PwC’s quarterly economic bulletin on the Middle East titled ‘Middle East Economy Watch,’ stated that some economies in the Middle East region perked-up with momentum building in the UAE, where the PMI hit a two-and-a-half-year high in August. Saudi Arabia also saw positive sentiment in its non-oil sector. Meanwhile, Egypt delivered a much stronger than expected Q2 growth of 4.9 per cent and burgeoning central bank reserves could be a lead indicator of higher foreign investment.
“Growth in Q1 was mixed, with results in Saudi and the Palestinian territories lower than expected, but a steady performance elsewhere. However, more positive data is coming through from forward looking indicators (e.g. August PMIs for Saudi Arabia and the UAE) and the non-oil sector in these economies is also growing strongly,” the PwC report notes, arguing that the growth outlook has stabilised.
“These signs,” it continues, “suggest that stronger non-oil economic growth could return in 2018, so long as oil prices maintain or exceed current price levels, although an extension of production cuts would limit overall growth.”
The results so far have been less than anticipated, the PwC report adds, although hopes were high that 2017 would be a turning point for oil-exporting nations, as OPEC-led production cuts rebalanced the market.
Oil prices below expectations
Brent crude oil has averaged $52/barrel so far this year, lower than the $58/barrel expected at the start of the year, the report added. This is due to inadequate compliance with cuts, at least until August, along with a revival in production of shale in Libya, Nigeria and the US.
Deficits fall, but not fast enough
Fiscal data produced for the first half of the year (only available for three GCC countries) shows that Oman and Qatar deficits decreased by about a third compared with the first part of 2016, and is less than anticipated, the PwC report notes.
And although the Saudi’s deficits will decrease in the first half of the year by more than 50 per cent y/y, expenditure in the second half is bound to increase as the Saudi government has pledged to repay various public sector benefits and bonuses, thereby resulting in larger deficits than anticipated for the year as a whole, the PwC report adds.
Richard Boxshall, Senior Economist at PwC Middle East, said, “While the economic and fiscal outturns for the first half of the year are less than anticipated, momentum is building in key parts of the region. These signs suggest that stronger economic growth could return in 2018, so long as oil prices maintain or exceed current price levels.
Reaffirm currency pegs
The lower for longer oil price environment has prompted renewed debate in the suitability of the GCC currency pegs, adds the report. Since the mid-1980s, the Gulf currencies have all been pegged at fixed rates to the US dollar, with the exception of Kuwait, which pegs to a basket of currencies.
The pegs compel central banks (including Kuwait’s) to broadly match US interest rates, even if business cycles are not aligned, as is currently the case, and so the rates don’t necessarily suit the Gulf’s economic needs and can create pressure on the pegs.
“While external pressure remains within comfortable boundaries, it is also up for debate whether they remain economically suitable. Devaluations, either one-off moves or free-float regimes, would not do much to boost competitiveness in most Gulf countries,” it notes, adding, “This is because of the current paucity of non-commodity exports, except in a few cases—for example Dubai’s tourism sector. For now, while the region’s economy remains dominated by oil and other commodities traded in dollars, the advantages of retaining the pegs outweigh the downsides.”|
Richard Boxshall, Senior Economist at PwC Middle East, adds: “A change in the currency regime is only likely to make good economic sense if and when commodities play a much smaller role in the Gulf economies as a result of successful diversification efforts. For most countries, this remains a fairly distant goal.”