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Higher oil prices and output to boost public spending and GDP growth of GCC

GDP growth in the GCC to shift from a contraction of 0.3% in 2017 to a growth of 2.5% in 2018

Dubai: Oil prices are forecast to average above $70 (Dh257) this year, despite the potential increase in output boosting the prospects of higher public spending that is will drive both oil and non-oil gross domestic product (GDP) growth this year, according to economists.

The consistent rise in oil prices, combined with fiscal consolidation efforts through subsidy cuts and improved revenue augmentation through introduction of value-added tax (VAT) in the UAE and Saudi Arabia has improved the fiscal positions of these countries.

While the oil prices are likely to face headwinds from higher Opec output in the second half of this year, economists and analysts say higher output is likely to offset the impact of lower price for countries such as Saudi Arabia, the UAE and Kuwait.

According to the Institute of International Finance (IIF) the recent agreement between Opec and Russia could partially offset the upside to prices that came from lower output in Venezuela and Iran. Saudi Arabia, with 2 million barrels per day (mbd) spare capacity, is likely to increase its crude oil production by 0.6 mbd in the second half of this year while Kuwait and the UAE could each increase their output by 0.15 mbd.

“We still expect Brent oil prices to average $72/bbl in 2018 and $65/bbl in 2019; the modest decline in prices next year will be driven by the output boost in Saudi Arabia and Russia, and continued increase in the US and Canada,” said Boban Markovic, Senior Analyst, IIF.

Higher oil prices is expected to provide a boost to economic activity through additional public spending and improvement in private sector confidence.

“We expect overall real GDP in the GCC region to shift from a contraction of 0.3 per cent in 2017 to a growth of 2.5 per cent in 2018, supported by higher oil output and government stimulus. Non-hydrocarbon growth is set to gradually improve, driven by higher public spending. However, lacklustre credit growth indicates sluggish recovery of the private sector,” said Garbis Iradian, Chief Economist and Head of Research, Mena, IIF.


Analysts expect GCC members with spare capacity to increase production to compensate for lower or falling output from other countries involved in the Opec deal. According to Abu Dhabi Commercial Bank’s Economic Research team, the GCC Opec producers (Saudi Arabia, UAE and Kuwait) and Iraq are the main countries that have the capacity to increase production meaningfully.

While Saudi Arabia’s real GDP growth for 2018 and 2019 are forecast at 2.7 per cent and 2.8 per cent respectively compared to a contraction of 0,9 per cent in 2017, for the UAE, the IIF expects a real GDP growth of 2.4 per cent and 2.7 per cent.

“We now see these GCC countries increasing their output above their Opec quota levels in the second half of 2018, supporting real GDP growth in their oil sectors. Moreover, oil revenue will be supported by oil prices remaining high as the overall November 2016 output agreement remains intact. We have already seen signs of a looser fiscal policy in the GCC in 2018 supported by a rise in the oil price,” Monica Malik, Chief Economist of ADCB, said in a recent note.

A tighter monetary policy, in the context of the pegged exchange rates, is likely offset some of the gains from the expansionary fiscal policies in 2018. “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 and the UAE. We expect two more hikes, 25 bps each, for the remainder of this year and three hikes in 2019,” said Iradian.

According to the IIF fiscal deficits will narrow as oil earnings climb, which will more than offset the high levels of public spending (an average increase of 13 per cent for the GCC in 2018). The external positions will also strengthen, with widening current account surpluses in the UAE, Saudi Arabia, Kuwait, and Qatar. External pressures on Bahrain is expected persist as both fiscal and current accounts remain in deficits while official reserves are critically low.

Source : Gulf News

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