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Higher oil prices add momentum to regional growth
April 8, 2018, 3:37 pm
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Brent oil prices that have hovered over the US$60 per barrel mark since October 2017 along with prevailing benign global economic environment have given a much-needed fillip to GDP growth among oil producers in the region. Real GDP growth rates in the GCC are now projected to rise to around 2.3 percent in 2018, compared to 0.6 percent in 2017. The oil production cuts agreed to by OPEC member states in December 2016, which was later buttressed by compliance from 11 non-OPEC producer nations led by Russia, has removed 1.8 million barrels per day from global oil output and led to an increase in global oil prices.

The decision by oil producers last November to extend production cuts to the end of 2018 has further depleted surpluses from oil inventories worldwide and sustained oil prices over the $60 per barrel mark. The fillip in oil prices have helped the six-nation Gulf Cooperation Council (GCC) states to improve their fiscal performances and trim budget deficits this year. However, regional geopolitical risks and the current volatility in energy prices means that growth will continue to remain anemic and well below pre-2014 levels.

Also, while the recent decision by OPEC and several non-OPEC members to extend their ongoing production cuts have provided a positive outlook for oil prices in the short-term, the cutbacks have been cutting into sales volumes, and consequently state revenues. This could make sustained GDP growth more challenging going into the future. Though average oil prices of US$54 in 2017 was a17 percent hike from the $46 in 2016, oil is now expected to average only $57 for 2018.

The lower average price, together with the fall in revenues brought on by OPEC-mandated production cuts could see many regional oil producers face tighter fiscal positions and continue to struggle with budget deficits. In addition, because most regional currencies are pegged to the US dollar, tighter liquidity conditions are expected to remain in the region following the recent decision by the US Federal Reserve to hike rates. Meanwhile, the latest available data from Coface, a worldwide leader in trade credit insurance, shows that non-oil real GDP growth of most of the Gulf countries will improve in 2018 compared to 2017. 

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