The year 2016 can be divided into two halves as the first half witnessed sluggish growth in global economies, while the second half depicted signs of pickup in economic growth, especially in the US and China started stabilising on the back of government measures. The global markets have witnessed two key events, one being the Brexit and another the US elections, both of which have negatively surprised and pointed towards a more populist victories. Further, central banks have embarked on monetary policies, which was considered a temporary measure to tackle the slowdown, and has now become a permanent fixture. Moreover, the central banks are also coming to terms that the policies adopted are becoming less effective and negative interest rates are potentially harmful for the global recovery.

According to the latest report by the IMF (January 2017), it has maintained its global projected growth at 3.1 per cent in 2016, but expects the growth to pick up in 2017 and 2018 to 3.4 per cent and 3.6 per cent, respectively. This indicates that the environment seems to be stabilising as the IMF has downgraded their estimates on multiple times in the previous year.

Mena economies witnessed a challenging 2016 on the back of record low oil prices, which impacted the government’s ability to service its ambitious spending programmes. Lower oil prices exposed the regional governments with a number of structural challenges, which the region has not experienced even during the global financial crisis. The slowdown was more noticeable in the GCC region as it relies on oil prices to drive the overall economic activity. However, since the third quarter, the region has started to gain some traction on the back of accommodative policies, higher production and gradual recovery in oil prices. The Mena region is estimated to have registered a GDP growth of 3.2% in 2016 compared to 2.1 per cent in 2015 and 2.6 per cent in 2014. The oil-exporting countries are likely to benefit from the gradual recovery in oil prices, while the oil-importing countries might face marginal pressure in the last two quarters of 2016.

Domestic issues

Given that most part of 2016 experienced record low oil prices, the fiscal deficits rose across the Mena region, especially for oil exporting countries. The oil importing countries, on the other hand, are experiencing domestic issues, which is likely to push the region into deficits in 2016. As a result, the fiscal deficit of the GCC region in 2016 is expected to range from of 3.6 per cent of GDP in Kuwait to 15 per cent in Bahrain. In order to fund these rising deficits, the regional governments resorted to various channels, the most obvious being the deposits parked with local banks and foreign reserves.

Going forward, global growth is expected to continue its upward trajectory, led by the US, followed by the ongoing recovery in Europe and stabilisation in the Chinese economy. Further, the abundant liquidity provided by the accommodative policies adopted by the central banks will also play a role in driving the consumption, which is likely to support the broader economies. However, the main challenge for the global growth would be the rising political risk, which is creating new headwinds in global trade. The central banks across the globe have entered a critical phase as the policy measures are waning out, hence policymakers are likely to limit the reliance on monetary policy by turning attention to fiscal measures to drive economic activity.

Austerity measures

The Mena region was faced with structural challenges post the record low oil prices in 2016, something the region has not experienced in the past decade. However, the governments responded by taking appropriate measures to boost the non-oil revenues by introducing reforms and spending cuts by resorting to austerity measures. Since the region is pursuing economic diversification that started gaining traction in 2016, it is likely to create more sustainable economies by reducing the reliance on hydrocarbon sector and increasing the contribution of non-oil based activity. The stability in oil prices is an important development as it improves government’s ability to support its spending plans to meet its strategic plans. The rise in government revenues would also offset curtailment in spending that the region experienced in 2016. Further, the thrust towards infrastructure investment will ensure support to the non-oil activity, however the growth is likely to be more gradual compared to the oil sector activity.

Outlook on oil prices

According to IMF’s October 2016 edition, the Mena region is expected to grow by 3.2 per cent in 2017, similar to growth witnessed in 2016. However, since the IMF has released its estimates, the environment around the globe as well as outlook on oil prices has changed significantly, which warrants re-evaluation of regional growth projections. Hence, we believe that the outlook of the region has improved and growth is expected to accelerate from 2017 onwards. According to the World Bank’s latest edition (January 2017), the regional growth is estimated to have fallen to 2.7 per cent in 2016, slightly below their June projections. However, the World Bank believes that the oil prices have bottomed out in 2016, which is likely to accelerate the growth in 2017 to 3.1 per cent and 3.3 per cent between 2018-19.

Although the fiscal deficits have peaked out in 2016 and expected to decline in the coming years, it will continue to remain a concern for the region. Nevertheless, the reform measures taken by regional governments is likely to boost government revenues, however it will not be enough to service the deficits. As a result, we expect more debt to be raised from international markets in the coming year, led by Saudi Arabia and Qatar, followed by Bahrain and Kuwait. Further, the regional conflicts is also hindering the investment activity and impacting the region’s broader economy.

Shailesh Dash, Founder and CEO, Al Masah Capital