Economic activity in the GCC region is projected to slow this year despite continued expansion in hydrocarbon output. However, non-oil growth could marginally increase next year, said an IMF report on regional economic outlook.

The slump in oil prices and ongoing conflicts continue to weigh on Middle East and North Africa’s economic outlook. Despite recent increases, oil prices - the key driver of the outlook for Menap oil exporters - are projected to remain low over the coming years, the IMF report on Middle East, North African and Pakistan (Menap) region said.

The report was released in Dubai by Dr Masood Ahmed, director, Middle East and Central Asia Department, IMF.

Fiscal tightening and declining liquidity in the financial sector are projected to reduce non-oil growth in the GCC to 1¾ percent in 2016, down from 3¾ percent last year, the report said.

GCC non-oil growth is projected to pick up to 3 percent next year as the pace of fiscal consolidation eases. Over the medium term, less fiscal drag and a partial recovery in oil prices are projected to raise GCC non-oil growth to 3½ percent, well below the 7 percent average during 2000–14.

The Menap growth will be modest at 3½ percent this year, with little improvement expected in 2017. Considerable uncertainty surrounds these forecasts, however, because of the fluctuation in oil prices and the threat of regional conflicts, it said.

Structural transformations are needed across the region to raise medium-term prospects and create jobs, the report said.

The subdued growth prospects will keep underlying inflation low in the GCC region. Although energy price reforms are expected to temporarily push up headline inflation to about 3½ percent this year, inflation is expected to drop back to 2½ percent in 2017.

Lower public consumption and investment may subtract more than 2 percentage points from the estimated GCC growth outturn in 2015 and projections for 2016.

Last year, this drag was largely offset by resilient private consumption and investment, as well as by higher
hydrocarbon production. This year, however, the adverse growth impact will be felt more strongly, although
higher exports, especially due to stronger-than-expected petrochemical output in Saudi Arabia - and lower
imports will partly soften the drag.

This year’s hydrocarbon budget revenues are projected to be lower by $400 billion compared with 2014 in teh region. Cumulative fiscal deficits during 2016–21 are forecast to be about $765 billion, down from $1.1 trillion in the April 2016 REO Update.

The significant deficit-reduction efforts which began last year are continuing, with the 2016 non-oil
fiscal deficit expected to improve by more than 5 percent of non-oil GDP. Fiscal consolidation is
particularly fast in Oman and Saudi Arabia, where non-oil deficits are projected to fall by more than
10 percentage points of non-oil GDP. In 2017, the pace of consolidation is expected to ease to
about 1½ percent of non-oil GDP, the IMF said.

An econometric model of GCC growth suggests that there is a large degree of uncertainty about the central forecasts. Growth could be either stronger or weaker than currently projected. On the downside, an adverse feedback loop between budget spending cuts and tightening credit conditions could reduce the private sector’s ability to pick up the slack created by the shrinking public sector. On the upside, growth headwinds could be smaller than projected if the composition of fiscal consolidation is favourable.

To boost the growth outlook and create jobs, the fiscal adjustment should be implemented in a growth friendly way and accompanied by these supporting policies:
• Use appropriate fiscal measures. Spending cuts should be targeted toward expenditures with the smallest adverse impact on growth, such as those resulting mostly in lower imports and savings. However, the adverse impact of spending cuts on growth could increase over time as governments run out of “low-hanging fruit” and confront the need to curb core expenditures, such as the public sector wage bill, which might reduce consumption. Introducing a value-added tax and property taxes, eliminating exemptions, and increasing excises are likely to carry a smaller adverse growth impact than other alternatives.
• Avoid sharp cuts. Spreading deficit-reduction measures over time would be desirable, to allow the private sector to adjust.
• Keep bank credit flowing. Policymakers can ease the risk of a double whammy from tighter fiscal policies and credit conditions by ensuring adequate liquidity in the financial system; for instance, by reducing required reserves and increasing the loan-to-deposit ratio, where appropriate.
• Look for new growth opportunities. Deep structural reforms would, over time, support private sector activity and attract foreign investment, thus weaning the GCC economies off their over-reliance on oil and public spending. In Oman, for example, a focused development plan, the prioritization of public investment, and the draft foreign investment law have all helped to boost private sector confidence. In Bahrain, the upcoming expansions of an aluminum smelter and oil refinery are expected to support growth.

Faced with dwindling oil revenues, the GCC region has been implementing energy price reforms as a means of reducing spending. Higher energy prices will help slow the region’s rapid growth in energy consumption and will support fiscal adjustment.

Headline growth in Iran has been revised up to 4½ percent this year, owing to faster-than-expected increases in oil production following the removal of sanctions. The outlook for Iraq, Libya, and Yemen remains predicated on an easing of conflicts in those countries.

The negative impact of fiscal consolidation and tightening liquidity on growth could be larger than anticipated. Regional conflicts could intensify. A deeper slowdown in China could further weaken commodity prices, while a faster-than-expected US monetary tightening could increase global financial volatility, thereby reducing the availability of international financing, especially for lower-rated issuers.

Risks to medium-term growth

Authorities could make faster-than-expected progress in implementing structural reform plans.
However, considering the scope of the envisaged economic transformation, such plans could run
into obstacles, which could lead to reform fatigue. The significant deficit-reduction efforts which
began last year are continuing, with the aggregate 2016 non-oil fiscal deficit expected to improve
by more than 5 percent of non-oil GDP. Despite recent consolidation measures, including welcome
reforms to domestic energy prices, deficits are projected to remain large - all countries are
anticipated to record fiscal deficits this year, and only Iraq, Kuwait, and the UAE are set to post surpluses by 2021.

Further fiscal adjustment is needed, which will require difficult policy choices and the adoption of well-calibrated measures to protect the vulnerable.

Additionally, countries need to accelerate structural reforms to diversify their economies away from hydrocarbons, boost the role of the private sector, and create jobs for their rapidly growing labour forces. The envisaged economic transformation, as reflected in country diversification plans, will take time.

Careful and steady implementation will be key to success. As economic diversification proceeds, new skills will be required for new and existing workers to succeed. Upgrades to education and training programs should focus on reducing skill mismatches, while anticipating future needs of the
private sector. - TradeArabia News Service