2017: Where is the economy heading?

06 February 2017

Authors: Paul Cochrane and Keith Nuthall


2017: Where is the economy heading?

The oil price may be (almost) stabilising, but uncertainty still abounds. We asked leading economists and academics to make sense of the numbers


UAE

Outlook
The UAE has the most diverse economy in the Gulf region, and “the feeling is things will get better from here rather than worse”, says Chris Greaves, managing director of executive search group Hays in the UAE. But with global trade facing possible obstacles next year – Brexit and a Trump presidency are obvious storm clouds – the country has vulnerabilities. “World trade is more depressed than it was a few years ago, which is a potential risk for Dubai as it is very trade dependent,” says Dr Hannes Baumann, a Middle East specialist at the University of Liverpool in the UK.

Biggest opportunities for 2017
“We are seeing enhanced hiring activity. This is because of the introduction of VAT, so there’s a beefing up of tax advisory teams. And we’re seeing a marked increase in the IT sector in two areas: online payments systems and cybersecurity,” says Greaves. The feeling is that the UAE is well-placed to recalibrate its economy to take advantage of such growing sectors over time.

Biggest challenges
“No doubt the federal sector has been going through severe belt tightening and is facing more budget cuts in 2017, so that is still playing out. In Abu Dhabi, there is not much hiring, so it’s more about replacement than expansion,” says Greaves. And the sheer size of the government sector means that its relative gloom is seen as holding back other sectors.

Best-case scenario
If energy prices stabilise, the trickle-down effect will insulate the UAE from any significant economic shocks, which is likely to further reinforce its position as a regional powerhouse. It may also attract new investment from multinationals unhappy with volatility in Europe and the US.

Worst-case scenario
Any form of regional conflict is a concern for local businesses, which will be keeping an eye on the bigger picture in 2017. And the UAE’s scale, and its ambitious growth plans, mean it is under pressure to deliver.


Saudi Arabia

Outlook
“Saudis will tell you everything is stable, but historically speaking every time the king changes, [other] things also change,” says Naser al-Tamimi, an independent Middle East analyst. The succession of King Salman bin Abdulaziz Al Saud to power has ushered in a number of younger princes – such as deputy crown prince and defence minister Prince Mohammed bin Salman – and these political shifts will continue during 2017. The country’s reduction in oil output, announced in November, is being seen as historic. But what happens next?

Biggest opportunities for 2017
“The situation is so fluid that to make a macroeconomic prediction is to hope for the best,” says Dr Theodore Karasik, senior adviser at Gulf State Analytics. Al-Tamimi says: “Saudi Arabia is more promising than other Gulf states as it’s a big country and has said it will open up mining, tourism, education and other sectors, so if you are a foreign company you’d logically look there.”

Biggest challenges
Political instability is always a threat, though there is nothing new in this regard. More significant, says Karasik, is the potential for lower oil prices to lead to a broader slowdown in economic activity that could affect the country’s credit rating.

Best-case scenario
As long as oil stays above $60, Saudi Arabia will be able to continue balancing the budget and begin to think about longer-term deficit reduction (perhaps via the planned Saudi Aramco IPO). It will also give the government room to manoeuvre as it makes tough economic decisions.

Worse-case scenario
A faltering oil price could lead to unease. And economic diversification simply might not happen fast enough to satisfy markets.


Kuwait

Outlook
“Kuwait has the strongest balance sheet in the Gulf, but a fractured political environment means growth is likely to remain sluggish over the next couple of years. The government will struggle to push through its latest development plan, which is aimed at improving the business environment and boosting investment,” says Jason Tuvey, a Middle East economist at Capital Economics. This investment is needed to give the country the ability to swiftly respond to shifts in demand for oil. Kuwait is politically complicated, with the opposition winning almost half the seats in the National Assembly in November 2016, which could hamper development.

Biggest opportunities for 2017
Tuvey says he has pencilled in GDP growth of just 1 per cent in 2017, but most commentators are more bullish. Kuwait has a growing financial sector and has proved resilient in the past, given its relative economic strength.

Biggest challenges
The government plans to limit growth in the public sector wage bill and push ahead with subsidy cuts. “Tight fiscal policy and slow progress on the development plan will hold back growth in the non-oil sector,” says Tuvey.

