Dubai: Low oil prices will continue to weigh heavily on the GCC (Gulf Cooperation Council) economies with the average weighted real non-oil GDP (gross domestic product) growth moderating to 2.2 per cent in 2016, down from 4.1 per cent in 2015, according to the latest economic forecast from Abu Dhabi Commercial Bank (ADCB).

“Our forecasts are based on a Brent price of $41 (Dh150) per barrel (p/b) in 2016 and $50 p/b in 2017. We had already expected a marked slowdown in real non-oil GDP growth in 2016 on the back of more meaningful fiscal austerity programmes. The lower oil price will further impact private sentiment, on both the consumption and investment sides, whilst also requiring deeper fiscal adjustment by governments,” Monica Malik, chief economist of ADCB, said.

The slowdown in economic expansion will be directly linked to the sharply lower government expenditure, both current and capital. Government spending remains a key driver of growth and the main conduit for oil revenues to enter the economy. Moreover, the fiscal retrenchment and low oil price environment will continue to impact private sentiment and spending (both retail and corporate). There are already signs of weaker pay (or cuts) and smaller bonus increases alongside signs of increased job losses across the region.

Saudi Arabia and Oman have recently reduced benefits to public-sector employees. The subsidy reforms will lower individuals’ disposable incomes. In Saudi Arabia, higher gas and feedstock prices are expected to increase costs for industrial companies. Reduced investment by corporates is forecast in response to the softening domestic and external demand and weak expected oil prices.

The fiscal reforms process is just beginning, with multi-year reforms expected. All of the GCC countries except Kuwait have introduced reforms to fuel price subsidies. Kuwait has indicated that it is considering introducing domestic energy price reforms and rationalising government spending for 2016. Saudi Arabia introduced wider energy reforms in December, including raising the prices of gas for industry and petrochemical feedstock. Meanwhile, Abu Dhabi raised water prices further for expatriates in January 2016, while Oman has increased the corporate tax rate.

“We expect a deeper pullback in areas of government spending that directly feed into economic activity in 2016, than in 2015. Dubai has announced an expansionary budget for 2016, though we expect lower consolidated spending for the UAE as a whole,” Malik said.

Despite the government spending cuts announced, fiscal deficits are expected to widen across GCC in 2016. “We still see double-digit fiscal deficits relative to GDP in Bahrain, Oman and Saudi Arabia. We see the relatively hydrocarbon richer-per-capita countries [Kuwait, Qatar and the UAE] requiring more moderate fiscal retrenchment programmes in 2016 given their deeper fiscal buffers and smaller deficits,” she said.

UAE outlook

The UAE’s more diversified economy, led by Dubai and Abu Dhabi’s strong FX reserve position, make it one of the best-positioned countries to withstand the low oil price environment.

“Key service sectors such as tourism and transportation [including aviation] are continuing to see growth, albeit decelerating. Moreover, there are initial indications that Dubai’s investment programme has gathered pace into 2016, with a number of projects awarded [including ports, hotels, leisure/tourism facilities and real estate],” Malik said.

There are also indications that a number of transportation and other projects are progressing towards the awarding stage. This includes the extension of the Dubai Metro to the Expo 2020 site. These should support the investment outlook, potentially resulting in a smaller fall in project awards in 2016 than in 2015. Dubai has announced an expansionary budget for 2016, with investment spending increasing by around 20.6 per cent.

“We expect a substantially softer landing for the economy than in 2009, when the correction of asset price bubbles resulted in a contraction in real non-oil GDP growth,” Malik said.

Despite the relatively better fiscal environment in the UAE, economic challenges are expected to increase in 2016 with the further fall in the oil price. “We forecast real non-oil GDP growth to slow to 2.5 per cent in 2016, down from 3 per cent in 2015 and below the 2011-14 average of 5.2 per cent. The UAE will not be immune to the slowdown in wider GCC non-oil GDP growth or the lacklustre global growth backdrop,” Malik said.