Saudi Arabia warned financial assets may be drained within five years

The IMF is projecting weaker growth and a wider fiscal deficit for the Arabian Gulf region, warning of a rundown of financial buffers in most countries in five years if they do not improve their finances.

The IMF slightly revised downwards its projection for Gulf growth to 3.3 per cent this year, down from 3.4 per cent in May, as lower oil prices impacts non-oil growth.

“Lower oil prices are reducing non-oil growth, including through fiscal adjustment or its expectations, although this is partly compensated by higher oil production, notably in Saudi Arabia,” the IMF said in a regional report released today.

As the international oil benchmark Brent plummets to around $50 a barrel, down from last year’s peak of $115 a barrel, Gulf countries’ oil revenues are dwindling, leading to fiscal deficits.

The Gulf countries’ fiscal deficit will reach 13 per cent of GDP this year, versus IMF’s projection of an 8 per cent deficit in May.

“For most countries, the fiscal measures currently being considered are likely to be inadequate to achieve the needed medium-term fiscal consolidation,” said the IMF. “Apart from Kuwait, Qatar, and the UAE, under current policies, countries would run out of buffers in less than five years because of large fiscal deficits.”

Saudi Arabia, the world’s biggest oil exporter, is forecast to run a fiscal deficit of 20 per cent of GDP this year, according to IMF projections. The kingdom has drawn down its foreign currency reserves and issued domestic debt to finance the deficit. Its reserves are down to 2.48 trillion Saudi riyals in August, a 31 per cent drop from the peak of 2.79tn riyals reached in August of last year.

“Countries with fiscal space are using their buffers appropriately, but medium-term plans to put fiscal finances on a stronger footing are lacking, including in those countries with the largest adjustment needs,” said the IMF. “Some countries without fiscal space have started to meet some of their funding needs through monetary financing, which creates inflation risks.”

The IMF has urged Gulf countries to adjust to the new oil price scenario and implement a slew of measures to deal with the new realities that includes more entrants to the job market.

These measures include the streaming of expenditures, raising non-oil taxes, reducing subsidies and bolstering private sector growth

“Lower oil prices will lead governments to slow public spending, underscoring the need for policies to support a diversified private sector,” the IMF said. “Some 10 million people are expected to enter the labour force in MENAP (Middle East North Africa and Pakistan) by 2020, while cash-strapped governments will have limited room to create public sector jobs.”

In all six Gulf countries excluding the UAE, over 2 million nationals will enter the job market by 2020. If private sector growth does not pick up, more than half a million will be jobless, in addition to the 1 million currently unemployed. In this case, the Gulf’s aggregate unemployment rate could go up to 16 per cent from 12.75 per cent.

“Lower oil prices will eventually force governments of oil exporters to hire fewer public servants,” said the IMF.

“Clearly, if more fiscal adjustment were to take place, with some of it in the form of reined-in public sector hiring, unemployment rates would be even higher.”

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