Dubai: Strong policy response, primarily fiscal reforms to counter bulging budget deficits across the GCC in the context of reduced oil revenues are bearing fruit, but structural reforms could take longer as slowing economic growth could hold back pace of reforms, economists said a panel discussion at the 2017 IIF Mena Financial Summit.
GCC economies have recorded a slowdown in 2016 amid public sector spending cuts, tightening liquidity, and investor uncertainty. All GCC countries except Kuwait, had seen economic contraction in 2016.
“The UAE’s growth remained somewhat resilient to lower oil prices because of its relatively more diversified economy and small population. But the non-oil growth faced challenges as external demand, mostly from the GCC were impacted because of various austerity measures and a strong dollar hurting sectors such as travel, tourism and hospitality sectors,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.
UAE’s efforts in front loading some of the fiscal reforms such as subsidy reductions and introduction of market linked pricing of petroleum products and augmenting of government revenues through higher fees helped the country to manage its budget more efficiently.
“Although the UAE led the way in subsidy reforms, the country did not introduce all measures at one go. A gradual approach to reforms has helped in preserving domestic demand,” said Malik.
Kingdom’s growth
Saudi Arabia’s fiscal reforms ranging from cuts in government spending to salary cuts clearly impacted domestic demand and the GDP growth last year. The kingdom’s economic growth was around 1.2 per cent last year. With improved banking sector liquidity and some amount of easing in the austerity measures Saudi GDP growth is expected to accelerate to 1.8 per cent in 2017.
“There is a strong correlation between government spending and GDP growth in Saudi Arabia,” said James Reeve, deputy chief economist, SAMBA.
Economists said 2016 was a transition period for Saudi economy in terms of finding a policy direction. “The Kingdom now has a clear direction in terms of fiscal reforms and structural reforms. The new policy favours reduced government spending and increased private participation in the economy,” said Fahad Al Turki, chief economist of Jadwa Investment.
While seeking more domestic private sector investments in the near term, in the long term Saudi reform plans are targeted at seeking more foreign investments. “Saudi Arabi’s structural adjustment is geared more towards attracting foreign direct investments while transforming the domestic industrial sector government suppliers to exporters,” said Samba’s Reeve.
Of course, such transformation is faced with challenges such as competitiveness. With most GCC currencies pegged to the dollar, a strong dollar could impact all levels of export driven economic activity.
