Dubai: GCC region is projected to slow this year despite continued expansion in hydrocarbon output and the recent increase in oil prices according to the latest Regional Economic Outlook of the International Monetary Fund (IMF).
“We expect the a GDP growth of 2.3 per cent for the GCC as a whole for 2016, down from 4 per cent last year and forecast a slight recovery next year to 2.5 per cent,” Masood Ahmad, Director, Middle East and Central Asia Department of the IMF.
Fiscal tightening and declining liquidity in the financial sector are projected to reduce non-oil growth in the GCC to 1.25 per cent this year, down from 3.75 per cent percent last year. GCC non-oil growth is projected to pick up to 3 per cent next year as the pace of fiscal consolidation eases.
Over the medium term, the IMF expects less fiscal drag and a partial recovery in oil prices that are expected to raise GCC non-oil growth to 3.5 per cent, well below the 7 per cent average during 2000–14.
Potential deepening of regional conflicts and deeper slowdown in China that could result in further weakening of commodity prices are seen as two major factors that could further impact GCC economic growth. In addition, 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 are double-sided. 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 IMF said.
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 per cent 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 in the GCC only 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 labor forces. The envisaged economic transformation, as reflected in country diversification plans, will take time. Careful and steady implementation will be key to success,” said Ahmad.
Oil prices will continue to remain the key driver of the outlook for GCC countries given their high dependence on hydrocarbon budget revenues and exports. Having hit a 10-year low of less than $30 a barrel in January, oil prices have staged a partial recovery to about $40–$50 a barrel, supported by lower output from high-cost oil fields and supply disruptions in Canada and Nigeria, which have outweighed substantial production increases in Iran and Iraq.
However, despite this rebound, the oil market outlook has not fundamentally changed since the April 2016. The latest IMF regional outlook assumes Oil prices to average $43 a barrel in 2016 and $51 a barrel in 2017. Over the medium term, any further oil price recovery is expected to be limited, with futures markets suggesting prices will remain below $60 by 2021.
