Why International Monetary Fund (IMF) slashed GCC growth forecasts
By Hina Latif
Hina Latif has over six years of media and publishing experience under her belt, spanning multiple magazines and a newspaper in the UAE. She studied creative writing at the University of Oxford and has a Master’s degree in Journalism.
MENA economist Jean Michel-Saliba talks about the current macroeconomic issues faced by GCC countries in USA Merrill Lynch’s GEMs Macro Monthly report.
UAE: Still soft landing
Merrill Lynch expects non-oil real GDP growth to have bottomed out as the fiscal drag eases and infrastructure activity picks up. It is anticipated that UAE overall's real GDP growth of 0.9 per cent in 2017, from 2.2 per cent likely in 2016.
The headline figure masks a likely contraction in the oil sector due to the OPEC deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017, from 2.3 per cent in 2016.
Over the medium-term, we expect non-oil growth to increase to 3-3.5 per cent on the back of greater Expo 2020 projects.
Growth remains broad based although the construction sector is the laggard. The fastest growing sectors are restaurants and hotels, electricity, gas and water, transport and real estate.
The key sectors in real GDP are whole and retail trade (30 per cent of real GDP), real estate and construction (a combined 22 per cent), transport and communication (15 per cent), finance (12 per cent) and manufacturing (12 per cent).
The 2017 budget does not include the impact of OPEC-mandated cuts but is based on an oil price assumption of $50/bbl.
The 2017 budget assumes a surplus of AED15bn ($4.1bn; 1.9 per cent of GDP) on revenue projections of AED285bn and spending targets of AED270bn.
Further hikes to administered utility and energy prices (electricity, water and gas) are planned this year.
The approaching completion of major infrastructure projects (airport, in particular) should help keep a lid on capex spending as it peaks over 2017-18.
Over the next five years to 2022, authorities are planning to anchor spending at a flat level of AED250bn and target revenues increasing through the passage of a VAT, crude oil production increases and oil stabilizing at $50/bbl.
An initiative to improve transparency and publish budget data is being pursued.
Qatar: External debt issuance not to be excluded
There has been improvement on the fiscal front but a further external debt issuance is not to be excluded this year.
A strategic decision has been taken not to tap the state of Qatar Investment Authority (QIA) foreign assets. This is in part due to the rate of return on QIA assets being greater than the cost of borrowing and as it allows QIA’s investment income to be reinvested.
Authorities guided that they would decide in June or September whether to issue an international bond or not. It was suggested that enough external financing was raised last year to pre-finance a portion of fiscal needs this year.
The recent uptick in government deposits in the e Banking (onshore and offshore) sector suggests that a portion of external bond proceeds were deposited locally.
The 2017 budget is based on oil prices at $45/bbl and pencils in a deficit of QAR28.3bn ($7.8bn; 4.5 per cent of GDP).
Kuwait: Strong balance sheet but robust supply pipeline
Kuwait has one of the strongest balance sheets in the GCC region thanks to very low leverage yet large foreign assets in the state of Kuwait Investment Authority (KIA).
However, the fiscal deficit is among the largest in the GCC region and likely implies a repeated large issuance of international bonds. Fiscal reforms are thus necessary to reduce imbalances and support a narrowing of the risk premium going forward.
Political leadership has endorsed a deficit ceiling as the target is to bring the non-oil fiscal deficit to non-oil GDP ratio from 88 per cent to 78 per cent over the next three years.
Parliament is unlikely to allow sharp fiscal consolidation and we expect continued structural tensions between Cabinet and Parliament. We expect reforms to proceed gradually and in a non-disruptive fashion overall.
Bahrain: Under pressure, but supported
The USD peg continues to be under pressure but that GCC support remains firm. Over time, the GCC is likely to require greater reforms from the Kingdom of Bahrain to restore sustainability.
Economic diversification has helped as the key main sectors leading economic activity have been construction, real estate and onshore financial institutions while hospitality and manufacturing slowed down.
Major projects such as the new 400k bpd Saudi-Bahrain pipeline, the Sitra oil refinery, Aluminum Bahrain and Bahrain International Airport expansions are proceeding ahead and will support activity going forward.
