Despite global economic uncertainties,  prompted by lower oil prices, rising US interest rates and the Chinese slowdown, GCC countries are better-placed than many parts of the world to withstand the problems.

They can expect continued strong, if slightly slower, growth going into 2016, according to a new Institute of Chartered Accountants in England and Wales (ICAEW) report.

The report, "Economic Insight: Middle East Q4 2015", is produced by Cebr, ICAEW’s partner and economic forecaster. It was presented in Bahrain yesterday (November 16) at the Gulf Hotel by
Nina Skero, ICAEW economic adviser and economist at Cebr.

Commissioned by ICAEW, the report provides a snapshot of the region’s economic performance. In this quarterly review of the Middle East, ICAEW looks at the ‘game-changing’ global economic events of 2015 and how they affect the regional outlook for the coming years.

Lower oil prices are significantly changing public spending patterns across the region and households and businesses should brace themselves for fewer giveaways. A combination of diversification and drawing on financial reserves will allow oil-exporting GCC countries to continue their economic growth plans in the short term. However, strong performance down the line will require reconsideration of both public spending priorities and sources of government revenue.

The Bahraini Government no longer subsidises meat prices and similar measures are being implemented for fuel, electricity and water. The UAE has also eliminated fuel subsidies. Qatar has no immediate plans to either reduce subsidies or cancel funding of state-backed projects.

Skero said: “Given the unforeseen extent of the fall in government revenue, it will be difficult for oil exporting countries to stick to their current obligations. Further public spending reforms are likely to be necessary but, if this transition is handled in a timely and gradual manner, strong economic growth across the GCC should continue.”

With the US Fed preparing to raise interest rates in the coming months, maintaining currency pegs is likely to be more difficult for GCC countries. Large sovereign wealth funds and trade surpluses mean GCC countries are better positioned to withstand monetary policy tightening in the US.  However, any significant interest rate gaps will leave GCC countries vulnerable to destabilising capital flows. As the US gradually increases interest rates, the Middle East may have to follow its path. This is not an ideal scenario when economic growth is already being dragged down by lower oil revenues. A potential decoupling of the monetary policy cycles in the US and the GCC would make it harder to maintain currency pegs.

The slowdown in the Chinese economy at a faster-than-anticipated rate also poses challenges to commodity-exporting GCC nations. In 2013, nearly 12 per cent of Middle Eastern exports were sold to China. Several governments in the region and numerous businesses are also in the process of shifting their investment focus eastward.

In April, Qatar opened the first centre among GCC states for clearing Yuan-denominated transactions with the aim of boosting economic links between China and the Middle East. The Chinese slowdown may have curbed the enthusiasm of local governments and businesses to deepen trade links with the country. However establishing closer ties with the Far East does remain a viable economic growth strategy for the GCC, as long as appropriate levels of caution are exercised.

As international sanctions on Iran are gradually lifted, the country’s oil will begin competing more with other exporters, intensifying the need for public spending reviews. However, the opening of the market will also create numerous opportunities for businesses across the GCC. Firms considering entering the market should keep in mind that even with sanctions relief, it will take time for the country to adjust to an increase in international business activity. Additionally, not all restrictions against Iran will be lifted, meaning that many firms will continue to have a limited capacity to work in the country, says the report.

Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said: “It has been a tumultuous year for the global economy, and the GCC countries are not immune from these pressures. Global growth forecasts have been cut, but the economic diversification strategies of the GCC governments should see the Gulf States weather the slowdown better than other parts of the world. However they will need to continue to review sources of revenue and reassess their spending priorities.”  
      
The report also shows:

• GDP growth in Saudi Arabia over 2016 is expected to reach 2.3 per cent thanks to diversification efforts. The kingdom is taking on numerous measures to adjust its economy in preparation for a prolonged period of lower oil prices, including actively pursuing opportunities to attract higher levels of foreign direct investment.

• The heavy focus on diversification in the UAE will contribute to strong 3.9 per cent GDP growth in 2016. Continued investment in big infrastructure projects should support growth in the face of sustained lower oil prices. Further efforts in non-oil sectors can also be expected given Sheikh Mohammed bin Rashid Al Maktoum recently announced a target for non-oil sectors to account for 80% of GDP by 2021.

• Expectations for 2016 GDP growth in Bahrain has been lowered to 2.8 per cent. The change in expectations is partially a result of a worsening outlook for the country’s non-oil sectors, such as banking. Rating agency Moody’s has said the macroeconomic headwinds will impact the profitability of banks operating in the country and changed its outlook for the sector from stable to negative, expecting to slow from 4.0 per cent last year to 2.6 per cent in 2015. The country has relatively low oil reserves, compared to many of its neighbours, and this will likely jeopardise a part of planned infrastructure spending.

• In 2016 Qatar’s economy is expected to grow by 6.8 per cent, fuelled by substantial infrastructure investment, including rail network improvements and reservoir construction. Qatar has no plans to scale back on its major programmes, with many of the planned construction projects related to the 2022 FIFA World Cup.

• Although a notable sovereign wealth fund and investment in social areas such as youth development will support 1.9 per cent growth in Kuwait in 2016, in the medium and long term the country will need to find ways of addressing the projected fiscal deficits. Given that low oil prices look here to stay, measures such as value added tax (VAT) may become necessary.

• Oman’s economy is expected to expand by 3.2 per cent in 2016. Thanks to strong historic ties with Iran, the Sultanate should see a boost in form of foreign direct investment and domestic business gaining access to a new market. Infrastructure projects, seen as crucial to diversification efforts, such as the Liwa Plastics plant and national railway expansion, will also provide a source of growth.  - TradeArabia News Service