Muscat: Higher oil prices coupled with improved global economic conditions are expected to support growth momentum of the Gulf Cooperation Council (GCC) countries, according to an economist at Coface Credit Insurance.
This was highlighted by Seltem Iyigun, Coface Economist for Middle East & Turkey, during her presentation on the “GCC Economic Outlook” at the recent Key Broker Event organised by Coface Credit Insurance GCC in Dubai. Coface is a world leader in credit insurance providing cover to its clients in more than 200 countries.
Iyigun said real gross domestic product (GDP) growth rates in the GCC are expected to grow to around 2.3 per cent compared to 0.6 per cent in 2017. However, growth will remain below pre-2014 levels due to volatile energy prices and geopolitical uncertainties.
“We see a slight recovery in the growth momentum of the GCC nations’ GDP on rising oil prices. The recent extension in oil production cut is a positive sign for the oil price outlook in the near term, but prices remain volatile,” she said.
Oil prices have averaged at $54 a barrel in 2017, up from $46 in 2016, and are expected to average at $57 in 2018.
In December 2016, 12 OPEC countries agreed to their first production curbs in a decade. Later, 11 non-OPEC producer nations, led by Russia, joined the decision. Last November, they decided to extend the oil output cuts until the end of 2018. OPEC produces a third of the world's oil and it pledged to remove 1.8 million barrels per day from global oil production.
It is expected that GCC countries will improve their fiscal performances or budget deficits this year. UAE maintained much better fiscal deficit compared to other GCC countries. The UAE was the only country in the region, which maintained its government gross debt during the last couple of years.
Data from Coface GCC Economic Outlook shows that non-oil real GDP growth of most of the Gulf countries will improve in 2018, compared to 2017, except Bahrain and Saudi Arabia.
Iyigun said that tighter liquidity conditions will remain in the region following the recent US Federal Reserve rate hike because regional currencies are pegged to the US dollar. However, loan growth is not expected in the next three years compared to the 2012-2016 period.
The UAE’s high performing non-oil sectors are expected to drum up growth. The country’s private consumption will most likely remain among the main drivers of growth in 2018, sustained by household consumption and higher international tourism. The country’s domestic appliances, metals and pharmaceuticals will be the fastest growing, while information, communication and technology (ICT) and machinery will be the slowest growing.
“We believe the UAE is a safe haven, despite regional uncertainties and the geopolitical situation,” Iyigun said.
While the country’s inflation rate is predicted to be higher than last year (two in 2017 vs 3.7 in 2018), the recently rolled out VAT will drive in more government revenues, given the UAE’s large consumer base and the importance given to retail spending, especially from foreign visitors.
The construction sector, which is the main pillar of UAE’s economic diversification strategy, recorded remarkable growth at 7.7 per cent year-on-year in the second quarter and 7.5 per cent year-on-year in the third quarter of last year, the fastest growth rates since the financial crisis.
The growth in the construction industry is supported by high investment inflows due to the upcoming Expo 2020. Construction opportunities continue to emerge in the run-up to the international event. According to BMI, 64 per cent of construction is commercial compared to other infrastructure developments.
In terms of economic contribution by output, the services sector enjoys the lion’s share of 48 per cent, followed by extraction (29.9 per cent), construction (9.4 per cent), manufacturing of intermediate goods (7.9 per cent), then utilities, agriculture and other sectors, according to Oxford Economics findings. UAE food sales are expected to continue the upward journey in 2018.
The petrochemical sector in the UAE will remain stable with the support of non-oil growth. Mining will continue to grow along with construction in this sector, but manufacturing will see some pressure. Export of crude oil and petrochemical products remained stable during the last three years.
Although competition and saturation tighten margins in the UAE ICT sector, consumer electronics maintained demand levels in 2017 and will continue in 2018, according to BMI data. Key categories handsets, computer hardware and audio-visual sales are expected to go up.
Iyigun forecasts a better outlook for the automotive sector in the UAE. Quoting industry sources, she said UAE vehicles sales witnessed a sharp increase in 2017 and the trend will continue in 2018. The demand for passenger vehicles, as well as light commercial vehicles will rise in 2018.