A key catalyst going forward could be the approval of the 2017 and 2018 budgets. Authorities are currently debating the extent of fiscal consolidation with parliament. This has delayed approval.
The 2017-18 budgets are likely to be based on an oil price assumption of $50/bbl.
Building a safety net could take time, while fiscal consolidation needs are pressing. As the fiscal consolidation is to be implemented through budget laws, it will have to be debated and approved in parliament. This could cause delays or watering down of budgetary targets.
THE IMF REPORT ON GCC
The International Monetary Fund (IMF) has downgraded 2017 growth forecasts for most GCC countries. The IMF revised its forecast for global growth for the first time in five years when its World Economic Outlook released last week.
The fund now expects the UAE’s economy to grow just 1.5 per cent this year (from a previous estimate of 2.5 per cent and down from an estimated 2.7 per cent growth in 2016).
This is suprising as the UAE is one of the world’s most open economies and should benefit from the improving global economic conditions that the fund has noted elsewhere.
GCC growth to dwindle
The Kingdom of Saudi Arabai, Kuwait and Oman have also had their growth forecasts slashed this year, with only Qatar and Bahrain remaining relatively unscathed.
The reason why:
"The report highlights lower oil sector growth assumptions for this year, following Opec’s November agreement to cut output. In the October 2016 Regional Economic Outlook for MENA, the IMF assumed oil sector growth of two per cent for the UAE in 2017.
If the IMF now expects a 4.6 per cent cut in oil output (in line with the Opec agreement), this explains the dramatic downgrade of headline growth for 2017. It appears that the IMF is also not expecting much by way of non-oil growth to compensate.
And when it comes to oil production, while the larger GCC countries have reduced crude production in Q1 2017 relative to Q4 2016, it seems unlikely that the decline will be sustained for the full year".
Global economy to accelerate
The IMF expects global growth to pick up from 3.1 per cent in 2016 to 3.5 per cent in 2017, compared with its previous forecast of 3.4 per cent for 2017.
However, the IMF warned that a number of risks could upset the global recovery such as trade protectionism, geopolitics, rising debt and tighter-than-expected monetray policy.
IMF’s World Economic Outlook report said: “A number of factors are expected to drive up global growth. First, fiscal policy is expected to become more supportive of growth in 2017. The government response to the global financial crisis of 2008-09 and European sovereign debt crisis in 2011-12 was to implement more ‘austere’ fiscal policy which dragged on growth right up to 2015.”
“However, the IMF estimates that fiscal policy became mildly supportive of growth in 2016. The lagged effects of this change in stance and broadly neutral fiscal policy this year are likely to contribute to higher growth in 2017.”
China supports development
China is providing considerable stimulus through public investment in infrastructure and real estate that reflects in the global economic growth.
The IMF report expects monetary policy in a number of economies to remain highly accommodating. The European Central Bank continues with negative interest rates and quantitative easing, which is pushing credit growth higher. And the Bank of Japan has introduced a policy to target ten-year yields of zero.
The report said:
“Higher commodity prices are expected to contribute to global growth. The IMF expects oil prices to rise from an average of $45 per barrel in 2016 to $56 per barrel in 2017. This will support global growth as higher revenue leads to a recovery in income and spending in commodity-exporting countries and as investment in the energy sector recovers, particularly in the US.”
The inventory cycle is likely to contribute to growth in 2017. In 2016, as growth proved slower than expected in a number of large economies, companies in the US and Europe pulled back on investment and drew on inventories to meet demand, which led to a drag of around 0.4 per cent on GDP growth.
However, since mid-2016, companies have started rebuilding inventories leading to higher investment, which is expected to continue in 2017 and should be an important contributor to growth in both the US and Europe.
Finally, consumer and business sentiment are also likely to be important contributors to higher global growth, particularly in the US Forward looking indicators of business and consumer confidence have picked up globally since the middle of 2016.
Despite the positive prognosis, the IMF also cautions against a number of risks that could upset growth.
“Growth may be picking up in 2017, but the recovery could easily be short lived with a return to the slow global growth rates of the recent past not a distant possibility,” said the report.