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A recent report of the Abu Dhabi Commercial Bank ( ADCB ) indicated that deficits across the GCC countries will ineluctably be getting worse in 2016 despite all the preventative measures such as fiscal arrangements, possible introduction of taxation and spending cuts.  Are GDP growth in 2016 and liquidity tightening in GCC a new trend in the region?

Domestic borrowing schemes meant to alleviate differences in the GCC’s fiscalities that were in any case minimal before this recent drastic fall in the oil price, would most probably impact the banking sector liquidity available in the region.

As a consequence, Saudi Arabia floating bonds, Qatar and Oman cancelling certain finance operations, coupled with the sovereign downgrades of Bahrain and others of the GCC by the rating agencies, could not stop the cost of funding to increase.

Back in 2013, real GDP growth in the GCC was estimated at 4.1% with the highest growth rate recorded in Qatar with 6.5% and only 2.7% for the rest of the MENA region.

This growth in the GCC linked to a recovery in global energy demand that coupled with large investment spending is expected to continue apace in at least the near future.  The rest of the MENA is however likely to continue to trail behind; this divergence believed to be caused by the lack of political stability and structural reforms.  The difference in growth between the GCC countries and the other MENA countries is merely a continuation of a trend established in recent years and is due mostly to the rapid expansion of the non-hydrocarbon sector that followed large investment spending.

The weaker growth experience in the rest of the MENA region in 2013 is believed to be due to geopolitical factors. Syria, Lebanon, Jordan and Iraq are in this case.  Political instability negatively affected growth in Egypt (2.1%), Tunisia (2.7%) and Libya (-9.4%).  Iran (-1.7%) continued to suffer from international sanctions.  On the other hand, Mauritania (6.7%) and Morocco (4.5%) expanded and grew relatively rapidly.

The trend of a two-speed MENA is likely to be maintained in 2014, 2015 and beyond, especially due to a gradual recovery in global energy demand and a few new oil and gas developments in the region.  Large investment spending in the non-hydrocarbon sector is in the meantime supposed to induce growth acceleration in Qatar (6.8%), Saudi Arabia (4.5%) and UAE (5.0%).

As a whole, the rest of the MENA region was likely to reach only 2.5% growth in 2014.

Several investment and banks experts stated that this continued divergence in growth between the GCC and the rest of the MENA region has important implications.  It does show the need for political stability, subsidy reforms to reduce unsustainable fiscal deficits and the establishment of a business-friendly environment for higher foreign direct investment in the rest of MENA region in order for growth to converge and eventually reach the GCC levels.

But today low oil prices that continue to weigh heavily on the GCC economies with the average weighted real non-oil GDP growth moderating to 2.2% in 2016, down from 4.1% in 2015, according to many local banking establishments.

The slowdown in economic expansion will directly be linked to the sharply lower government expenditure that remains the real driver behind growth.

There are however indications that since a good number of important infrastructure projects are still being awarded making many to expect a substantially softer landing for the economy than in 2009.

Despite the relatively better growth environment in the UAE, more economic challenges are expected in 2016 with the continuing lowering of the oil price affecting all non-oil GDP growth to slow down in similar fashion to that of the non petro-countries of the MENA back in the 2013/ 14.

Any light at the end of the tunnel ?
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