JEDDAH — Falling oil prices – driven by weaker demand, increased supply and a more powerful US dollar – will pose significant challenges to GCC markets, according to a new report by ICAEW. The latest Economic Insight report warns the impact of continued oil price weakness could put considerable pressure on GCC economies and affect real GDP growth, unless they step diversification efforts. However, Saudi Arabia, Qatar, UAE and Kuwait are better placed. The report showed that although Saudi Arabia's output contracted by 3.1 percent during Q2, partly thanks to falling exports and tighter government spending and export earnings likely to drag on GDP over the coming years, with annual growth slowing from 4.2 percent this year to 3.9 percent in 2016, more dramatic deceleration is unlikely, given the Kingdom's commitment to stable growth, and realistic plans for medium-term fiscal expansion. According to the International Monetary Fund, the projected 2015 breakeven prices, at which oil must sell in order to balance the budget, put Bahrain and Oman under the greatest pressure at $116 and $108 per barrel respectively. Saudi Arabia, Qatar, UAE and Kuwait are better placed, thanks to large and mature domestic banking systems, access to international markets and large sovereign wealth funds generating ample investment income. A cut in production levels could be considered in response to falling prices, as done in the past by Saudi Arabia. However, the spending plans suggested by the breakeven prices imply that most GCC hydrocarbon exporters do not have the flexibility to endure sustained reductions in either output or revenues. Michael Armstrong, ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “Weakening oil prices show how vital it is to grow economies away from total dependence on commodities. By continuing to focus on further diversifying economies, it will help to ensure sustainable economic growth and stability.” Latest projections for 2016 government net borrowing in GCC countries show Kuwait, UAE and Qatar with the highest surpluses; 24.1 percent, 9.8 percent and 6.6 percent of their respective annual GDP. Bahrain is the only GCC country with a current fiscal deficit of 4.8 percent, although Oman's government net borrowing is forecast to reach 1.8 percent of GDP in 2016. Douglas McWilliams, ICAEW Economic Adviser and Executive Chairman of the Centre for Economics and Business Research (Cebr), said: “Large shares of government budgets in the GCC are swallowed up by public spending, such as generous public sector wages, subsidies for food and fuel and direct cash to households. Reforming these subsidies could also help to reduce the strain on public finances as they face lower oil revenues.” Although government spending plans are substantial, they are not necessarily unsustainable. Ambitious plans for investment and infrastructure building across the region should stimulate growth in the short term, and could also raise long-term productivity. Also there is good news in increased demand from emerging markets, particularly in the ASEAN region. The UAE's annual GDP growth is likely to be 4.6 percent in 2014, slowing marginally to 4.4 percent in 2015. The Emirates' progress in diversifying away from oil means it should be relatively protected from the worst impacts of falling oil prices. However, recent downturns in equity markets – with Dubai's property index down over 15 percent since September – underline risks to this outlook. Qatari GDP contracted during Q2, with strong growth in non-oil sectors only partly offsetting a slowdown in the hydrobcarbon sector. Annual growth is expected to be 6.3 percent this year, rising to 7.2 percent in 2015, assuming announced infrastructure projects proceed as planned. Growth is expected across construction, financial and business services, and tourism. Intensive capital investment should buttress GDP expansion across the medium term. Oman's hydrocarbons production has been sluggish, leading to annual growth slowing to an estimated 3.3 percent during 2014. Owing in part to lower-than-expected oil prices, GDP growth is not likely to improve markedly in the short term. Longer-term outlooks are brighter, with new gas fields expected to begin production and developments in downstream and non-oil activities boosting output. Bahrain's output should expand by 4 percent over 2014. However growth is expected to slow, to an average of 3.5 percent over 2015-16, thanks to flat oil production, and weaker growth in non-oil activities. Kuwait's oil production has fallen short of projections, and GDP growth has been lower than expected. Strong increases in private sector credit indicate the non-oil sector has offset some of this weakness, however, GDP is estimated to have grown by 1.7 percent this year, accelerating to 2.5 percent next year. Economic Insight: Middle East is produced by Cebr, ICAEW's partner and economic forecaster. The report undertakes a quarterly review of the Middle East, focusing on the Gulf Cooperation Council (GCC) member countries (United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5). — SG
