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Growth to gather pace, debts to cover deficits
March 17, 2018, 2:40 pm

The year 2018 could be an economic inflection point for nations in the Middle-East, as oil exporters in the region leave behind consecutive years of low oil price environment and move up a growth path, while oil importers benefit from an upswing in the global economy and relative improvements in regional political stability, says a new report on the region.

The study, by the Institute of Chartered Accountants in England and Wales (ICAEW) and global advisory firm Oxford Economics, shows that the past couple of years have been difficult for oil exporting countries in the region, including the six-nation Gulf Cooperation Council (GCC) states, as well as Iran and Iraq. The fall in oil prices in mid-2014 led to a sharp economic downturn in the region, straining government finances and exacerbating fiscal and external vulnerabilities. Economic growth in the region slowed down to an 8-year low in 2017, growing by just 1.1 percent. The report estimates that GCC states grew by only 0.1 percent last year, the slowest since 2009, while Iraq’s economy contracted by 0.3 percent in 2017.

Low oil prices and limited hydrocarbon output due to the production cuts — agreed to by Organization of Petroleum Exporting Countries (OPEC) along with several non-OPEC member states — together with various fiscal consolidation measures and sustained political challenges have impacted the economies of regional oil exporters in 2017. But this year could mark a turning point with growth in GDP of the GCC states, Iran and Iraq now projected to be 2.4 percent, 4.1 percent and 2.5 percent respectively this year. Regional growth this year is also expected to average 2.9 percent, underpinned by rising oil prices, expansionary fiscal policy and relative improvements in the overall security conditions, said the report’s authors.

The spew of financial and economic reforms undertaken by GCC countries in the last few years have also helped in trimming their budget deficits by nearly a third in 2017, from around US$150 billion in 2016 to close to $100 billion last year. The aggregate GCC fiscal deficit in 2018 is now projected to be around $74 billion. However, in the last couple of years, GCC states have been very successful in financing budget deficits by borrowing on international debt markets. The issuances have helped ease close to 50 percent of government financing needs and has been eagerly sought after by international investors. The taste of this early success has now led to a healthy appetite for bond issuances in the region and more issuances are expected in 2018.

Last year, gross GCC issuance (public and private) crossed $100 billion for the second year in a row, supported by largely by robust sovereign activity. Of all the new debt in 2017, public sector debt issuance accounted for $84 billion of which $50 billion was international sovereign debt. Private sector issuance was down by $4 billion last year, but remained strong on the back of robust non-financial sector activity and touched $16 billion.

Total outstanding debt of all GCC states increased by 16 percent in 2017 and reached a record $436 billion, attesting to the attractiveness of GCC debt on international markets. Nevertheless, analysts caution that the gradual tightening of global monetary policy and the volatility of oil prices could weigh negatively on regional funding conditions that could be further exacerbated by any worsening of geopolitical uncertainty in the region.

For instance, ongoing conflicts in Syria and Yemen that could further escalate the simmering tension between Saudi Arabia and Iran, or the continued boycott of Qatar by its immediate neighbors, Bahrain, Saudi Arabia and the UAE, that have weakened traditional GCC unity and undermined the organization’s relevance, could impact international borrowings.

Meanwhile, in its country assessment of Kuwait, the global rating agency Standard and Poor’s noted that in line with other oil-exporters in the region, the year gone had been challenging for Kuwait. The agency reported that Kuwait’s “undiversified” economy, which derives about 60 percent of its GDP, more than 90 percent of exports, and about 90 percent of fiscal receipts from hydrocarbon products, saw its GDP fall by 2.3 percent in 2017 against a bland oil price backdrop.

However, the rating agency added that the picture for 2018 was more positive and it expected growth to rise 2.5 percent this year, and to climb higher in 2019 as hydrocarbon prices rise and OPEC’s oil production cuts start to phase out. Accordingly, in late February, the agency reaffirmed the country’s stable rating of ‘AA/A-1+’.

“The stable outlook reflects our expectation that Kuwait’s public and external balance sheets will remain strong over the forecast horizon, backed by a significant stock of financial assets. We expect these strengths to offset risks related to lower oil prices, Kuwait’s undiversified economy, and rising geopolitical tensions in the region,” said S&P.

As part of Kuwait government’s continued push for economic reforms in a bid to wean the country away from its over-dependence on oil, and encourage greater private sector participation in the economy, it has been reported that the local stock exchange, Boursa Kuwait, will come up for sale later this year. According to Mishaal Al-Usaimi, vice-chairman of the Capital Markets Authority (CMA), which regulates the stock exchange and other capital markets in the country, the CMA is currently conducting market studies to launch an initial public offering (IPO) for Boursa Kuwait, sometime later this year.

Notably, Kuwait’s benchmark index, which has 156 members many of whom have shown no activity since 2006, rose 11 percent last year. This was the highest rise since 2013, and marked the first time, after several consecutive years of losses, that the index notched an annual profit of KD3.5 million.


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