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Regional economies could struggle through 2017
December 17, 2016, 3:28 pm

A new report from the independent economic research company, Capital Economics, warns the region will once again face a ‘struggle’ in 2017. With fiscal policies continuing to be tightened to stem current account and budget deficits, which have widened in the past two years as a result of persistent low oil prices, economies in the Middle East and North Africa (MENA) region could witness one of the weakest growths since the global financial crisis of 2008-2009, notes the latest outlook by Capital Economics.

The Gulf Cooperation Council (GCC) states could also see their share of economic growth falter in the year ahead says the report. The recent OPEC deal, in which major oil producers agreed to cut production, has prompted speculation of a major shift in Saudi Arabia’s oil policy, but Capital Economics said it was “skeptical” that this would take place. It explained that the kingdom’s oil policy from the past two years remains in place and therefore it does not anticipate any significant and sustained drop in output. Prices are therefore unlikely to increase much, it said.

Of course, this means the Saudi government will need to further tighten monetary policy to alleviate budgetary pressures, and the kingdom’s overall economy is expected to grow by just 1.3 percent in 2017, the report noted.

The UAE’s economy is likely to record its slowest growth since 2010 this year at around 2 percent, according to the report. However, the country’s strong balance sheet means it should start to recover in 2017-18. The UAE “should embark on a gradual recovery in the coming quarters and is likely to be the best performing economy in the Gulf in 2017-18,” said the report.

The UAE's non-oil direct trade increased by 3 percent in the first half of 2016, reaching US$150.6 billion, according to official figures. The $4.8 billion increase was registered as Asia, Australia, and the Pacific regions retained their place as top trading partners with a share of $57.5 billion accounting for 39 percent of the total non-oil trade. Europe ranked second, with a share of $38.1 billion (26 percent), and the Middle East and North Africa region came next with a share of $25.3 billion (17 percent).

In Kuwait, meanwhile, economic growth is expected to remain weak due to the “fractured” political environment despite a strong balance sheet, the report said. It noted that Qatar’s economy, too, is likely to stay sluggish as fiscal policy becomes more restrictive and credit growth eases, while Bahrain and Oman will “underperform” their Gulf peers. Overall average growth in the region is likely to weaken to 1.5 percent in 2017.

Meanwhile, on Wednesday, Saudi Arabia, Kuwait and Bahrain raised interest rates within minutes of the US Federal Reserve's decision to do so, as they scrambled to avoid downward pressure on their currencies due to low oil prices. Qatar and the UAE followed the next day, with Qatar's central bank saying on Thursday it was raising policy rates by 25 basis points, according to the official Qatar News Agency. The UAE central bank also said on Thursday that it was raising interest rates on its certificates of deposit, its main policy instrument, by 25 basis points.

Early this year, speculators attacked the Saudi riyal and other Gulf currencies as cheap oil pushed the state finances of those countries into deficit. The riyal and most other Gulf Arab currencies are pegged to the US dollar.

Pressure on the currencies has eased in recent months as oil prices have begun to rebound and governments have cut spending to reduce their deficits. But authorities are keen to prevent higher US interest rates from reviving the speculation.

After the Fed lifted the federal funds target by a quarter of a percentage point, Saudi Arabia raised its reverse repurchase rate - the rate at which commercial banks deposit money with the central bank - by the same margin to 0.75 percent.

But it also decided to keep its repurchase rate, which it uses to lend money to banks, unchanged at 2.00 percent - a signal that it is trying to prevent low oil prices from hurting liquidity at banks and pushing up money market rates steeply, which could slow the Saudi economy.

Kuwait's central bank raised its discount rate, used to determine maximum interest rates on dinar borrowing at local banks, by a quarter of a percentage point to 2.50 percent. The bank said it aimed to "ensure the continued competitiveness and attractiveness of the national currency".

Bahrain raised a range of policy rates by a quarter of a percentage point. In the past, the UAE has hiked rates within a day of a US increase, and Oman's central bank began raising its overnight repo rate in small increments earlier this year.

In contrast to other Gulf central banks, Qatar decided not to hike rates after the last US interest rate increase in December 2015, and it may make the same decision again. However, analysts believe that, because of its currency peg to the dollar, Qatar will not be able to resist pressure indefinitely to tighten monetary policy, especially since the Fed signaled a faster pace of increases in 2017.

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