Dubai: Broad-based pick-up in economic growth is expected across Gulf Cooperation Council (GCC) countries in 2018, with most economies seeing an uptick, according to economists at Standard Chartered.

“In the GCC, we see growth rising to 2 per cent in 2018 from an estimated 0.3 per cent in 2017. The recent rise in global oil prices should cause sentiment to bottom out, and is unlikely to derail policy makers’ efforts to diversify oil-centric economies,” said Bilal Khan, Senior Economist, MENAP, Standard Chartered Bank.

“We expect interest rates to rise across the MENAP [Middle East, North Africa, Pakistan] region alongside FFTR hikes; the notable exception is Egypt, where we expect the central bank to continue with gradual easing in 2018.”

Economists expect Saudi Arabia and Kuwait (the worst-hit by Opec cuts) to emerge from recession. In general, GCC growth will be coming from a low base resulting from the 2017 oil output cuts.

“We remain cautious on the outlook for GCC non-oil sectors given VAT [value-added tax] implementation in Saudi Arabia and the UAE, higher energy prices, and tighter monetary policy. Anecdotal evidence suggests sentiment remains generally subdued,” Khan said.

Fiscal policy developments in the region are expected to be supportive as most GCC budgets for 2018 include spending increases. Higher-than-budgeted oil prices for most economies should give policy makers room to pursue more gradual fiscal consolidation as they seek to diversify their hydrocarbon-centric economies over the medium term. Oil prices around $60/bbl (Dh220/bbl) may be the “sweet spot” for reform: not high enough to abandon difficult decisions, and not too low for sharp fiscal cuts.

In the UAE and Saudi Arabia, fiscal deficits are expected to narrow despite higher spending; recent VAT implementation should also boost revenues at the margin. In the rest of the GCC, VAT implementation may be delayed until 2019. In Bahrain and Oman, off-budget spending financed by GCC pledges should support growth. Most GCC budgets are based on an oil price assumption of $50-55/bbl.

Monetary policy tightening across the world, especially in the US resulting in the interest rate hike is expected to be headwind for the GCC economies. “Tighter monetary policy comes as the region’s business cycle is out of sync with that of the US. We expect regional economies with pegged currencies (the GCC countries, Jordan and Lebanon) to raise interest rates, in line with our expectation of a further 150bps of tightening by the Federal Reserve through mid-2019,” said David Mann, Global Chief Economist of Standard Chartered.

Standard Chartered economists have a global growth forecast of 3.9 per cent for 2018. While the economists are optimistic, at the same time they are uncomfortable on variables such as risk of the disruptive impact of US disengagement with the world, as demonstrated by the recent escalation of protectionist measures against China. Expected tightening by major central banks following the most aggressive period of G3 balance-sheet expansion in the QE (quantitaive easing) era may cause markets to demand more risk premium. The impact of this on over-leveraged economies will be transmitted through funding cost.

BOX - UAE to see gradual improvement in growth

Dubai: Standard Chartered has forecast 2.6 per cent gross domestic product (GDP) growth for 2018, but sees increased downside risks.

“Although our 2018 forecast is higher than our 0.9 per cent estimate for last year, we are more cautious on the growth outlook than the IMF’s 3.2 per cent forecast,” said Bilal Khan, senior economist, MENAP, Standard Chartered Bank.

While the more accommodative fiscal spending plans are supportive of the non-oil sector growth, analysts are cautious on the more than 3 per cent growth projected.

“On one hand, implementation of VAT [value-added tax] at 5 per cent and tighter monetary policy raise downside risks to our 3 per cent non-oil GDP growth forecast. On the other, a more accommodative fiscal stance at both the federal and emirate levels (particularly for Dubai due to higher spending on Expo 2020 projects) bodes well for growth,” Khan said.

-B.D.A.