GCC set to slash fiscal deficit by half

dubai - $52 for an oil barrel in 2017 will shift current account from $43 billion deficit to surplus

With average oil prices expected at $52 per barrel this year - an increase of 16 per cent from 2016 - the consolidated fiscal deficit of the GCC countries is expected to narrow from 10.3 per cent of gross domestic product (GDP) in 2016 to five per cent in 2017, while the current account is projected to shift from a deficit of $43 billion to a small surplus, the Institute of International Finance (IIF) said.

While growth in GCC countries is projected to slow further from 1.9 per cent in 2016 to 1.6 per cent in 2017, reflecting the decrease in oil production, following the November 2016 Opec agreement, banking systems are well positioned to cope with low oil prices in the short term, economists at IIF said.

Garbis Iradian, chief economist, IIF Middle East, said banks' liquidity conditions had tightened with rates rising and profitability declining.

"We do not expect a change in the exchange rate regime in the GCC, Jordan and Lebanon, given that the peg is regarded as a critical anchor for price and financial stability. The pegs to the dollar are underpinned by large foreign currency assets. Also, the flexibility of the labour market in the GCC allows for improving competitiveness without the need for currency adjustment," the IIF said.

They predicted that non-oil growth in the GCC is expected to pick up to 2.4 per cent in 2017 and three per cent in 2018 due to easing of fiscal consolidation and the modest recovery in oil prices.

"Nonetheless, headwinds from tight financial conditions and a real exchange rate appreciation will pose challenges for non-oil activity. We expect growth in non-GCC oil exporters to remain relatively strong, helped by the lifting of economic sanctions on Iran and recovery in economic activity both in Libya and Iraq after three years of contraction. Oil exporters in the region have responded to the sharp deterioration in fiscal accounts by launching much-needed fiscal reforms, which have so far focused on cuts in fuel subsidies and capital expenditure," said Giyas Gökkent, senior economist, IIF Africa/Middle East.

Gökkent said additional adjustment in the coming years would focus more on mobilisation of non-oil revenues, including fees, various charges, introduction of value added tax, or VAT, in 2018 at five per cent, and privatisation.

"The sizeable fiscal consolidation under way, combined with a gradual recovery in oil prices, should put GCC fiscal positions on a more sustainable footing," he said.

IIF economists observed that while Mena's oil importers have benefited from low oil prices, declining remittances and investment from the GCC countries have partly offset the benefits. While public spending has been rationalised through wage restraint and cuts in fuel subsidies, the fiscal deficits and the debt-to-GDP ratios remain high in Lebanon, Egypt and Jordan.

Oil importers in the Mena region will see a pick-up in growth from 2.8 per cent in 2016 to 3.3 per cent in 2017 and four per cent in 2018. Improved private sector confidence, owing to some progress from recent reforms and de-escalation of conflicts in the Mena region, will support the recovery. Key downside risks include a weaker-than-expected rise in oil prices, faster-than expected US monetary tightening, worsening of security conditions, collapse of the nuclear deal with Iran, and slower implementation of reforms, which would undermine tourism, private investment, and macroeconomic stability," IIF economists said.

"We expect some recovery in oil prices, on the back of stronger global demand and the agreement among major oil producers to cut supply. The positive impact from higher oil prices for the Mena region could be partly offset by higher global interest rates," they said.

- issacjohn@khaleejtimes.com