Steadfast on the path of economic diversification and structural reforms, countries in the Gulf Cooperation Council (GCC) seem to have finally found the equilibrium to adjust to the “new reality” of lower oil prices. This is reflected in the recently released outlook for the region in 2018 by various international organizations and analysts.
According to the International Monetary Fund (IMF), the overall growth in the Gulf Cooperation Council (GCC) is projected to bottom out at about 0.5 percent in 2017, whereas its non-oil growth will pick up to 2.6 percent in 2018. The Emirates NBD Research forecasts the UAE economy to expand 3.4 percent from 2.2 percent in 2017; Saudi Arabia 2.5 percent, Oman and Bahrain nearly 2.4, and Kuwait 2.2 percent.
“Ambitious reform plans across the region are balancing the need for a more broad-based diversified economy. We think the progress achieved so far brightens the region’s outlook and expect GDP growth to rebound to 2.3 percent in 2018 from 0.6 percent in 2017,” says Ali Janoudi, Head (MENA Wealth Management), UBS, a global financial services firm.
Since oil and gas account for about 75 percent of the total revenue and represent 65 percent of the region’s total exports, many analysts believe stabilization of oil prices in the corridor of $60-70 bracket will help the governments remain committed to the respective vision statements, diversification plans and capital spending on building infrastructure.
The Emirates NBD Research expects the total budget deficit of the GCC will be around $100 billion (7 percent of the GDP) in 2017-18 as compared to $150 billion last financial year on account of sustained fiscal consolidation and reforms. As global interest rates are favorably low, a large portion of the deficit is expected to be financed from international debt issuances, thereby easing a lengthy funding squeeze.
Economic experts are of the view that regional debt levels will continue to fall till 2022 if governments carefully target current expenditures to spur social spending and public investment to mitigate the low growth fallouts.
Governments putting strong foot forward
The regional governments have also done well by holding on to their foreign assets and not using them to make up for any shortfall in oil revenue. According to Institution of International Finance, consolidated gross public foreign assets of the GCC countries, which peaked at $2.6 trillion in 2014, are likely to decline only to $2.3 trillion in 2017-18. Almost two-thirds of these assets are managed by sovereign wealth funds with diversified portfolios of public equities and fixed income securities. Sovereign wealth funds are currently in a healthy position to attract more foreign investment.
“Improved current account positions as a result of replenished oil reserves will support investment in non-oil sectors of the economy as the Gulf countries attempt to diversify away from dependence on hydrocarbons,” says Chris Lafakis, Economist, Moody’s Analytics.
The governments across the region are using this improved position to further strengthen sovereign wealth funds, which in turn will become engines of growth. For example, Saudi Arabia has developed the 2018-20 roadmap to position its Public Investment Fund (PIF) as one of the world’s top sovereign funds. The plan is to increase assets under management from current $230 billion to $400 billion by 2020 and $2 trillion by 2030, and achieve average investment returns of four to five percent by 2020, up from the current three percent, and eight to nine percent by 2025.
GCC nations offering hope
Despite the tense geopolitical climate in the Middle East, GCC nations provide enough hope and evince interests of foreign investors to be part of the new economic order in the region.
Saudi Aramco’s IPO, billed as historic and biggest ever and likely to be out later this year, and NEOM, a $500-billion technology driven futuristic city, have global players rushing towards the region.
The UAE has always been economically stable and reliable, and probably the best example of diversification. Exciting times lie ahead. Oxford Economics predicts 2018 is the year of reckoning for the GCC as it is set to witness a robust expansion after three years.