Posted on June 02, 2016

The report Economic Insight: Middle East Q2 2016, produced by Oxford Economics, ICAEW’s partner and economic forecaster, says that as GCC economies continue to diversify away from oil-driven investment and public spending productivity growth will become vital.

Despite strong GDP growth and previously high oil prices, the GCC region’s overall productivity performance has not been encouraging. Between 2002 and 2015, it made zero or negative contributions to GCC economies at the whole economy level, and showed only marginal improvements when focussing on the non-oil sector. By contrast, output per worker contributed 1.5pp in Singapore and 4pp in Vietnam per year over the same period. However, this obscures a number of structural movements within the GCC region’s economies – diversifying into new sectors, accommodating an expanding workforce to achieve this and increasing female participation.

Graeme Harrison, ICAEW Economic Adviser and Director of Oxford Economics’ Macroeconomic Consultancy for Europe, Middle East and Africa (EMEA), said: “The productivity underperformance across the GCC is partly caused by workforces diversifying into more labour intensive sectors. This has meant an increase in the working age population thanks to increased migration to support new sectors, and again from greater female participation in the workforce. So GDP per capita has risen faster than output per worker.”

On aggregate, the female labour market participation rate has increased 3pp in the GCC over the last 15 years, compared to falling by over 4pp in Emerging East Asia. Recent research by Oxford Strategic Consulting suggests women in the region are increasingly targeting higher value-added service sectors like banking and financial services. Success in this area would support both overall GDP and productivity growth.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA). Said: “Focussing on output per worker fails to account for wider sectoral and labour force rebalancing, so this is slightly misleading. However, it remains crucial for GCC countries to raise the productivity of individual workers. This can be done by increasing their access to capital, their skills and the competitive environment in which they work. At the same time, governments will need to sustain progress made from their diversification efforts and attract more women into the workforce. They will also need to increase job prospects for nationals and reduce levels of youth unemployment in order to realise short term growth within the context of sustained low oil prices.”

A meaningful change in the oil market climate is unlikely for at least the next six months. With oil exporters failing to secure a production freeze, the price of Brent Crude is expected to remain around $38 per barrel in 2016 and average $43 per barrel in 2017. Most GCC countries will see a slowdown in growth momentum in 2016, because of the direct impact of low oil prices, fiscal adjustment programmes, market pressures on currency pegs and tightening liquidity conditions. Fiscal austerity has taken the form of spending cuts including reductions to fuel subsidies, wage restraint and squeezing government waste. GCC government expenditure fell by an estimated 7.9% in 2015 and a further 9% in 2016.

The report also shows:

GDP growth in Saudi Arabia in 2016 is expected to rise just 0.8%, its weakest growth since 2002 as the cumulative impact of government spending cuts and low oil prices feed through to the economy. The recent announcement of Vision 2030 outlines strategies to reduce dependence on oil in the Kingdom, but immediate actions will be required to show commitment to this very ambitious plan. 

The UAE is expected to see growth of 2.3% in 2016. The country’s Aa2 credit rating was confirmed by Moody’s in May, but was assigned a negative outlook, reflecting the low oil price outlook and relatively large fiscal deficit. Signs of stress from the slowdown are visible in new regulations from the UAE Banks Federation to help with debt restructurings for troubled SMEs. Bahrain’s downgrade to below investment-grade status by Standard and Poor’s (S&P) in February reflects weak public finances with relatively high political risk and few policy buffers. Substantial fiscal austerity is underway with an emphasis on cutting subsidies, control of the government wage bill and increased non-oil revenues. GDP is expected to rise 1.3% in 2016.

S&P also downgraded Oman to BBB in February – the lowest investment grade rating. Oman’s vulnerability reflects a lack of policy buffers, an especially weak budget position, depleting oil capacity and tightening bank liquidity. Growth prospects are weak with GDP projected to rise 1% in 2016. Qatar’s Aa2 rating was confirmed by Moody’s with a negative outlook in May, reflecting a more advantageous position than its GCC+5 (Egypt, Iran, Iraq, Jordan and Lebanon) peers but worries over the pace of government capital spending. GDP is forecast to rise 4% this year, supported by strong non-hydrocarbon activity, up an expected 7% in 2016.

Kuwait’s economy is expected to expand 2.3% in 2016. While its policy response has so far been limited to a partial fuel subsidy reform in 2015 and other measures like reduced allowances for government entities’ travel expenses, the government is pushing ahead with further fiscal adjustment. These include a 10% corporate tax on local companies, further cuts to fuel subsidies, and privatisation of some state-owned projects.

The full Economic Insight: Middle East report can be found here: