Dubai: The International Monetary Fund (IMF) has forecast across the board decline in economic growth for the oil exporters of the Middle East region with GCC’s GDP growth forecast revised downwards due to the decline in oil prices.

Between July 2014 and April 2015, oil prices dropped by 50 per cent. They are now expected to be $58 per barrel in 2015 before rising gradually to $74 per barrel by 2020, in response to a decline in oil investment and production and a pickup in oil demand as the global recovery strengthens.

“Despite the sharp decline in oil prices the downward pressure on GCC economies has been limited because these countries have been able to use their substantial financial buffers to mitigate shortfall in oil revenues,” said Masood Ahmad, Director Middle East and Central Asia Department, IMF.

In the GCC countries, growth is forecast at 3.4 per cent in 2015, revised downward since last October by 1 percentage point, mainly because of a slowdown in non-oil growth in response to lower oil prices.

The UAE economy is forecast to grow at 3.2 per cent in 2015 and 2016 compared to 3.6 per cent in 2014. In Saudi Arabia, the growth forecast for 2015 is now 3 per cent, down 1.5 percentage point from last October.

In the GCC, the IMF expects inflation to decline by 0.5 percentage point to just above 2.1 per cent because of strengthening currencies that are pegged to the US dollar and declining food prices. In the UAE consumer price inflation is projected at 2.1 per cent in 2015 and 2.3 per cent in 2016.

According to the IMF forecasts, the current oversupply in the global oil market suggests that GCC may face challenges in maintaining market share, with potential downside pressures on oil production. Government spending and hence non-oil activity may slow down by more than expected.

The normalisation of US monetary policy is expected to tighten financial and monetary conditions in the region, especially in the GCC, although the pass-through is expected to be slow and partial. For countries that are highly dependent on foreign funding such as Bahrain, Oman, Yemen, financing and rollover risks may raise, the IMF said.

“We do not expect the gradual rate normalisation in the US to have any big impact on project funding across the GCC. In UAE and Dubai we see most near to medium term project funding requirements have been covered and do not expect any disruptions,” said Ahmad.

Banking risks

GCC banks are expected to remain sound despite the sharp decline in oil prices and slowing loan growth, because they have strong initial financial positions. They will also be supported by continuing government infrastructure investments which drives non-oil growth, bank credit, and profitability. Liquidity could tighten as oil-related bank deposits decline, and non performing loans (NPLs) could rise. However, banks are well positioned to absorb the shocks.

By contrast, non-GCC banks are more vulnerable. Iran’s banking system is already exhibiting system-wide stress, on the back of high NPLs, because of a weaker economic environment and the withdrawal of correspondent banks in response to sanctions. In Yemen, large exposures to the government, against the backdrop of a weak fiscal position, declining oil revenues and the escalating conflict has raised systemic risks. In Iraq, the deteriorating political and economic environment is exerting pressure on an already weak banking system.