Complex Made Simple

Is the GCC heading for another recession?

Countries in the GCC have endured a challenging economic environment and slow business growth for several quarters recently. While business confidence in 2017 is steadily climbing, a recent spate of uncertainty is weighing on growth prospects for the year ahead. The question on everyone’s minds: Are we in a period of market maturity or are we entering another recession?

With the price of oil volatile, the future of the eurozone still far from secure, travel bans and visa worries for Middle East travellers and concern around the pace of the slowdown in China, the confidence of business leaders, especially in the region, has slipped.

MENA economist Jean Michel-Saliba talks about the current macroeconomic issues faced by GCC countries in America Merrill Lynch’s GEMs Macro Monthly report.

UAE: Still soft landing

Merrill Lynch expects non-oil real GDP growth to have bottomed out as the fiscal drag eases and infrastructure activity picks up.

We anticipate overall UAE real GDP growth of 0.9 per cent in 2017, from 2.2 per cent likely in 2016.

The headline figure masks a likely contraction in the oil sector due to the OPEC deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017, from 2.3 per cent in 2016.

Over the medium-term, we expect non-oil growth to increase to 3-3.5 per cent on the back of greater Expo 2020 projects.

Growth remains broad based although the construction sector is the laggard. The fastest growing sectors are restaurants and hotels, electricity, gas and water, transport and real estate.

The key sectors in real GDP are whole and retail trade (30 per cent of real GDP), real estate and construction (a combined 22 per cent), transport and communication (15 per cent), finance (12 per cent) and manufacturing (12 per cent).

The 2017 budget does not include the impact of OPEC-mandated cuts but is based on an oil price assumption of $50/bbl.

The 2017 budget assumes a surplus of AED15bn ($4.1bn; 1.9 per cent of GDP) on revenue projections of AED285bn and spending targets of AED270bn.

Further hikes to administered utility and energy prices (electricity, water and gas) are planned this year.

The approaching completion of major infrastructure projects (airport, in particular) should help keep a lid on capex spending as it peaks over 2017-18.

Over the next five years to 2022, authorities are planning to anchor spending at a flat level of AED250bn and target revenues increasing through the passage of a VAT, crude oil production increases and oil stabilizing at $50/bbl.

An initiative to improve transparency and publish budget data is being pursued.

Qatar: External debt issuance not to be excluded

There has been improvement on the fiscal front but a further external debt issuance is not to be excluded this year.

A strategic decision has been taken not to tap the Qatar Investment Authority (QIA) foreign assets. This is in part due to the rate of return on QIA assets being greater than the cost of borrowing and as it allows QIA’s investment income to be reinvested.

Authorities guided that they would decide in June or September whether to issue an international bond or not. It was suggested that enough external financing was raised last year to pre-finance a portion of fiscal needs this year.

The recent uptick in government deposits in the banking sector suggests that a portion of external bond proceeds were deposited locally.

The 2017 budget is based on oil prices at $45/bbl and pencils in a deficit of QAR28.3bn ($7.8bn; 4.5 per cent of GDP).

Kuwait: Strong balance sheet but robust supply pipeline

Kuwait has one of the strongest balance sheets in the GCC region thanks to very low leverage yet large foreign assets in the Kuwait Investment Authority (KIA).

However, the fiscal deficit is among the largest in the GCC region and likely implies a repeated large issuance of international bonds. Fiscal reforms are thus necessary to reduce imbalances and support a narrowing of the risk premium going forward.

Political leadership has endorsed a deficit ceiling as the target is to bring the non-oil fiscal deficit to non-oil GDP ratio from 88 per cent to 78 per cent over the next three years.

Parliament is unlikely to allow sharp fiscal consolidation and we expect continued structural tensions between Cabinet and Parliament. We expect reforms to proceed gradually and in a non-disruptive fashion overall.

Bahrain: Under pressure, but supported

The USD peg continues to be under pressure but that GCC support remains firm. Over time, the GCC is likely to require greater reforms from Bahrain to restore sustainability.

Economic diversification has helped as the key main sectors leading economic activity have been construction, real estate and onshore financial institutions while hospitality and manufacturing slowed down.

Major projects such as the new 400k bpd Saudi-Bahrain pipeline, the Sitra oil refinery, Aluminum Bahrain and Bahrain International Airport expansions are proceeding ahead and will support activity going forward.

A key catalyst going forward could be the approval of the 2017 and 2018 budgets. Authorities are currently debating the extent of fiscal consolidation with parliament. This has delayed approval.

The 2017-18 budgets are likely to be based on an oil price assumption of $50/bbl.

Building a safety net could take time, while fiscal consolidation needs are pressing. As the fiscal consolidation is to be implemented through budget laws, it will have to be debated and approved in parliament. This could cause delays or watering down of budgetary targets.

An IMF program is not being considered.

The recent Gulf tour of Bahrain’s Crown Prince Salman Al Khalifa to Saudi Arabia, Qatar, Kuwait and the UAE over February-March is positive in view of securing continued support.