Qatar’s FIFA 2022-linked infrastructure investments and Kuwait’s implementation of five-year development plans will be the GCC growth triggers in 2018 and 2019. The ongoing preparations for Expo 2020 in the UAE will be another catalyst, IMF said yesterday.
“Growth in the Gulf Cooperation Council countries (GCC) is expected to recover to 2.4 percent in 2018 and 3 percent in 2019, following a 0.4 percent contraction in 2017. This is mainly due to the implementation of public investment projects, including those consistent with the five-year development plan in Kuwait, infrastructure investment projects ahead of the FIFA 2022 World Cup in Qatar… and ongoing preparations for Expo 2020 in the UAE,” the fund noted in its latest ‘Regional Economic Outlook’.
Supported by higher oil prices, oil exporters in the Middle East, North Africa, Afghanistan, and Pakistan (Menap) region will experience visible improvements in external and fiscal balances in 2018–19. Non-oil activity is expected to continue its recovery, supported by a slower pace of fiscal consolidation, while oil production picks up where spare capacity is readily available.
Risks remain skewed to the downside over the medium term. These include a faster-than-anticipated tightening of global financial conditions, escalating trade tensions that could affect global growth and put downward pressure on oil prices, geopolitical strains, and spillovers from regional conflicts.
While a slower pace of fiscal consolidation may be justified in the short term, consolidation efforts should continue over the medium term. This will enable countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue.
Continued structural reforms will facilitate private sector development and strengthen long-term resilience. Any delays on the structural reform agenda could curtail economic diversification and inclusion, the fund said.
IMF noted that Oil prices continued to increase through the first half of 2018 and are now trading at about $75 a barrel. Production restrictions have been removed following the 4th Opec and non-Opec Ministerial Meeting (OPEC+) in June. Against this backdrop, economic activity in Menap oil-exporting countries is expected to strengthen this year and next.
Real GDP growth is projected at 1.4 percent in 2018 and 2 percent in 2019, up from 1.2 percent in 2017. This reflects a pickup in non-oil activity (except in Bahrain and Iran), underpinned by a slower pace of fiscal consolidation, as well as spillovers from higher oil output.
Nonetheless, non-oil growth for MENAP oil exporters is projected to remain virtually unchanged this year and next compared with the 2.4 percent growth in 2017, mainly due to a drop in non-oil activity in Iran.
Notwithstanding recent oil price developments and some increase in futures prices relative to the May 2018 regional economic Outlook update, markets will continue to expect oil prices to peak in 2018 and then decline gradually to about $60 a barrel by 2023.
As the effect of higher oil prices fades, growth in Menap oil exporters is projected to decelerate to an average of 2.3 percent in 2020–23, well below historical trends. Furthermore, while the impact of the shock to non-oil growth triggered by the by the 2014 drop in oil prices was of a magnitude broadly similar to the slowdown triggered by the global financial crisis, the projected recovery is anticipated to be weaker this time.
The IMF document recalled that Menap oil exporters were affected by the 2009 global financial crisis by way of a 36 percent drop in oil prices, a contraction in the global economy, and a sudden drying up of capital flows.
The pickup in oil prices of 28 percent in 2010 and 32 percent in 2011 is comparable to the 23 percent increase observed in 2017 and the 30 percent increase projected for 2018–19.
However, global growth is anticipated to be weaker this time relative to the years following the 2009 crisis, as the global expansion has become more uneven and appears to have peaked in major economies, where slack is diminishing while capacity utilization is beginning to constrain supply.
With oil prices having increased significantly since 2016, most Menap oil exporters have seen tangible improvements in their external positions, although those positions remain weak in some countries.
Oil exports have increased by about $260bn during 2016–18—mostly due to price effects given the OPEC+ restrictions on production—and the current account balance is expected to shift from a deficit of $68bn in 2016 to a surplus of $120bn in 2018, an improvement of almost 8 points of GDP.
The financial account is also projected to improve further in 2018. Many countries have tapped global financial markets this year—as of June 2018, Menap oil exporters had issued sovereign debt worth $32bn (of which $22bn corresponds to Qatar and Saudi Arabia).
Capital inflows following Saudi Arabia’s inclusion in the MSCI Emerging Markets Index (March 2018) and the FTSE Russell Equity Indices (June 2018) are also supporting the improvement of its financial account. Against this backdrop, foreign exchange reserve accumulation has resumed in several countries, although coverage is low in some.
Higher oil prices have also improved liquidity conditions for banks. Nevertheless, private sector credit growth remains generally subdued, largely reflecting weak demand given the nascent economic recovery, and a weak real estate market in several GCC countries.
In Bahrain, growth in corporates’ demand for credit is weak given that major investment projects are financed by GCC funds. In Oman, demand for credit in the construction sector has weakened, partly reflecting the effects of fiscal consolidation. In Qatar, where real estate lending represents a large share of loans, credit growth remains weak, in part because of the downward trend in real estate prices.
In Saudi Arabia, lower credit to the construction sector has more than offset stronger mortgage lending. In addition, policy rates in the GCC have risen in line with increases in the United States’ federal funds rate, resulting in higher interest rates that could have also affected the demand for credit.