Dubai: The UAE and Saudi Arabia are leading the post-pandemic economic recovery of the GCC, according to Washington based Institute of International Finance, an association of global financial institutions.
The ongoing economic recovery is projected to accelerate in 2022 as the third wave of the pandemic recedes. COVID-19 vaccines have become widely available in GCC, and oil production cuts have tapered in line with the OPEC+ agreement.
“We expect the GCC to grow 1.7 per cent in 2021 and 4.2 per cent in 2022. High-frequency indicators, including PMI (Purchasing Managers’ Index) and credit to the private sector, point to strong recovery in the private sector,” said Garbis Iradian, Chief Economist, Mena of IIF.
Strong oil-led growth
Hydrocarbon real GDP growth for the region is projected at 5 per cent in 2022 on the assumption that the OPEC+ production cuts end by mid-2022.
The UAE can afford a modestly expansionary fiscal stance in 2021 given its spare capacity and the recovery in oil prices. Higher oil prices combined with the economic recovery will support the banking sector by improving the liquidity situation and demand for private sector credit, respectively.
The UAE economy is recovering, supported by higher oil prices, higher vaccination rate, and further progress in structural reforms. The PMI rose to a two-year high of 54 in July. However, the IIF expects resumed travel restriction in Europe and elsewhere due to the spread of delta variant poses a headwind to stronger recovery.
IIF expects average inflation to increase to 1.1 per cent in 2020 due to higher food and transportation prices.
“The UAE can afford a modestly expansionary fiscal stance in 2021 given its spare capacity and the recovery in oil prices. Higher oil prices combined with the economic recovery will support the banking sector by improving the liquidity situation and demand for private sector credit, respectively,” said Iradian.
Saudi GDP growth is projected to accelerate in 2022 to 4.6 per cent, up from -4.1 per cent in 2020 and 1.9 per cent in 2021. Saudi’s vaccine programme has made significant progress, with over 50 per cent of the population at least partially vaccinated.
Higher oil prices and a tapering of production cuts are expected to further support the economic recovery and improve the country’s fiscal footing. The higher VAT rate combined with the substantial increase in global non-fuel commodity prices could keep average headline inflation slightly above 3 per cent in 2021.
Supportive policies
GCC central banks are expected to leave their policy rates unchanged through end-2022 as they track US rates in the context of the peg to the US dollar. Central banks in the region have maintained their liquidity support measures to support the private sector, particularly SMEs, by allowing them to defer payments on existing loans and increase lending to businesses.
IIF expects average CPI inflation to increase from around 1 per cent in 2020 to 2.3 per cent in 2021 driven by higher food and gasoline prices. However, there is much variation among the GCC countries with average inflation of 3.1 per cent in Saudi Arabia and -0.2 per cent in the UAE.
Fiscal consolidation
The 2021 budgets in the six GCC states envisage a significant fiscal consolidation. The envisaged fiscal adjustment relies mainly on significant improvement in non-hydrocarbon revenues through tax reforms (Saudi Arabia and Oman) and re-prioritisation of spending, including cuts in nonessential investment projects (Saudi Arabia, Oman, and Qatar).
“Under our assumption of Brent oil prices averaging $67/bbl and modest fiscal consolidation, we expect the aggregated fiscal deficit to narrow from 8.5 per cent of GDP in 2020 to around 1 per cent in 2021. We project an increase in hydrocarbon revenue from $221 billion in 2020 to $326 billion in 2021,” said Iradian.
The announced plans for fiscal adjustment in the coming years in Saudi Arabia, the UAE, Oman, and Qatar will put the fiscal position on sound footing over the medium-term even if oil prices resume their decline beyond 2021. Stronger adjustment is needed in Bahrain to achieve fiscal sustainability. With a sizeable improvement in non-hydrocarbon revenue and restrained public spending, the fiscal breakeven oil prices will decline, particularly in Saudi Arabia and Oman. Saudi Arabia, Qatar, and the UAE, with large public foreign assets, are better placed to accommodate additional spending on social sectors than Bahrain and Oman.
