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Gulf Economic Monitor Summary (Issue 2, February 2018)

Core Content

The Gulf Economic Monitor Issue 2, February 2018, provides an overview of economic developments, near-term prospects, and reform priorities in the Gulf Cooperation Council (GCC) countries. It emphasizes the need for deepening reforms to diversify economies, improve fiscal sustainability, and enhance labor market efficiency. The report also highlights the importance of reforming pension systems to ensure long-term economic stability and growth.

Main Points

Global Economic Outlook

• Global Growth: Expected to strengthen to an average of 3.0% annually in 2017–2019, up from 2.4% in 2016.
• Global Trade: Projected to grow at around 4.0% in 2018–2019, driven by increased demand in advanced economies, China's recovery, and renewed activity in commodity importers.
• Energy Prices: Crude oil prices rose to around US$64 in 2017, up 24% from 2016. They are expected to average US$58 in 2018 and US$59 in 2019.
• Global Financing Conditions: Remain accommodative, with gradual U.S. rate hikes not expected to cause significant market volatility. Emerging markets are anticipated to benefit from a favorable financial environment.

Regional Developments in the GCC

• Growth in 2017: Regional GDP growth weakened to 0.5%, the lowest in several years, due to lower oil production and fiscal austerity.
• GCC Countries Performance:
  • Saudi Arabia: Experienced its weakest performance since 2009, with GDP contracting by 0.7% in 2017. The economy entered a recession in Q1 and Q2, but showed signs of recovery in Q3 and Q4.
  • UAE: The economy contracted in Q2 2017, mainly due to weakness in the hydrocarbon sector and property market softening. However, there were signs of recovery in the fourth quarter.
  • Qatar: Suffered from the diplomatic rift with Saudi Arabia, the UAE, and other Arab countries, leading to a sharp decline in imports and a rise in food inflation. However, the country quickly adapted by diversifying trade routes and sources, and by increasing domestic food processing, which helped stabilize the economy.
  • Kuwait: Experienced a slowdown in oil production, but non-oil activity remained relatively strong, with increased consumer spending and a rebound in residential property sales.

Key Risks

• External Risks: Tightening monetary policy in advanced economies and geopolitical tensions could lead to global financial volatility and lower commodity prices.
• Regional Risks: The expiration of OPEC+ production cuts in 2018 could impact oil prices, while continued fiscal austerity and weak institutional capacity may hinder reform efforts.
• Long-term Risks: The GCC's heavy reliance on oil and gas exports makes them vulnerable to global energy market shifts toward cleaner fuels. Structural reforms are essential to reduce dependency on hydrocarbons and diversify economies.

Pension System Reforms in the GCC

• Current Landscape: The GCC pension systems are fragmented, with varying structures and administration across countries.
• Challenges:
  • Sustainability: High public debt and reliance on oil revenues pose long-term risks.
  • Equity and Welfare: Inequitable access and contributions, as well as the need to ensure financial security for all workers, including expatriates.
• Options for Reform:
  • Improve efficiency by reducing fragmentation and enhancing administrative systems.
  • Simplify access and contributions to workers through better identification and information technology systems.
  • Strengthen governance and establish effective regulators for pension institutions.
  • Address the needs of expatriates to support the development of a knowledge-based economy.
• Importance of Reforms: Failure to reform pension systems could negatively impact economic growth, fiscal sustainability, and labor market stability.

Structural Reforms and Economic Diversification

• Economic Diversification: The GCC is aiming to reduce their dependence on oil and gas by increasing the private sector's share of GDP (from 40% to 65% in Saudi Arabia).
• Private Sector Development: Requires political commitment, a favorable legal framework, and regulatory reforms to promote competition and attract private investment.
• Labor Market Reforms: Need to reduce segmentation between public and private sectors, increase domestic labor participation, and attract skilled foreign workers.

Fiscal and Monetary Policy

• Fiscal Adjustments: Continued in the GCC to reduce energy subsidies and improve public finances. The introduction of VAT is expected to increase non-hydrocarbon revenues by 1.2–2.1% of GDP.
• Monetary Policy: GCC central banks are likely to follow U.S. rate hikes while maintaining currency pegs to the U.S. dollar.
• Banking Sector: GCC banks are generally well-capitalized and positioned to benefit from the expected economic recovery.

Conclusion

The Gulf Economic Monitor highlights the need for GCC countries to continue with structural reforms to reduce economic reliance on oil and gas, enhance fiscal sustainability, and support private sector growth. It also underscores the urgency of pension system reforms to ensure long-term economic and social stability. The report cautions against complacency and urges continued focus on reform to secure the future of the GCC economies and their populations.

Key Economic Indicators

• GDP Growth: Expected to rise to 2.1% in 2018 and 2.7% in 2019.
• Inflation: Moderated in 2017 and is expected to rise in 2018 due to VAT introduction, but moderate in 2019.
• Oil Production: OPEC+ production cuts have helped stabilize prices, but U.S. shale production may limit future gains.
• Trade: Improved due to higher oil prices, though still affected by geopolitical tensions and fiscal austerity.
• Public Finances: Expected to improve with ongoing fiscal reforms and the introduction of consumption taxes.