Complex Made Simple

Here’s how growth, debt issuing will look for GCC region – IMF

In its latest Regional Economic Outlook, the IMF anticipates that the prospects of the MENA remain to be subdued primarily because of the ongoing adjustment to low oil prices, but also partly faulting regional conflicts.

“Countries in the region should capitalize on the current global growth upswing to place their public finances on sounder footing, accelerate job-creating reforms, and diversify their economies,” said the IMF

“Over the medium term, growth is anticipated to accelerate gradually in most MENA economies (in addition to those of Afghanistan and Pakistan), but it will remain below what is needed to tackle the high level of unemployment in the region and raise standards of living for all,” said Jihad Azour, Director of the Middle East and Central Asia Department at the IMF.

Read: The GCC can benefit from a sharing economy. Here’s how. . .

Lower growth 

The IMF says that overall growth in oil exporting countries is expected to bottom out at 1.7 percent in 2017, hampered by lower oil output under the OPEC-led agreement extending to March 2018.

Among GCC members, overall growth is projected to bottom out at about 0.5 percent in 2017.

Oil prices are trading between $50–$60 a barrel, an increase from last year’s average of $43 a barrel.

“In contrast, non-oil growth is expected to recover to about 2.6 percent in 2017 as the pace of budget deficit reduction slows,” it said.

“Efforts to promote growth-friendly fiscal consolidation, stronger monetary policy frameworks, economic diversification and private sector development should continue.”

IMF projects GCC non-oil growth to be modest at 3.4 per cent in 2022, about half of the 6.7 percent of 2000.

The organization said that most countries outlined ambitious diversification strategies and reform plans, but that the pace of implementation should try to catch up with the global growth momentum.

“GCC countries with larger buffers, such as Kuwait and the United Arab Emirates, are adjusting their fiscal positions gradually. This is allowing them to keep non-oil growth broadly steady. The diplomatic rift between Qatar and several other countries is expected to have a limited impact on growth in the region at this stage,” IMF said.

Read: ‘Middle East economic growth prospects to improve for 2018’

Budget deficits

Iran, Kuwait, Qatar and the UAE have had fiscal deficits of less than five per cent of GDP in 2016.

“The countries with low deficits typically have substantial buffers (Kuwait, Qatar, United Arab Emirates), or are less dependent on oil revenues (Iran), and are planning a gradual fiscal adjustment to the lower oil price environment,” said the IMF.

“Algeria and Saudi Arabia have announced ambitious consolidation plans Other countries, however, should do more to put debt on a downward path.”

In an earlier report, the IMF expected the cumulative budget shortfall of the GCC through 2021 to stand at about $240bn, compared with a forecast of about $350bn in its 2016 outlook.

None of the MENAP oil exporters are accumulating sufficient resources to protect the economic well-being of future generations once hydrocarbon resources are exhausted, it recently said.

“Fiscal consolidation plans in the GCC region include measures ranging from further reductions in non-wage recurrent spending, reductions in public wage bills as a share of GDP, additional cuts to capital expenditures, and higher non-oil revenues, particularly the introduction of value-added taxes (January 2018) and excise taxes,” it said.

The IMF wrote that MENA oil-exporting countries continued to issue debt to meet their budget financing needs and that countries with market access tapped significant amounts from international markets; where in the first half of 2017, GCC countries issued some $30 billion.

The IMF recommends issuing debt locally as Saudi has done.

Read: UAE salary growth slows, pressure on wallets increases

According to Reuters, despite Saudi issuing up to $10bn, in what would be its third international bond sale after a $17.5 bn debut international bond last year and a $9 billion sukuk, or Islamic bond, issued in April this year, the Kingdom has raised debt financing from local investors through three monthly domestic sukuk sales starting in July, which totaled 37 billion riyals ($9.9 bn).

Issuing debt internationally avoids crowding out private sector lending, but issuing it domestically can help support gradual financial market development.

The IMF said that debt management offices were established in Kuwait, Oman, and Saudi Arabia and strengthened in Abu Dhabi and Dubai to manage risks by issuing longer maturity debt (Oman issued a 30-year bond in March 2017).

FinTech to the rescue

FinTech has the ability to address the critical challenges of enhancing financial inclusion, inclusive growth and economic diversification, through innovations that help extend financial services to the large unbanked populations and facilitate alternative funding sources for small and medium-sized enterprises (SMEs), according to the IMF.

“To unlock this potential, further reforms are needed to close gaps in the regulatory, consumer protection, and cybersecurity frameworks as well as improve the business environment, information communication technology (ICT) infrastructure, and financial literacy,” it said.