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Non-oil sector growth impelled by lower oil revenues
July 29, 2017, 2:40 pm
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Kuwait, along with other oil-exporting Gulf Cooperation Council (GCC) states, will have to significantly boost non-oil sector growth in order to offset loss in oil revenues from lower prices and continued commitment to OPEC production cuts.

Given the current modest oil price scenario, governments across the GCC region must increase their non-oil sector growth — projected to be around 2.6 percent for 2017 — to sustain current low price scenario and longer OPEC mandated oil production cuts, says a new report by the UK-based accountancy and finance institution, ICAEW.

Despite the acceleration of global trade in the first half of 2017, its impact is expected to be felt unevenly across GCC economies and will probably see the region’s GDP growth easing to just short of 1 percent in 2017, says the ICAEW report titled ‘Economic Insight: Middle East Q2 2017.

The report, produced by Oxford Economics, ICAEW’s partner and economic forecaster, anticipates non-oil sector growth across the GCC in 2017 to be offset by a further 3 percent contraction in the oil-producing sectors. The report warned that although the broad-based pick up in the world economy is providing a useful tailwind to some GCC economies, others are likely to benefit far less from this rebound due to a range of structural reasons.

Among the structural limitations shackling GCC states are: heavy reliance on commodity exports and low non-oil exports, as in the case of Kuwait; the strengthening US dollar in a longer-term context which undermines the export competitiveness of dollar-pegged oil economies, such as that of other GCC states with the exception of Kuwait; and a lack of readiness by GCC states — with the possible exception of the UAE — to seize their strategic location and serve as hubs facilitating global trade.

In Kuwait, where oil sector continues to dominate the economy, accounting for 88 percent of government income in 2017/18 budget, non-oil revenues will struggle to manifest itself in any meaningful manner for some time to come. Meanwhile, other GCC states, which have pegged their currency to the US Dollar, are also unlikely to unpeg their currencies any time soon, as it continues to serve them well with regard to managing inflation expectations, and enhancing foreign currency inflows.

Also, even though the UAE, especially Dubai, has been a resounding success story when it comes to serving as a hub facilitating trade between economies in the east and west, the narrative has not resonated with equal success in other GCC states. Ineffectual responses to the above challenges means that, at least in the short- to medium-term, most GCC countries will struggle to benefit from accelerated global growth and will continue to rely on their traditional revenue streams from export of oil and its derivatives.

The UAE is the most diversified economy in the GCC region with oil generating just 22 percent of export revenues, followed by Bahrain where it accounts for 34 percent of export revenues. Kuwait is the least diversified economy within the region, with oil revenues accounting for over 80 percent of export earnings and over half of the GDP.

Even when it comes to oil revenue, the six-nation bloc cannot expect a smooth ride going forward. There have been heavy headwinds in recent months and the turbulence has only been augmented by the ongoing rift among several GCC members. The announcement by OPEC in late May that it would extend its current production cuts by a further nine months to March 2018 was a tacit admission that their earlier decision to cut production from the start of 2017 had not whittled down global oil surpluses as expected.

Global oil stockpiles continue to beleaguer OPEC and its non-OPEC partners partly because compliance outside the GCC has reportedly been patchy, and also because any rebound in oil prices has led to more US oil coming on-stream. Continued commitment to OPEC-mandated cuts is already having an impact on revenues of several GCC states, especially since they are being asked to bear the brunt of any increase in production cuts.

The ICAEW report estimates oil to remain close to UD$45 per barrel throughout 2017 and gradually rising to $55 per barrel by 2019, when spare capacity in world markets is expected to close. However, this price is still short of the $60 earmarked by OPEC’s de-facto leader Saudi Arabia as the minimum sustainable price level.

Nevertheless, is it not all gloom and doom for the region; the 2018 economic outlook for the GCC bloc as a whole is more positive. Oil output is expected to rise 1 percent complementing momentum in the non-oil sector (which is expected to grow by 4 percent) resulting in overall GDP growth of 2.7 percent.

However, any further oil price weakness or escalation of tensions between Qatar and its GCC neighbors, would clearly pose a downside risk to growth, warns the ICAEW report.

Obviously, Kuwait and other GCC countries need to step up their efforts to increase non-oil revenues. While the launch of Value Added Tax (VAT) from early next year is a good beginning,  other measures, including diversifying the economy, rationalizing expenditure, trimming bloated public-sector jobs, and encouraging private sector to increasingly participate and contribute to economic development, are clearly needed to maintain financial steadiness in the coming years.

 

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