Economic growth in the GCC has shown continued resilience this year. However, it is becoming increasingly evident that the continued oil price correction and the ongoing fiscal re-engineering efforts by the regional governments have weakened some of the key traditional growth drivers and tested sentiment, "Bahrain Economic Quarterly" report for September 2016 showed. In general, growth across the region is expected to fall clearly short of last year's levels before rebounding somewhat in 2017. For instance, the latest IMF projection for Saudi growth put the headline figure for this year at 1.2%, followed by 2.0% in 2016. The IIF expects non-oil growth in the GCC to decelerate from close to 3% in 2015 to less than 1.5% this year before rebounding to the neighborhood of 2% in 2017. Saudi headline growth is projected at 1% this year and 1.2% next year, whereas the corresponding figures for the UAE are 2.2% and 2.7%. Intermediate data for the individual GCC economies points to continued general weakening of the non-oil growth momentum. Economic growth in the region's largest economy, Saudi Arabia, declined to an annual 1.5% in Q1 and marginally further to 1.4% in Q2. Growth in Q1 was above all due to the oil sector where record output levels fuelled a 5.1% YoY expansion. The main negative on growth was a decline in the government sector which pulled the overall non-oil growth rate to -0.7% YoY. By contrast in Q2, the non-oil sector expanded by 0.4 with the non-oil private sector posting a small 0.1% gain. Oil sector growth moderated to an annual 1.6%. Indicators of Saudi economic activity in recent months have been mixed with a sharp drop in consumer spending in the summer, although employment levels are moving up with 201,500 new jobs created in net terms during the first half of the year. Import volumes have remained on a fairly consistent downtrend in recent months, dropping by an annual 24% in July. Non-oil exports have been more mixed but nonetheless recorded a fall of 10% YoY in July. In the UAE, the Central Bank projects real growth of 2.8% this year followed by 3.0% in 2017. This represents a deceleration from 4.0% in 2015. Non-oil growth is projected to remain fairly steady: 3.5% in 2016 and 3.6% in 2017, down marginally from 3.7% in 2015. The Emirates NBD Dubai Economy Tracker points to a slight pick-up in economy activity, although the August reading of 55.7 marked a slight drop from 2016 high recorded in July. Overall, economic activity in the summer looked brisker than during the first half of the year. The output index was above 60 for the second consecutive month. Sales are continuing to grow, albeit partly due to price discounting. The Qatari economy expanded by an annual 1.1% in real terms during Q1. The Mining and Quarrying sector (mainly hydrocarbons) contracted by 3.0% whereas the non-oil economy grew by 5.5%. Revised estimates by the Ministry of Development Planning and Statistics show that real growth of the Qatari economy reached 3.6% in 2015 and an average (CAGR) of 4.2% in 2011-2015. Qatari growth is expected to strengthen to over 3% for the year as a whole and close to 4% in 2018. Investment spending, partly in preparation for the FIFA World Cup, will be an important source of momentum. The Kuwaiti economy posted 1.8% real growth in 2015 in an increase from 0.5% in 2014. High levels of investment were a major contributor to this expansion and rose by 13%. Non-oil growth was estimated at 1.3% whereas the oil sector shrank by a real 1.7%. Growth is expected to remain on a positive trajectory this year with a continued pick-up in the implementation of projects under the current economic plan. In line with the relative resilience of non-oil activity, the scale of infrastructure investment in the region has remained broadly stable. The aggregate value of the GCC project pipeline according to MEED was just over $2.82 trillion in mid-September, almost exactly equal to the reading a year earlier. While Saudi Arabia has seen a small 3.2% YoY drop in its pipeline to $1.17 trillion, the UAE experienced a 3% increase to $866.2 billion. The sharpest YoY drop was registered in Qatar: by 6.9% to $268.4 billion. By contrast, Oman saw the largest increase, by 15.8% to $196.8 billion. All other regional economies posted YoY gains. Also forward-looking indicators of economic activity in the region point to generally firmer confidence in recent months. The Emirates NBD Purchasing Managers' Index (PMI) for Saudi Arabia reached a reading of 56.6 in August, the highest in a year. Although, it subsequently relapsed to 55.3 in September, the quarterly average for July-September (56) was ahead of 1H16 (53.4). By contrast, the UAE index has shown somewhat greater volatility, declining to 54.1 in September as compared to a 2016 high of 55.3 in July. In both economies, new orders, especially exports, remain the main area of weakness. In spite of significant steps toward fiscal reform, the budget deficits across the GCC look likely to be broadly comparable to last year's levels. The IIF projects an overall deficit of 11% of GDP for the regional as a whole. In a departure from last year, a greater proportion of the shortfall is expected to be financed through foreign borrowing, partly to protect domestic bank liquidity, partly avoid having to draw down fiscal buffers. The IIF expects foreign borrowing to total $50 billion this year and $40 