Higher oil prices and output a boon for GCC economies

GCC governments are expected to benefit from a combination of higher oil prices and elevated oil production levels, contributing positively to oil sector growth, fiscal and external balances, according to a report from the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics.

Indicators for the non-oil sector are also showing positive signs after a slow start in 2018. The PMI index, which measures the health of the non-oil private sector, slumped amid the introduction of the 5 per cent value-added tax (VAT) in Saudi and UAE in January 2018, but recovered thereafter and remains expansionary.

Another key indicator, credit to the private sector, which measures bank lending to the private sector and acts as proxy of domestic economic activity, has accelerated in the top three GCC economies — Saudi Arabia, UAE and Qatar — in the second quarter of 2018. Credit to the private sector in Saudi Arabia was mostly in negative territory last year and in the first quarter of 2018. It has steadily trended up this year, reaching 1 per cent year-on-year in August 2018 — a 19-month high.

In the UAE and Qatar, credit growth to the private sector grew from 1.5 per cent and 7.4 per cent in the first quarter to 2.3 per cent and 10.4 per cent in the second quarter, respectively, reflecting the gradual strengthening of private sector activity.

“Supported by higher oil prices, oil exporters in the Middle East region will experience visible improvements in external and fiscal balances in 2018-19. Non-oil activity is also expected to continue its recovery, supported by a slower pace of fiscal consolidation,” said Mohammad Bardastani, ICAEW economic adviser and senior economist for the Middle East at Oxford Economics.

The report calls on GCC governments to continue fiscal consolidation and structural reforms over the medium term to enable these countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue.