Gulf countries will return to economic growth 

UAE Currency

The International Monetary Fund (IMF) has forecast the return of GCC countries to faster economic growth starting next year, supported by a fundamentally strong financial services sector and improved growth in the non-oil private sector as well as a partial recovery in oil prices following the output cut led by the Organisation of Petroleum Exporting Countries (Opec).

The GCC’s real gross domestic product (GDP) growth is projected at 0.9 per cent in 2017 and is expected to surge to 2.5 per cent in 2018 on the back of stronger projected growth of 4.4 per cent in the UAE, 3.8 per cent in Oman, 3.5 per cent in Kuwait and 1.3 per cent in Saudi Arabia in 2018.

“Sustained, broad-based growth requires a healthy financial system. For the most part, banks within the region are stable, liquid, and adequately capitalised. However, given five consecutive years of subdued growth, along with an uncertain outlook, these banks face a challenging environment, particularly with relatively high levels of nonperforming loan ratios,” said the latest IMF Regional Economic Outlook.

While credit growth remains moderate, the IMF outlook has observed that banks in the region remain generally well-capitalised.

However, profitability is declining as liquidity tightens in most countries — although it has eased in recent months in Saudi Arabia and the UAE — and as pressures on asset quality emerge in some countries.

“Banking sector regulatory reforms are progressing, and a number of countries are strengthening their resolution frameworks, including introducing bankruptcy laws [passed in the United Arab Emirates and planned in Saudi Arabia] and developing crisis management frameworks [Kuwait],” said Jihad Azour, director of the IMF’s Middle East and Central Asia Department.

The region’s credit markets were initially shielded from the slowdown in deposit growth that resulted from lower oil prices. To support credit, banks in general increased foreign wholesale funding. However, credit growth slowed significantly in 2016.

Beyond 2016, credit demand could decelerate further as higher US interest rates are reflected in lending rates. However, the IMF expects factors such as the 2022 Fifa World Cup in Qatar and the Expo 2020 in Dubai to support credit demand in Qatar and the UAE.

Going forward, the IMF said, countries in the GCC will need to adapt to this environment of lower oil prices and tighter liquidity to ensure the continued availability of credit to support the private sector.

Recent measures include the relaxation of the loan-to-deposit ratio, the introduction of longer-term repos in Saudi Arabia, and the tailoring of programmes of Treasury bill auctions to liquidity conditions in Qatar.

Additionally, the IMF calls on the region’s central banks to implement more active liquidity management, which will require improvements in the institutional framework in some countries.

Continued efforts to improve private sector access to finance will be needed to support successful diversification.

Structural reforms

Persistently lower hydrocarbon revenues mean that the current development model based on a redistribution of oil wealth through government jobs and generous subsidies is no longer sustainable.

The challenge, therefore, is to develop a new model of economic growth that is both resilient and inclusive. In particular, there is a need to reduce the dependence on oil and generate private sector jobs for the rapidly growing labour force.

Across the GCC, efforts to encourage greater foreign investment are underway. New investment laws in Oman (currently under consideration) could boost foreign direct investment, while allowing foreign ownership outside free economic zones in the UAE could have the same effect. Saudi Arabia has introduced reforms to its equity and bond markets, including the easing of restrictions on foreign investment.

“More needs to be done, however, to improve the business environment as progress has been uneven. For example, the recent opening of the Kuwait Business Centre [a business-facilitating one-stop window] is an important step in the right direction. The UAE improved their World Bank Doing Business rankings by eight places, on average; [the] region’s oil exporters gained only one place,” the IMF report said.

Source: Gulf News

Leave a Comment


Broker Cyprus TopFX