GCC Quarterly: Q4 2017

Against an improving global macroeconomic backdrop, the outlook for the GCC economies is also broadly constructive, notwithstanding the impact of lower oil production on headline GDP growth this year.  Non-oil growth has held up relatively well in an environment of tighter fiscal policy, underpinned largely by infrastructure investment.

Fiscal deficits remain substantial in most GCC countries, with the UAE being the exception.  While governments made significant cuts to subsidies and reined in spending in 2016, there has been little progress on fiscal reform this year, although some fees and taxes have been increased and businesses are preparing for the introduction of VAT in January 2018. 

As oil prices have recovered this year, authorities’ focus has shifted from curbing spending to increasing public sector efficiency, privatization and other structural reforms to support increased investment and non-oil growth, but execution so far has been slow.

Current account balances have improved in 2017 on the back of both higher oil prices and stable export volumes (despite lower crude production).  However, net foreign assets at the central banks in Saudi Arabia, Qatar and Bahrain have declined year-to-date pointing to negative overall balance of payments positions in those countries.

Oil markets have currently priced in an extension of the current deal beyond its March 2018 expiry, but this has not been assumed in our 2018 GCC growth forecasts.  If the agreement is extended next year, OPEC producers will need to maintain strict discipline to keep oil markets close to balance.  This could result in further contraction in oil production for countries like the UAE, and presents a downside risk to our 2018 growth outlook.    

GCC central banks' net foreign assets decline even as oil price recovers

Source: Emirates NBD Research

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