Weaker oil prices present a “serious challenge” to the growth outlook for the Gulf Cooperation Council region, but the region will manage to avoid a recession, a new report has found.
According to the ICAEW report – produced by Oxford Economics, depressed oil prices will compound economic concerns in the region, which is already facing issues over fiscal sustainability, structural economic weaknesses and deepening military conflict.
Oil prices are set to remain lower until at least 2017 due to existing high stock levels and modest demand growth as concerns mount over growth in China and other emerging markets.
Prices will also remain depressed as the Organisation of Petrol Exporting Countries continues its policy of keeping oil production high in order to maintain market share and squeeze higher-cost producers out of the market.
Sanctions relief in Iran also has implications for the GCC region and the oil market. With Tehran planning to increase its oil output rapidly in the first year, prices will remain low for a longer period.
Brent crude is expected to average $32 per barrel this year and remain below $70 for the rest of this decade, the report said.
“Sustained low oil prices will erode existing buffers like subsidies in oil-rich Gulf countries more rapidly, threaten to undermine long-standing currency pegs and slow economic growth further as trade, investment and capital flows fall back,” said ICAEW economic adviser and economist at Oxford Economics Tom Rogers.
“Although recession should be avoided, growth across the GCC will be just 2.1 per cent – it’s lowest since the financial crisis.”
Region-wise, gross domestic product growth this year is expected to reach 1.2 per cent in Saudi Arabia, 2.7 per cent in the UAE, 1.9 per cent in Bahrain, 4.3 per cent in Qatar and 2.3 per cent in Kuwait.
Although the region’s non-oil growth has grown and averaged 7.2 per cent per year from 2003-2014, much of this growth was fuelled by oil-financed government spending on infrastructure, key development projects, public sector salaries, benefits and subsidies, the report said.
With government spending now set to be cut back, growth will be hit.
The Saudi government has announced a year-on-year decline in planned spending for the first time in 14 years, while Oman has announced a 16 per cent cut in 2016 spending and a rise in corporation tax.
All GCC governments have also committed to establishing a region-wide value added tax over the medium term to lift non-oil revenues and most have already started on cutting energy subsidies.
Overall, government spending in the region is expected to decline by 8 per cent this year and rise more slowly in future years, the report said.
Growth in the Gulf region is also facing pressure from long-standing currency pegs to the US dollar. Countries like Oman and Bahrain are particularly vulnerable due to low financial reserves, it added.
While de-pegging would generate greater government revenues, it would also impose heavy costs, including rising inflation, a loss of policy credibility and additional volatility in oil revenues.
“The near-term objective for GCC governments will be to maintain financial stability and avoid a deeper crisis,” said ICAEW regional director for the Middle East, Africa and South Asia Michael Armstrong.
“Weak growth will make the case for economic reforms in areas such as privatisation and competition policy, housing, the labour market, education and the public sector bureaucracy even more complex on a country-by-country basis.
“A period of skillful policymaking will be required to balance the need for both growth and stability,” he added.