Arabian Gulf states' non-oil sectors remain tied to fortunes of oil

Non-oil growth in the GCC will fall to its lowest pace this year for more than a decade, a new report forecasts.

An Oxford Economics and ICAEW report has predicted that non-oil growth in the GCC will stand at 2.9 per cent this year.

That is significantly below the average non-oil growth rate of 6.8 per cent of GDP between 2000 and 2013 – a sign that the region’s diversification efforts are not yet paying economic dividends.

“Recession may be avoided, but non-oil growth will be its weakest this year since the early 1990s,” the report said.

While the Arabian Gulf has sought to diversify its economies away from oil dependence, the IMF said that they have been only partly successful.

The non-oil sector’s fortunes remain aligned with growth in the oil price, which suggests that Gulf “progress toward genuine output diversification has been modest”.

Profits in the Gulf’s private sector remain highly dependent on state spending, the IMF said, while governments have focused diversification efforts on industries that have also been affected by low oil prices.

The report came after the ratings agency Moody’s put all the members of the GCC on notice that their credit ratings could be further downgraded.

Credit ratings for the UAE, Kuwait, Saudi Arabia and Qatar could suffer after Moody’s said that it was now studying whether their downwards revision of their expectation for this year’s oil price would affect the sovereigns’ abilities to repay their debts. Moody’s is likely to announce its changes on credit ratings in two months.

Moody’s downgraded Oman and Bahrain, which ratings agencies have identified as the countries most vulnerable to the collapse in oil prices because of their smaller financial reserves relative to Gulf peers. Credit ratings for both countries could be further cut.

With the ratings agency cutting its oil price forecast for this year to US$33 per barrel, down from its previous forecast of $46 per barrel, the region’s fiscal deficits are likely to widen. Moody’s said that the UAE ran a fiscal deficit of 4.1 per cent of GDP last year, which it expected would widen to 9.5 per cent this year.

The ratings would be based “not only on the impact of lower oil prices, but also on the governments’ reaction to low oil prices”, said Mathias Ango­nin, a Dubai-based analyst who covers Middle East states at Moody’s.

Gulf governments have discussed a range of reforms to deal with the economic strains. Mohammed bin Salman, Saudi Arabia’s deputy crown prince, told The Economist that the country was considering the flotation of a small stake in Saudi Aramco, part of a wave of privatisations of state industries.

The Arabian Gulf countries have agreed to introduce a 5 per cent sales tax before January 1 2019. States have moved to end what the IMF has called expensive and inefficient subsidies on fuel and electricity.

Gulf governments are also cutting spending. The UAE reduced spending by 21 per cent in the third quarter of last year compared with a year earlier, the most recent available data from the Ministry of Finance shows.

Saudi Arabia expected to shrink its budget for this year by 14 per cent. The research house Oxford Economics said that the Gulf would collectively cut spending by 8 per cent this year.

“We are now seeing a lot of announcements about the governments’ medium-term fiscal measures – for instance on energy subsidies, and more and more clarity on what governments are planning to do on tax reforms,” Mr Angonin said.

“These reforms may not be enough to return to the fiscal surpluses run during the high oil prices, but they go some way towards rebalancing the fiscal accounts,” he said.

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