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 Future of GCC Economies

April 10, 2016

GCC is quite a diversified economy that has many extremes, as faced with plenty of challenges due to oil price collapse that accounts for almost 55 pct of the nominal GDP. Murky geopolitical condition in the Gulf region makes it further vulnerable.
M/E economies are in a fix due to pressure mounting from deficit. For e.g., the average subsidy given to energy sector is around 45 pct to push industrial/manufacturing sector growth, but smaller businesses surely provides more opportunities, as they do not require training and skills.

Though, the job market condition in this region is already poor for the locals due to various unfavorable factors, but focus on localization may add further pressure, whereas, corporations has almost fixed and calculated expense and opportunities.

Immense economic pressure compelled Gulf policy makers to impose taxes and duties on some of the products and further plan to introduce value- added tax (VAT) in 2018 that could yield nearly 1 pct of GDP in Fiscal Revenue. They have raised gasoline prices substantially. UAE will charge departure exit tax from passengers.

This is surely not enough and sustainable for the Middle Eastern economies, as fiscal health of GCC countries is very worrisome due to lower oil prices.

Budget deficit will continue to add pressure, as average break even oil price is plus $ 50, which means at current prices, oil producing GCC economies is spending cash from its own kitty, it has deepened the hole that may potentially see GCC region losing nearly USD 300 Billion in 2016.

Current economic condition strongly demands Revenue Contribution from non-oil sector, which is only be possible by selling of Land and Real Estates, by lifting good part of Subsidies and through Privatization.

The other possible strategic measures that can be taken are by sending back foreigners or expatriates working in the region and by reducing salaries. Presently on an average GDP growth in the M.E zone ranges between 2.5-4 pct is down from average 4.5 pct 2014.

However, there is a huge risk that despite fiscal consolidation, oil at current price level is not sustainable for the GCC economies. Whereas, in coming months there is real threat of another sharp drop in oil prices. Oil rigs have dropped to almost half from its peak, the flow of oil has slowed down, but the taps are still oozing oil because it cannot be shut down in one go and investors cannot take risk by holding funds and are pumping money.

Gulf Oil producing countries are faced with huge task after 9 pct or USD 127 Billion Fiscal Deficit in 2015 from USD 49 Billion surplus in 2014 is likely to widen in 2016 to USD 143 Billion on average oil price of $ 40 per barrel. In 1st quarter of current year oil has already averaged below $ 40. This also means breakeven price for oil to balance budget in GCC countries is around $ 80.

Fiscal adjustment looks extremely tough as impact of 5 pct VAT is likely to be introduced in 2018 may add mere 2 pct revenue, which only fills 20 pct of the gap.

 

Hence, Gulf economies will have to face with significant deficit that will require financing by using its Reserves or by Issuing Debt.

Ongoing oil related economic challenges and bleak outlook adds pressure on GCC currencies and interest rate. Due to size of the hole, holding of currency peg is once again in limelight. FED delay to hike its interest rates and US Dollar weakness may have provided breathing space.

Though economies of Bahrain and Oman is already faced with extraordinary unfavorable economic condition, but in reality pegging of currencies still suits remaining of the GCC economies because of smaller non-oil trading volumes and peg also help to contain inflation.

Saudi Arabia, Kuwait, Qatar and UAE have sufficient Reserves and Sovereign Wealth Fund Assets. GCC countries can even have secret understanding/pact to bail out two ailing economies to avoid bad spell in the region and can linger on for next 2- years in hope of oil recovery or else potentially two countries will be forced to surrender peg.

Whereas, due to large deficit size that has ballooned in short span of time, Devaluation may not be as effective, which is also inflationary, even 30-40 pct adjustment may not provided much needed relief on the fiscal side unless spending plan is drastically chopped or both are effectively combined.

GCC that has a net share of roughly 20 pct of the global oil production, in 2015 was deprived of nearly USD 441 Billion cash money due to fall in oil prices, if calculation is based on USD 65 price decline.

Depleting oil revenue and government withdrawal of funds is causing loss of deposit growth. This draining of liquidity is causing liquidity crunch that may add pressure on inter-bank money market rates. Luckily FED has taken a breather, but hike in USA will make life difficult for the Private sector as borrowings will become more expensive. Draining of liquidity will surely make Cost of Capital more expensive that will widen corporate spread.

Hence, watch debt market and bond rates of GCC for guidance. In coming months Credit Default Rate (CDS) will be another key indicator that should provide future market direction.

The only hope that could provide temporary respite and shore up oil prices would be another round of understanding, similar to the one initiated earlier by Russia to convince Iran and Saudi Arabia to narrow down their differences or if OPEC members decides to freeze or hold at an agreed production level Or else More Doom and Gloom for Oil Producing Nations.

After Saudi Arabia, Which country is next ?

https://asadcmka.wordpress.com/2015/12/29/after-saudi-arabia-which-country-is-next/

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

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  1. Why Oil Prices will not surpass $ 60-65 | asadcmka

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