Dubai: Economic growth in the GCC, which is already facing a slowdown due to persistent low oil prices, is expected to slow further in the short term as countries initiate fiscal consolidation, according to the International Monetary Fund’s (IMF) regional economic outlook for the Middle East and Central Asia.
“The pace of fiscal consolidation poses a risk to GCC growth prospects, if the chosen mix of adjustment policies leads to a larger-than-expected decline in domestic demand. Further risks relate to potential structural reform fatigue as the effects of the fiscal consolidation filter through to the wider economy,” said Masoud Ahmad, the IMF’s regional director for the Middle East and Central Asia.
GCC growth is expected to slow to 3.25 per cent this year and further to 2.75 per cent next year from 3.25 per cent in 2014. The GCC’s non-oil growth is projected at just below 4 per cent for both 2015 and 2016, a reduction of 1.75 per cent per cent compared with 2014, as fiscal adjustment, or the anticipation thereof, begins to have effects, notably in Saudi Arabia and the UAE.
The oil price decline has increased the urgency for regional oil exporters to adjust their fiscal policies. GCC members’ average fiscal deficits are expected to reach 13 per cent of GDP this year, with the region’s largest economy, Saudi Arabia, facing a deficit of 21.6 per cent in 2015 and 19.4 per cent in 2016.
Lower oil export revenue by $360 billion (Dh1.32 trillion) for regional oil exporters as a whole in 2015 will sharply reduce the region’s external surplus, turning it into a deficit. GCC countries will see their current account balance dwindle from a surplus of 15 per cent of GDP in 2014 to a deficit of 0.5 per cent in 2015.
Apart from lower oil prices, the region’s economic growth has been adversely impacted by regional conflicts such as the ongoing wars in countries such as Syria, Iraq, Libya and the direct involvement of GCC states in some of these conflicts such as the one in Yemen. This will have an impact on their economies in terms of defence spending.
The IMF has warned that sustained conflicts could have an impact on region-wide confidence, further dimming growth prospects.
Slowing non-oil growth is expected to be partly offset by higher oil production, notably in Saudi Arabia. But to adjust for the sharp fall in oil prices, all GCC states will need to undergo fiscal adjustments to augment revenues and cut spending.
“Fortunately some of these states have large savings from accumulated oil export surpluses of the past which could be put to use to iron out revenue shortfalls in the short term. But for medium- to long-term fiscal sustainability, they will be required to make adjustments on both revenue and spending plans,” said Ahmad.
Over the medium term, continued fiscal consolidation could imply slightly slower overall growth over 2014, despite a modest recovery in oil prices and anticipated payoffs from structural reforms.
Growth in the GCC region is slowing as countries initiate fiscal consolidation, while conflicts weigh on the prospects of other regional oil exporters.
Lower oil prices are reducing non-oil growth, including through fiscal adjustment or its expectations, The conflict in Yemen and the slowdown in Iran — which is yet to benefit fully from the recent breakthrough in P5+1 negotiations — are projected to reduce the growth of non-GCC oil exporters to a standstill this year.
Because the oil price drop is likely to be large and persistent, oil exporters will need to adjust their spending and revenue policies to secure fiscal sustainability, attain intergenerational equity and gradually rebuild space for policy manoeuvring.
“The speed of adjustment should depend on the availability of buffers and fiscal space, and the composition of fiscal consolidation should be designed so that the negative impact on growth is minimised. Adjustment plans in most MENAP oil exporters are currently insufficient to address the large fiscal challenge,” said Ahmad.
