average fiscal deficit in Gulf Cooperation Council projected to narrow to 2% in 2020

Regional oil exporters will continue to face challenging growth outlook this year and next in an environment of low oil prices and public spending cuts, according to a report from Institute of International Finance (IIF), a Washington based association of world’s leading banks and financial institutions.

“We expect real GDP growth in the GCC to be broadly flat as oil GDP declines by 2.6 per cent due to oil production cuts under the extended Opec agreement. Nonoil 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,” said Garbis Iradian, Mena Chief Economist of the IIF.

Headwinds from tight financial conditions and a real exchange rate appreciation continues to pose challenges for non-oil activity. “Oil exporters in the region have responded to the sharp deterioration in fiscal accounts by launching much-needed fiscal reforms, which have so far focused on cuts in fuel subsidies and capital expenditure. Additional adjustment in the coming years will focus more on mobilisation of non-oil revenues (including fees, excise taxes, and introduction of VAT in 2018 at 5 per cent) and privatisation,” said Iradian.

The IIF expects average Brent price of oil to rise gradually from $52 a barrel (Dh190.84) in 2017 to $57 by 2020. As prices rise and nonoil revenue increase significantly, the consolidated fiscal deficit of the GCC is expected to narrow from 11 per cent of GDP in 2016 to 6 per cent in 2017 and 2 per cent by 2020.

The current account is projected to shift from a deficit of $43 billion in 2016 to small surpluses in 2017-2020. 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.

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.

The IIF expects oil prices to average $54 a barrel in 2018, under the assumption of the extension of the agreement beyond March 2018 that was reached between Opec and some non-Opec oil producers to cut supply. Brent oil prices have increased to an average of $52.6 a barrel from end2016 to October 10, 2017, an increase of 16 per cent from 2016.

Mena Chief Economist of the IIF