curb-spending

Weaker oil prices present a serious challenge to the growth outlook for the GCC region, which was already facing economic concerns. However, serious fiscal reform should see the region avoid recession, according to a new ICAEW report, Economic Insight: Middle East Q1 2016. “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. Although recession should be avoided, growth across the GCC will be just 2.1 percent – it’s lowest since the financial crisis,” said Tom Rogers, ICAEW Economic Adviser and Economist at Oxford Economics. OPEC’s policy of keeping oil production high to maintain market share and squeeze higher-cost producers out of the market, coupled by existing high stock levels and modest demand growth will see Brent crude average $32 per barrel this year and remain below $70 for the rest of this decade. What’s making matters difficult for the GCC is its heavy dependence on oil exports. With the exception of the UAE, true economic diversification in the region is yet to be achieved. Although non-oil growth averaged an impressive 7.2 percent per year from 2003-2014, much of it was fuelled by oil-financed government spending on infrastructure, key development projects, public sector salaries, benefits and subsidies. With the impending cut back in government spending, these growth drivers will fade. The Saudi Government has announced a year-on-year decline in planned spending for the first time in 14 years. Oman has announced a 16 percent cut in spending for 2016 and a rise in corporation tax. All GCC governments have also committed to establishing a region-wide Value Added Tax (VAT) over the medium term to lift non-oil revenues and most have already started on cutting energy subsidies. Overall, government spending in the GCC region is expected to decline by 8 percent this year and rise more slowly in future years. Pressure on long-standing currency pegs against the US dollar is another emerging threat to growth. For example, an unprecedented 10 percent depreciation of the Saudi riyal is expected over the next year. Countries like Oman and Bahrain are particularly vulnerable due to low financial reserves. While de-pegging would generate greater government revenues by lifting the dollar oil revenues in local currency terms, it would also impose heavy costs, including rising inflation, a loss of policy credibility and additional volatility in oil revenues. Sanctions relief in Iran also has implications for the region and the oil market. Following “Implementation Day” in January, evidence shows that Tehran is in a strong position to increase its oil output rapidly in the first year. The biggest regional impact of the deal is to depress oil prices and keep them lower for longer. This will add to the need for painful fiscal adjustment programs among the GCC countries. “The near-term objective for GCC governments will be to maintain financial stability and avoid a deeper crisis. Weak growth will make the case for economic reforms in areas such as privatization and competition policy, housing, the labor market, education and the public sector bureaucracy even more complex on a country-by-country basis. A period of skilful policymaking will be required to balance the need for both growth and stability,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA). – See more at: http://trendsmena.com/economy/serious-fiscal-reforms-required-avoid-recession-gcc-says-report#sthash.mcVLXxiU.dpuf

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