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03 October 2018

GCC economic growth sours in 2018

Buoyant oil prices throughout 2018 along with rising FDI point to positivity for GCC economies


The Arab Economic Outlook Report 2018 showed that the economic activities in the GCC region have improved in 2018 due to the increase in the global demand, the rise in the international oil prices, as well as the positive effects of economic reforms being implemented in some of the GCC countries. The growth rate of the GCC which has been revised upward to 1.9 per cent in 2018, is expected to rise to 2.5 per cent next year. This group of countries will benefit from the increase in oil production in the second half of the year. 

In 2018, oil prices remain buoyant as seems likely, with regional investment flows being boosted by initial public offerings (IPOs) and a rise in foreign direct investment (FDI), it is expected that non-hydrocarbon GDP growth in 2018 should be slightly stronger than in 2017, combined with flat (rather than reduced) oil production. Gulf countries are restructuring and opening up their economic activities, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with dependence on oil, with a strong focus on technology-intensive sectors like fintech industry. Also, is believed to be are part of a broader strategic shift on the part of respective governments to prepare for an after-oil era future, where oil’s global dominance is set to die down especially as electric cars as well as solar energy is set to become the norm over the next 

Oil revenue

Demand for Saudi oil is expected to increase as US sanctions against Iran comes into effect and will take some of its barrels off the market. The Kingdom through its energy ministry assured the world that Saudi Arabia is able to supply the demand for its crude in October which is expected to range between 10.5 million to 10.6 million barrels a day (bpd).  Saudi Arabia told OPEC that it produced a near-record 10.4 million bpd in August 2018. Saudi’s oil revenues leaped 82 per cent year on year to SAR 184.2 billion, reflecting a recent rise in prices in Q2 2018, oil has already surpassed the $80 mark with Brent crude, the international oil benchmark having surged to a fresh four-year high above $83 a barrel in the first week of October.

According to a monthly economic report by Al Rajhi Capital, the Kingdom’s oil revenue is expected to reach SAR 605 billion ($161.36 billion) against budgeted SAR  492 billion this year as the Kingdom witnesses a continuous improvement in the economy.  Additionally, Kuwait’s economy is still wholly dependent on oil production having shelved economic transformation reforms that are being implemented by its GCC allies. According to Fitch Solutions, in 2017, the hydrocarbon economy accounted for over half of Kuwait’s GDP, 92 per cent of export revenues and 90 per cent of government revenue.

Kuwait’s economy, like much of the Middle East, is heavily reliant on oil exports and it is home to six per cent of the world’s crude-oil reserves.  Kuwait has the highest percentage of GDP tied to oil among OPEC nations. The reliance on oil also ensures that Kuwait reduces unemployment rate as Kuwaiti nationals are guaranteed public-sector employment as part of the oil wealth distribution, while most private-sector employees are expats. The increase in the price of Brent private sector is expected to grow between 3.5 per cent and four per cent between 2018 and 2021.  On the other hand, the International Monetary Fund (IMF) recently lifted its economic growth forecasts for the UAE because of expectations that oil production. Natalia Tamirisa, IMF Mission Chief to the UAE, said that the GCC’s second-biggest economy is now likely to expand 2.9 per cent this year and 3.7 per cent next year.

The announcement coincided with the UAE cabinet approved a 17.3 per cent rise in the federal budget for 2019 compared to this year and rebounding oil prices have given the Government more money to spend.  Bahrain, despite being the GCC’s oldest oil producer it has modest reserves, and yet it is heavily dependent on the income it generates from oil.  In April, the Kingdom’s oil minister Sheikh Mohammed bin Khalifa Al Khalifa announced the discovery of hydrocarbon deposits containing at least 80 billion barrels of tight oil and 10-20 trillion cubic feet of deep natural gas in a new offshore field off the west coast of Bahrain.  However, Bahrain’s new oil find could eventually yield up to 2.4 billion barrels of recoverable oil reserves.

Moody’s added that it may be years before Bahrain’s new asset yields any profits, the newly discovered oil reserves are not expected to positively impact on Bahrain’s economy for at least another five years.  The IMF estimated Oman’s nonhydrocarbon economic growth to soared modestly in 2017 to about two per cent, from 1.5 per cent in 2016, as higher confidence in the wake of the rebound in oil prices helped offset the impact from fiscal consolidation on economic activity.  The Government’s revenue soared by 23.2 per cent to OMR 4.1 million in H1 2018, compared to the same period of last year, thanks to a major recovery in oil prices. 

The data released by Oman’s National Centre for Statistics and Information (NCSI) showed that the growth in oil prices resulted in the increase of the net oil revenue of the Sultanate’s government by 34.8 per cent to OMR 2.1 million in H1 2018. Reflecting the buoyant oil price environment, the Sultanate’s fiscal deficit in H1 2018 plunged by 46.2 per cent to OMR 1 million, from as high as OMR 2.4 million for the same period last. This mainly because of the rise in oil revenues in the aftermath of a major recovery in crude oil prices in the international markets. 

Economic diversification

Gulf countries are restructuring their economies, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with the oil era, with a strong focus on technology. The Saudi Crown Prince unveiled a series of economic transformation reforms under the Kingdom’s ambitious Vision 2030 plan. Recently, Crown Prince Mohammed bin Salman reiterated that Aramco should complete a deal to buy a $70 billion stake in SABIC, issue debt to finance the acquisition and go public by 2021.  According to the Arab Monetary Fund’s Outlook Report of September 2018, reforms being implemented in the GCC countries to improve the business climate in these countries will support economic activities during the forecast horizon. 



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