GCC surplus to surge on high oil prices

Top Stories

GCC surplus to surge on high oil prices
The region's oil exporters should pursue deeper structural reforms to strengthen the business climate and competitiveness to support private sector growth, diversification and job creation.

Dubai - Combined current account surplus of 10 Mena oil exporters to rise by about $150B in 2018

by

Issac John

  • Follow us on
  • google-news
  • whatsapp
  • telegram

Published: Fri 12 Oct 2018, 6:28 PM

Last updated: Sat 13 Oct 2018, 8:21 AM

A 37 per cent jump in average oil prices in 2018 is leading to a marked turnaround in external balances of the GCC countries and other Middle East and North African oil exporters, according to the Institute of International Finance (IIF).
With oil prices hovering above $80 per barrel and poised to hit $100 within months, the combined current account surplus of the 10 Mena oil exporters is projected to rise by about $150 billion to $197 billion in 2018. Of this, $169 billion is accounted for by the GCC countries, analysts at the IIF said in their Mena Economic Outlook report.
"For the GCC, the current account surplus will widen from $49 billion in 2017 to $188 billion in 2018, equivalent to 10 per cent of GDP. Financial soundness indicators suggest that the banking systems remain sound. Capital adequacy ratios exceed 16 per cent in the six GCC countries," said Garbis Iradian, IIF chief economist for the Mena.
"In the six GCC countries, we expect real GDP to shift from a small contraction in 2017 to a growth of 2.4 per cent in 2018 driven by higher oil production and fiscal stimulus in Saudi Arabia. However, lackluster credit growth indicates sluggish recovery of the private sector," said Iradian.
He said the consolidated fiscal deficit of the GCC would narrow significantly. Higher oil revenues and the further improvement in non-hydrocarbon revenues will more than offset the 15 per cent increase in public spending in 2018.
The IIF report noted that the banking systems in the GCC remain sound, with strong capitalisation and adequate liquidity, and the pick-up in growth will improve private sector credit demand beyond the near term.
"The fiscal deficits will narrow as oil earnings climb, which will more than offset the substantial increase in public spending [an average increase of 15 per cent in 2018]. The fiscal situations in Saudi Arabia and the UAE are now on firmer footing. External pressures on Algeria and Bahrain will persist as both fiscal and current accounts remain in sizeable deficits while official reserves are declining rapidly," said Iradian.
Jonah Rosenthal, senior analyst at the IIF, said despite growing emerging markets concerns, appetite for GCC debt remains high.
Saudi Arabia issued large tranches of sovereign debt in the first half of this year in anticipation of higher global interest rates. In general, regional equity indexes moves broadly with oil prices. The recent turmoil in emerging economies - particularly in Turkey and Argentina - had a limited impact on investor's appetite for GCC securities.
"We expect the Iranian economy to contract in 2018 and 2019 due to the re-imposition of US sanctions, which is leading to a sharp decline in oil exports and depreciation of the rial," Rosenthal pointed out.
"Non-performing loans to total loans are less than 2 per cent in Saudi Arabia, Qatar, Kuwait and Oman, and between 4 and 7 per cent in Bahrain and the UAE. Private credit growth remains subdued due to weak domestic demand," said Rosenthal.
The IIF analysts said a tighter monetary policy, in the context of the pegged exchange rates in the GCC, would offset some of the gains from an expansionary fiscal stance.
"Monetary tightening and the rise of borrowing costs come at a time when credit growth remains subdued and private sector economic activity is weak, particularly in Saudi Arabia."
The gradual recovery in the region's oil importers will continue, driven by Egypt. Mena oil importers are projected to grow 3.8 per cent in 2018 and 4.3 per cent in 2019, up from 3.5 per cent in 2017. Progress from recent reforms and de-escalation of conflicts in parts of the region will support the recovery.
However, this pace of growth will still be in-sufficient to significantly reduce high unemployment rates.
While the fiscal deficits will narrow through tax measures, the public debt-to-GDP ratios will remain very high, particularly in Lebanon, Egypt and Jordan.
Analysts said with higher oil prices and narrowing fiscal deficits, the urgency for reforms has diminished, particularly in Algeria, Iraq, Kuwait and Saudi Arabia. Oil exporters in the region should pursue deeper structural reforms to strengthen the business climate and competitiveness to support private sector growth, diversification and job creation.
- issacjohn@khaleejtimes.com


More news from