Outlook for GCC economy in 2017 Q4 remains gloomy

In the wake of the price slump in oil and gas, the GCC economy transformed itself into a mosaic of industrial sectors performing at different speeds. The outlook for the final quarter of 2017 remains rather gloomy, despite green shoots in the financial and energy sector.

“Do you want a regular income? Then you should open a grocery store or restaurant, because people will always need to eat,” said former Ford president and former Chrysler chairman Lee Iacocca in his autobiography.

Despite ongoing headwinds triggered by low hydrocarbon prices, the retail and the hospitality sectors have been leading the non-oil economy in Dubai in July, even though non-oil economic activity dipped slightly.

The Emirates NBD Dubai Economy Tracker Index – a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy – stood at 56.3 in July, down from 56.5 in June. An indicator above 50 points to an expanding non-oil economy. By sector, the wholesale and retail industry (index at 57.9) was once again the best-performing category, followed by hospitality (56.3), said Emirates NBD, the second biggest lender in the UAE. However, the labor market lags behind the pace.

“In spite of a steep expansion in business activity, the pace of job creation was only marginal, continuing the trend observed in the past five months of expansion,” said Khatija Haque, Head of MENA Research at Emirates NBD.

In line with this divergence, Emirati stock markets are in a fickle mode, too. The Abu Dhabi Securities Market General Index added a mere 0.19 percent since the start of the year (as of the close of August 10). Its sister exchange Dubai Financial Market General Index (DFMGI) in Dubai gained three percent amid huge volatility during the same period.

And Bill Winter, the CEO of British bank Standard Chartered, has warned that the ongoing crisis around Qatar could harm Dubai’s role as a leading financial center. ‘StanChart’ owns the biggest building in the 120-acre Dubai International Financial Centre (DIFC) district, where the lender runs the biggest trading room in the Middle East.

Analysts observe similar developments in all countries of the Gulf Cooperation Council (GCC).

About Saudi Arabia, Fahad Al-Turki, Chief Economist at Riyadh-based Jadwa Research, says: “In June, the net monthly change to government accounts with SAMA (Saudi Arabian Monetary Authority) came out negative, falling by 11.7 billion Saudi riyal. The majority of these declines were due to net withdrawals from government reserves.”

While Saudi Crown Prince Mohamed Bin Salman has implemented a gigantic economic reform program, “Saudi Arabia’s initiatives to move from heavy dependence on the hydrocarbon sector will take time, as long-term projects will face challenges such as the transfer of public sector jobs to the private sector,” says Jules Kappeler, CEO Middle East, Euler Hermes, the world’s leading provider of trade-related credit insurance solutions.

Qatar remains a “special case” due to the ongoing diplomatic rift with four Arab nations (Saudi Arabia, the UAE, Bahrain and Egypt), which erupted on June 5. The quartet accuses Qatar of sponsoring terrorism and imposed a boycott. The Qatari government denies the charges. Moody’s changed the outlook for Qatar’s banking sector to “negative” from stable.

With no end of the spat in sight, “it is difficult to draw strategic conclusions for the Qatari economy,” says Farouk
Soussa, Chief Economist MENA at the Citigroup, London.

Riad Kahnwaji, founder and CEO of Dubai-based think tank Inegma, is convinced that Qatar is in a “no-win situation.” Standard and Poor’s (S&P) Global Ratings expects political tensions to persists in the GCC “over the next few years”.Repercussions for Qatar’s neighbors could be triggered by a further escalation of the crisis, the rating agency added. The UAE, for example, gets liquefied natural gas through the Dolphin pipeline to meet roughly 30 percent of its energy needs. “We expect that the Dolphin pipeline will remain open, absent a further significant escalation in tensions between Qatar and the UAE,” S&P said.

However, it added: “Should the pipeline be shut off, this could result in higher fuel costs for national electricity generators and fiscal costs for the individual UAE emirates.”

Tourism boom

Bahrain witnessed a tourism boom in the first six months, as 5.6 million travelers flocked to the island, representing a 14 percent year on year increase, Gulf News reported in August 3.

According to the International Monetary Fund (IMF), Bahrain’s fiscal deficit is expected to fall to 12.6 percent of GDP in 2017 and remain close to that level over the medium term.

However, “a substantial increase in debt is projected.” Hence, the Washington-based fund, which supervises the financial stability of the world economy, urges the kingdom to implement austerity measures. “The wage bill, which is nearly 12 percent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages,” said the IMF.

The State of Kuwait is in a comfortable position to deal with the lowest fiscal breakeven price of $49.10 a barrel to balance its national budget within the GCC. That means Kuwait has been generating an almost balanced budget, as oil has been hovering around $50 a barrel in 2017.

Saudi Arabia needs $83.30 a barrel to reach fiscal breakeven, while the UAE needs $67 a barrel. Oil stands for 60 percent of the northern Gulf state’s GDP. “Kuwait’s economy is strongly dependent on oil; yet, despite the fall in prices over the past couple years, the government is continuing to invest in expanding and strengthening the country’s infrastructure,” says the Oxford Business Group.

According to the economic reform plan “New Kuwait”, the government envisions expanding the private sector and
reforming subsidies.

Oman expecting flat growth

The IMF expects that overall growth in Oman“willremainflatin2017”because “the oil production cuts agreed with OPEC will fully offset the 2.5 percent growth in the non-hydrocarbon sector, which is expected to slow due to planned fiscal consolidation.” Oman is the biggest Arab non-OPEC oil producer.

A relief rally in the energy sector, which could boost GCC fiscal revenues, is not in sight (as yet). According to the Director of the Middle East and Central Asia Department at IMF, Jihad Azour: “The price of oil will most likely remain at $55 per barrel (159 liters) on average in 2017 and in 2018, too.”

But where there is an opinion, there is a contrarian. London-based German energy expert Cornelia Meyer told German weekly magazine Focus, in August 2017: “The global economic recovery is intact, so there is a rising demand for oil. Despite the rise of electric vehicles, China and India will continue to post a growing demand for conventional cars. Hence, we will see the price of oil short-term to rise above $50 per barrel and, mid-term, it will hit $100 per barrel.”

Where there is shadow, there is light, especially during the ultra-hot summer time in the Gulf. Jadwa’s Al-Turki says: “The first quarter 2017 data (in Saudi Arabia) showed the current account moved into a surplus for the first time since the third quarter of 2014. This was mainly due to a notable improvement in exports and a decline in imports.”

However, on a positive note, the International Monetary Fund (IMF) says: “We expect non-hydrocarbon growth to average approximately 3.5 percent over the medium term.”

IPO market gains momentum

The hype around the planned listing of five percent of oil and gas giant Saudi Aramco, valued at approximately $100 billion, has motivated many other firms in the GCC region to follow the suit. In the first quarter of 2017, the IPO market in GCC countries hit a five-year high as ten new initial listings were recorded, said PWC in a report.

The UAE’s first oil company ADNOC plans to list its retail business in an IPO on the Abu Dhabi Stock Exchange by the end of the year. ADNOC signed in February an agreement with China National Petroleum Corporation (CNPC), awarding it an eight percent interest in Abu Dhabi’s onshore oil concession. CNPC contributed a sign-up bonus of AED6.5 billion ($1.77 billion) to enter the concession, according to Xinhua.

Kuwait Energy and Oman Oil Co. plan to go public as well.

Further, the planned introduction of a five percent value-added tax (VAT) in 2018 in the GCC will not limit growth in the union, according to the IMF. The introduction of VAT, a first for the GCC, “will trigger ample demand for specialist consultancy services among corporate auditors, accounting companies and law firms”, legal experts say.