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Gulf’s economic outlook creates contest of opinions

You know how it is — no sooner are you moved to make an assumption about something slightly unknown than it’s suddenly disproved.

Last week’s suggestion in passing that the Gulf states might have thought better about forming a monetary union, having viewed the disaster that is the Eurozone, was quickly usurped as a report emerged claiming that the decision to do so has been made. That report, though, has since been denied.

Still, it does create a focal point for the Gulf Cooperation Council’s (GCC) collective condition, as an entity that might re-invent itself from an association of neighbouring states with preferred trading arrangements and a degree of common identity to a unified area with a single currency (though for now the UAE and Oman stand apart from that particular project), along with its political ramifications.

Just how favourable are the pending circumstances of the region’s medium-term outlook?

On the one hand, there are plenty of voices ready to highlight the merits of the Gulf, with its scope yet for catch-up in economic development, and capacity to leapfrog many international standards by dint of its financial clout and determination to invest in education and innovation.

With much of the rest of the world frighteningly reliant still on artificial stimulus to show signs of recovery, this region’s balance of payments surpluses and therefore accumulation of reserves put it at a distinct advantage.

A memo on the global economy this month from international consultancy firm PriceWaterhouseCoopers featured the Gulf as “too big and dynamic to ignore”.

The report remarked that “since 2000 the GCC has grown at an average rate of 8.1 per cent per annum, faster than most emerging economies, including Russia and Brazil”, with its prospects “also bright, as the workforce is projected to grow by almost a third by 2025”. That was taken to be a spur to reform rather than the challenge to the economy that is often portrayed.

There is reasoning behind the assertions, though. PwC nominates three factors that it regards as distinguishing the region’s efforts and likelihood of outperformance ahead.

First, its pro-business environment (in five out of six component countries) compared to other feted emerging market nations, as measured by the World Bank’s Ease of Doing Business Index. Second, the strength of the surge in non-oil activities and their share of gross domestic product (GDP) across the board. Third, the “generally sound” financial sectors of the GCC economies, as indicated in the IMF’s description of the Saudi Arabia banking system as “well-capitalized, profitable and highly liquid”.

All very positive – and Dubai’s victory in the contest for Expo 2020 puts icing on that celebratory cake, in which businesses the world over might like a slice. The corresponding graphic shows what party-goers might perceive as bubbles of joy (see chart 1).

Speaking of the IMF, however, their detailed digest last month (its regular Mena regional report) of the Gulf’s status quo reads rather differently, not to say ominously. If it’s interpreted as cautionary rather than negative, the analysis still provides enough argument to make an observer suitably circumspect.

In summary, the Fund’s document foresaw growth being “defined by volatile oil production”, believing (at the time) that hydrocarbon output next year would rise by 1.75 per cent, a reflection of improved global demand, but inducing also a slight softening of prices.

Prior to the recent news on Iran, it expected that country’s exports to continue to drop – which makes its predictions therein actually potentially rosier than might be the case if overall oil supply will now be boosted, as Iran’s policy makers intend.

What is plainly apparent is how dominant oil remains, even if indirectly, as the GCC economy’s key driver, since “[oil-based] government and government-related services have been the fastest-growing segments of the non-oil economy”, while “steady consumer spending is supported by generous public employment and salaries”.

The IMF’s paper perceived the upside and downside risks to oil revenues as “broadly-balanced”. At the same time, it declared itself “uncertain” on the effects of the global monetary tightening that would accompany economic rebound, implying an approximately neutral outcome overall.

The research once again pointed to “fiscal vulnerability”, with oil prices needing to exceed $90 per barrel to balance budgets. Current account surpluses likewise are retreating.

As to structural trends, “the record in fostering self-propelled private sector activities through state-led capital spending has been at best mixed”. Total factor productivity has been declining (see chart 2), and public sector job creation is said to be diminishing private jobs rather than unemployment per se.

It’s a disappointing critique, for sure.

The two contrasting sources cited, both seemingly credible, certainly have differing prognoses about the economic calculus for this region.

At a time when doubts have been cast over oil prices by potential rapprochement between the West and Iran, clearly there’s a choice of scenarios as to what the Gulf is actually promising.