The UAE and Saudi Arabia will lead the growth of the non-oil sector in the short-term as the GCC region in general remains strong, driven by higher domestic demand, increased gross capital inflows, and reform implementation, the International Monetary Fund said in its latest report.
The UAE posted a robust non-oil growth of 5.9 per cent in the first-half of 2023, driven by strong domestic demand, while Saudi Arabia’s H1 2023 non-hydrocarbon GDP (non-oil private and government activities) growth averaged around 4.5 per cent, the IMF said in its report titled “Economic Prospects and Policy Priorities for the GCC Countries.”
The combined non-hydrocarbon GDP growth of the region is estimated at a buoyant 4.3 per cent in 2023 after a robust 5.3 per cent surge in 2022. However, oil production cuts will lower the GCC GDP growth to 1.5 per cent in 2023. The slowdown in overall growth from the exceptional 7.9 per cent registered in 2022 mainly reflects oil production cuts slowing hydrocarbon GDP. “While the GCC hydrocarbon GDP grew by 7.8 per cent in 2022 supported by global cyclical momentum, it is expected to register a negative growth of around 1.0 per cent in 2023 because of oil production cuts in line with the Opec+ agreement and further unilateral cuts of 1.0 million bpd by Saudi Arabia that were extended to end-December 2023.”
The Washington-based Fund noted that the increase in GCC’s non-oil revenues reflects the ongoing financial and structural reforms undertaken by the GCC countries.
“Inflation in the region is contained and current account surpluses are high. Inflation is expected to stay contained at 2.6 per cent in 2023 and 2.3 per cent in 2024, and converge with that of the US in the medium-term with pegs to the US dollar in place,” the IMF said.
“Fiscal balances remain healthy, supported by fiscal reforms and high oil prices. The primary non-oil deficits are expected to decrease to 24 per cent of the combined GDP of the GCC by 2028, with higher non-oil revenue reflecting sustained fiscal and structural reforms and contained expenditures. However, high global uncertainty is weighing on the outlook,” the IMF added.
It predicted that oil production – which depends on Opec+ decisions – will be subdued in the near term.
The region, the IMF suggested, should implement a comprehensive package of policies to respond to near-term shocks and uncertainty and to firmly address medium- and long-term challenges. “In the near term, fiscal policy should remain prudent, avoiding pro-cyclical spending and using the windfall from higher oil prices to rebuild buffers. Targeted and temporary fiscal measures could be undertaken to respond to shocks, if and when they materialise.”
The Fund urged the GCC to continue to follow the monetary policy of the US Federal Reserve while closely monitoring financial stability risks. “In the medium term, GCC countries should continue pursuing fiscal consolidation consistent with ensuring intergenerational equity and sustainability. Non-oil revenue mobilization efforts, energy subsidy phase-out, rationalisation of expenditures while increasing their efficiency, and strengthening social safety nets would help achieve this objective,” said the IMF.
The IMF suggested that the regional economies should continue to reform structural policies by focusing on diversifying the economies away from hydrocarbons. “Reform efforts aimed at further enhancing product market regulations, labor markets, and governance will spur growth, as will efficient investments in digital and green initiatives to accelerate transformation and support energy transition. The industrial policy should be carefully calibrated and not substitute for structural reforms while minimizing related inefficiencies.”
The IMF report noted that non-tradable goods inflation is becoming the main driver of the region’s headline inflation in 2023. “Stronger economic activity and rising housing costs are driving price increases. Real estate prices are increasing rapidly in Dubai and modestly in Saudi Arabia, while rents picked up in Kuwait. Wage growth has thus far remained contained, with wage-price spirals — whereby prices and wages accelerate together — not materialising (on average) in the GCC countries. A relatively elastic supply of expatriate workers and increased labour force participation explain tame wage increases in GCC.”