A challenging summer for the GCC’s policymakers

If you were an economic policymaker in the UAE, or any of the Arabian Gulf states, this time last year you would have gone off on your summer break with an easy conscience.

The oil price, the single most important element in your planning portfolio, was about US$100 per barrel and all was right with the world. You would be able to enjoy your holiday and get back in September to the serious business of running the economy.

On your return, you might have been disconcerted to see oil hovering around $90 per barrel, but even then things were OK. Normal trading fluctuations, certainly nothing to panic about.

Nothing could have prepared you for the months to come. By January, crude was hovering around $47 per barrel, roughly where it is now. All your careful financial and economic planning had been thrown out. Back to the drawing board.

Regional policymakers have actually been pretty sanguine about the plummeting oil price. There were apocalyptic visions from some experts – swingeing budget cuts, collapsing GDPs, social unrest – but the Arabian Gulf states have reacted cautiously to their first year of the “new reality” of much lower oil prices.

In fact, the most significant moves came just this week, from the UAE. The removal of subsidies on petrol and diesel, and the first cut in the UAE federal budget for 13 years, are the most radical actions taken by any GCC state so far.

It is still too early to tell what the long-term effect of these moves will be for the UAE, but at first sight the new petrol prices do not seem too onerous. They will push up inflation slightly, but most of us should be able to live with that. The long-term benefits seem to make that a price worth paying.

The federal budget cut – of 4.2 per cent – is also comparatively small, and note too it is (so far) only the federal budget that is affected, not the finances of individual emirates.

But taken together, the two UAE moves suggest an important straw has been thrown to the wind. The era of breakneck expansion fuelled by the public sector is over.

What effect has there been on the real economy? Some experts claim to detect signs of a slowdown in overall UAE economic growth as a result of the oil price decline. Capital Economics, the London consultancy that has consistently got it right in the region, says that the latest PMI index shows a decline in non-oil sector activity to its lowest level in two years, the result mainly of continuing soft property prices.

On the other hand, cargo and passenger traffic in Dubai grew at their fastest rate for two years during May.

Saudi Arabia is the big imponderable, and all eyes will be on its gigantic economy for the rest of the year. So far, it has obviated the fears of those who forecast economic collapse as a result of lower oil prices.

In fact, Capital Economics points out GDP growth has picked up in Saudi Arabia, with oil production still going strong (although obviously for significantly lower return) and a pick-up in non-oil activity partly a result of increased household spending via the bonus paid to public sector workers on the accession of King Salman. GDP growth could be more than 5.5 per cent this year, says Capital Economics.

Elsewhere in the GCC, the picture is mixed. Kuwait is well placed to weather lower oil prices, able to run a current account surplus even with oil at $55 per barrel. But the economy remains “sluggish” and suffers a lack of investment.

Qatar’s growth appears to be slowing quite significantly, but there is uncertainty because of some recent statistical changes in how GDP is measured. Capital Economics says it is concerned about the increasing rate of credit growth and bank borrowing in Qatar.

Oman and Bahrain remain the most vulnerable to the effects of low oil prices, and are running large budget deficits.

None of the GCC countries, apart from the UAE, has yet taken any action on spending or subsidies in the new environment. But they cannot put them off forever. No doubt policymakers are considering these issues during their summer vacations.


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