Saturday 25 March 2023

Oil sector could offset GCC non-oil growth: report

DUBAI, July 25, 2017

An anticipated non-oil sector growth of 2.6 per cent across the GCC in 2017 will be offset by a further three per cent contraction in the oil-producing sectors, said a report.

The acceleration of global trade in the first half of 2017 is expected to be felt unevenly across GCC economies and will probably see the region’s GDP growth easing to just short of 1 per cent in 2017, according to the report ‘Economic Insight: Middle East Q2 2017’, produced by Oxford Economics, ICAEW’s partner and economic forecaster.

Although the broad-based pick up in the world economy is providing a useful tailwind to some GCC economies, others are likely to benefit far less from this rebound due to a range of structural reasons.

The three main limitations are: heavy reliance on commodity exports and low non-oil exports; the strengthening US dollar in a longer-term context which undermines the export competitiveness of dollar-pegged economies; and a lack of readiness (with the exception of the UAE) to operate as key east-west trading hubs.

The principle mechanism through which the region’s economies might expect to benefit from faster trade and overall growth would be through the more traditional channel of the impact on oil demand and prices.

According to the report, Opec’s decision to extend its current production cuts from July 2017 to March 2018 failed to have much impact on oil prices through May and June – partly because compliance outside the GCC is likely to be patchy, and because any rebound in oil prices will bring more output back onstream in the US. “We expect oil prices to remain close to $45 per barrel (bbl) through most of 2017, creeping up through $55bbl by late 2019 as spare capacity in the world market is closed,” the report said.

However, the 2018 outlook is likely to be more positive. Oil output is expected to rise 1 per cent complementing momentum in the non-oil sector (which is expected to grow by 4 per cent) resulting in overall GDP growth of 2.7 per cent. The report does warn, however, that any further oil price weakness or escalation of tensions between Qatar and other GCC economies, would clearly pose a downside risk to growth.

Tom Rogers, ICAEW economic advisor and associate director of Oxford Economics said: “GCC countries have to step up their efforts and increase non-oil revenues. The introduction of VAT next year is a start but it’s not enough, other measures should be taken to maintain financial steadiness. These measures should be considered as part of broader economic diversification strategies.”

UAE on the right path

The UAE is benefitting more from the rebound in world trade flows than other GCC economies, thanks to its status as the world’s third-busiest airport (Dubai International Airport) and its position as the ninth-busiest container port (DP World).

 The country’s GDP growth is forecast at 1.7 per cent in 2017 (this is just over half as fast as in 2016, but with a greater contribution from the non-oil sector than last year), accelerating to 3.3 per cent in 2018. Passenger traffic through Dubai International Airport has increased 7.4 per cent in the first quarter of the year, and this improvement is mirrored in the wider non-oil sector.

Several key infrastructure projects are forging ahead, partly in support of Expo 2020 (the first to be held in the Middle East region), but also more widely driven by the ongoing expansion of trade and transport links. Overall, the number of construction projects awarded in 2017 Q1 was up 26 per cent compared to Q1 2016.

 Business investment has also been supported by an improving financial environment. The stabilisation in oil prices, the easing pace of austerity, and sovereign debt issuance have all helped ease liquidity pressures in the banking system over the course of the past year or so. Privately-held bank deposits were up by almost 9 per cent in the year to March, enabling lending to grow by 7 per cent over the same period.

Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (Measa), said: “The UAE is in a stronger position than other countries in the region due to its diversified economy, excellent infrastructure, political stability and ample foreign assets. Its reputation as a trade hub has helped the country to benefit from the rebound in the world economy more immediately than other economies in the GCC.”

The UAE is the most diversified economy in the GCC region - fuel generates just 22 per cent of export revenues. Followed by Bahrain with fuel generating 34 per cent of export revenues, Kuwait is the least diversified economy within the region, with fuel accounting for 80 per cent of export earnings.

However, the report says that UAE consumers will feel several drags on their spending power in the coming year or two. The introduction of VAT is expected to add 2 percentage points to inflation in 2018, pushing inflation to 4 per cent overall. Further pressure will be felt by consumers as a result of recent government legislation to enable excise duties on soft drinks and tobacco of up to 100 per cent of the product value.

Additionally, new regulations requiring all expats and dependents to hold health insurance in order to renew visas, will take a further chunk out of households’ spending power. – TradeArabia News Service

Tags: GCC | non-oil | VAT | ICAEW |

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