billion in 2017. At the same time, the regional economies are continuing with their structural reform efforts to reduce government expenditure and to diversify their revenue bases. A GCC ministerial meeting in June approved in principle regional value-added tax (VAT) and excise duty treaties. National legislation on VAT is expected to be implemented as of January 2018. But also a range of other measures are being pushed through. The Kuwaiti Government presented plans to raise gasoline prices by 42-83% (depending on the grade) in September. This step is estimated to reduce government spending on subsidies by 22.1% and constitutes part of a broader overhaul. The budget law puts the cost of subsidies this year at KWD2.9 billion, or 15% of total spending. Kuwait last year posted a deficit of KWD5.5 billion, much lower than projected but up sharply on KWD2.31 billion in FY2014/15, which the first deficit since FY1999/2000. The deficit this year is expected to reach KWD7 billion ($23 billion). Projected spending is KWD18.9 billion. While a range of reforms are generally beginning to put the fiscal situation across the region on a more positive trajectory, some of the measures are having broader economic implications. Among other things, more market-based pricing for goods that were previously subsidized is curbing consumption. For instance, Saudi Arabia saw a small 41,000 b/d in the domestic demand of gasoline, kerosene, and other refined products in 1H16. Saudi Electricity Company in September reported the first drop in power demand since its formation 15 years ago. Investments in renewable energy are emerging as an increasingly important theme in the region as the costs of solar energy hit new record lows and subsidies on hydrocarbons are modified. All the regional economies are now exploring alternatives, above all solar power, to help address their rapidly growing power needs. Large-scale solar generation in the GCC was pioneered by Abu Dhabi which launched its 100 MW Shams concentrated solar power plant in 2013. Abu Dhabi is now planning a 350 MW solar PV plant at Sweihan. The facility will be developed as an independent power project and is due to begin operations in 1Q9. ADWEA recently announced that the levelized cost of electricity of the six bids it had received for the project ranged from AED0.089/kWh to AED0.133, ie 2.42-3.63 US cents, which sets a new record. Dubai completed its first, 13 MW solar PV facility in 2013 – the first phase of a planned 5 GW Mohammed bin Rashed al Maktoum Solar Park at Seih al Dalal. By its projected completion in 2030, the part is expected to draw total investments of AED50 billion. DEWA this year selected a consortium led by Masdar to build the 800MW third phase of the project with a planned 2020 launch date. The project will be developed as an IPP and the winning bid was based on a record 2.99 cents/kWh life cycle cost. In a sign of the speed with which costs are declining, this was only 51% of the winning bid for the 200 MW second phase, which is due to be operational next year. DEWA has also launched a new Shams Dubai scheme to encourage the installation of rooftop solar panels which are estimated to generate up to 1.5GW of power by 2030. Dubai Municipality has announced plans for the region's largest, 60 MW waste-to-energy plant at Warsan. It is expected to have capacity to process close a third of the emirate's solid waste. Plans for three further similar facilities are under consideration. Dubai is planning to generate a quarter of its electricity from renewables by 2030 and 75% by 2050. Also FEWA, which produces power for the northern emirates, has announced plans for 200 MW of solar capacity. Apart from solar power, the UAE has 5.6GW of nuclear power capacity under development along with 5.1GW of coal-fired capacity. The Saudi Government has set a renewables capacity target of 3.45 GW by 2020, followed by further expansion to 9.5 GW by 2030. This compares to current solar capacity of 25 MW. Saudi Electricity Company (SEC) has approved plan for solar and wind projects with a combined capacity of 300MW. Projects planned by Saudi Aramco would take the current pipeline to 483 MW. Saudi Arabia is also planning to leverage solar energy to improve the efficiency of combined cycle power plants through ISCC technology. Inflationary pressures across the GCC have increased somewhat over the past year or so as regional economies have sought to rationalize their subsidy regimes. In general, however, the impact of such measures has been fairly muted. In no regional economy has the annual rate of inflation exceeded 5%. Moreover, any spikes caused by subsidy reform or other factors have been limited in duration with the headline readings typically beginning to decline again within months. This underscores the high degree to which price expectations are anchored in the region and the limited pass-through of higher consumer prices through second round effects. The fixed exchange rate regime is likely to have served as an important source of this stability. In general, consumer price trends across the region have shown signs of converging in recent months. The highest readings in Saudi Arabia have come down fairly clearly from their 4.2% peak in the spring. Conversely, Oman, which for a while recorded minimal price pressures, has seen the pace of consumer price inflation pick up fairly consistently. — SG