Best-case scenario
“If oil prices rise to $60 a barrel by the end of 2017, Kuwait’s current account and budget positions are likely to return to surplus next year,” says Tuvey. That puts it in a much more enviable position than some of its neighbours.

Worst-case scenario
“Oil production has picked up this year, but Kuwait’s ageing oil fields and lack of spare capacity mean growth in the sector will slow,” says Tuvey. Against that backdrop, longer-term economic diversification is imperative.


Oman

Outlook
Economic growth is expected to remain weak for at least a couple more years, according to Tuvey, with the lack of cash reserves an ongoing issue. The country is unlikely to abandon the dollar peg, which would be viewed as a watershed moment, but the currency is seen as more fragile than its neighbours and ill-prepared for the current oil price. On the plus side, Oman is hoping to capitalise on strong trading relationships with the rest of the region, and is optimistic of maintaining its political and social stability.

Biggest opportunities for 2017
Oman has taken a hit over recent years, with high inflation, restrained salary growth and tight government budgets, al-Tamimi points out. But as the oil price recovers, projects that were cancelled or scaled back can be brought online again and multinational companies will begin to see the opportunities in the country.

Biggest challenges
“Current account and budget positions had been deteriorating for several years and large twin deficits have now opened up,” says Tuvey. This will limit economic diversification efforts, such as encouraging Omanis to enter the private sector. “Compared with the other Gulf countries, austerity is likely to be harsher and continue for much longer,” he adds.

Best-case scenario
If the squeezing of government expenditure eases, analysts believe a new wave of growth could be unleashed.

Worst-case scenario
The recent poor health of Sultan Qaboos has brought the issue of succession on to the agenda, Tuvey points out. That could be a tricky discussion at a sensitive time in the country’s development.


Qatar

Outlook
This year is being viewed as a turning point for the Qatari economy, with most experts forecasting greater fiscal freedom linked to a recovering energy sector and a broader sense of optimism. An uptick in the economy will be a boon for the real estate and infrastructure sectors, as many projects had been put on hold. Qatar is investing $200bn in infrastructure to achieve its Vision 2030 development, and has the 2022 World Cup on its horizon too.

Biggest opportunities for 2017
“The government will implement projects that are important for the 2022 World Cup,” says al-Tamimi. Some $4bn is being invested in football stadiums for the tournament alone, and the hospitality sector is also expecting a boost. Higher oil prices could spell an end to a period where Qatar had to hold back on its development because public budgets had been squeezed.

Biggest challenges
“It is still tough for foreign investors; a lot of work needs to be done to encourage them. In energy, there are not any new discoveries to bring in more companies, so contracts will remain the same,” says al-Tamimi. “I don’t think the situation will be different in the next two years.”

Best-case scenario
Liquefied natural gas prices (which are crucial to the future Qatari economy – it is the world’s largest exporter) are unlikely to drop further, which means the country should stay resilient for the year ahead.

Worst-case scenario
The geopolitical situation affects Qatar more than other countries, given its economic, social and political links, so it will be hoping for a year free of significant GCC instability.


Bahrain

Outlook
“Bahrain faces problems because of the low oil price but also its unique internal dynamics. The outlook is positive but mixed,” says Karasik. Demand for political reform is expected to continue. “Tensions continue to rumble between the population and rulers,” says Tuvey. An uncertain oil price is a potential flashpoint in such a delicate situation.

Biggest opportunities for 2017
Bahrain is serious about economic diversification and has begun to empower government agencies and private investors to encourage entrepreneurship. It already has a strong track record in the non-oil sector, with a dynamic financial sector serving the region’s energy industry and investors from Asia, Europe and north America.

Biggest challenges
“Further subsidy reform is likely, so spending will continue to be scaled back and there will probably be further measures to raise non-oil revenues. Against this backdrop, growth is likely to be extremely weak. Worryingly, this bleak outlook comes against the backdrop of political uncertainty,” says Tuvey.

Best-case scenario
There is cause for hope. “I think the macroeconomic situation could improve, and overall things will look positive. If the oil price stays stable, credit ratings could improve, if not in the first half of 2017 then the second half,” says al-Tamimi.

Worse-case scenario
Political instability among the younger generation is a concern for local commentators; Bahrain is regarded as one of the more volatile countries in the GCC in this regard.