GCC ‘diversifies’ in unity

construction MoinStrengthening economic activity in the GCC, the regional trade bloc is good news for global businesses and the wider MENA region in terms of increased financial support and as a source of much-needed FDI in non-oil producing Arab countries. Economist Moin Siddiqi reports 

A combination of factors such as expansionary fiscal stance, higher oil revenue and publicly funded projects in priority sectors are underpinning growth revival across the GCC-bloc – projected at three per cent this year after contracting in 2017, according to the International Monetary Fund (IMF). 

“Domestic demand should strengthen with [the] easing of fiscal consolidation,” noted Washington-based Institute of International Finance (IIF). The sources of growth will be roughly balanced, with the contribution of private consumption to gross domestic product (GDP) growth doubling from 2016 to 2019 and that from fixed investment nearing a percentage point higher by 2020 (World Bank data). The IIF expects non-hydrocarbon growth to accelerate to 3.2 per cent by 2020. Overall, rebalancing the composition of public expenditures toward capital spend should help improve infrastructure, support non-oil growth, and spur productivity gains in GCC economies. 

Moody’s Investors Service echoed government spending on infrastructure and strategic projects, which contribute to economic diversification, will support non-oil businesses. It said, “The GCC corporate sector is dominated by state-owned enterprises, many of which benefit from strong business positions, good access to funding and supportive shareholders, and this has helped offset recent economic volatility. We have a stable outlook for credit conditions for GCC corporates.”

But monetary tightening in context of the pegged exchange rates in GCC (except Kuwait), may offset anticipated gains from expansionary budgets. GCC central banks followed recent US central bank’s move by also hiking key policy interest rates. The real estate and construction sectors are most exposed to higher borrowing costs. However, GCC’s banking systems, which comply with international codes of the Basle Committee, are sound as capital adequacy ratios exceed 16 per cent. The share of non-performing loans (NPLs) to total loans stands at only two per cent in Saudi Arabia, Qatar, Kuwait and Oman, and between four and seven per cent in Bahrain and the UAE (IIF data).

A one-third surge in average oil price in 2018 led to a marked turnabout in external and fiscal balances for oil-exporters that should continue this year. The combined current account surplus of 10 MENA oil-exporters rose by about US$150bn to US$197bn in 2018; of this, US$169bn was accounted for by GCC countries (World Bank data). Steady oil prices will slow recent debt build-up, whilst increasing official foreign reserves in the GCC-bloc (Table1 below).

Despite economic diversification efforts, the correlation between oil prices, public accounts and commercial activity in GCC remain strong. Fitch Ratings noted, “These are concentrated, narrow economies where government spending plays a significant role in economic growth.” The degree of oil exposure varies. The IMF calculated that ‘break-even’ oil price at which GCC states could balance their 2019 budgets fluctuate from an average of US$108 per barrel in Bahrain to US$44 and US$47 respectively, in Qatar and Kuwait. Also struggling with a high break-even is Saudi Arabia (US$73) and Oman (US$70). While the UAE (most diversified economy) needs US$67 to balance the federal budget.

Fast facts on GCC member states 

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