Arab Today, arab today cautious optimism for year ahead
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Arab Today, arab today
Arab Today, arab today

Cautious optimism for year ahead

Arab Today, arab today

Arab Today, arab today Cautious optimism for year ahead

Relatively healthy non-oil sectors and the commitment
London - Arab Today

Although 2016 will begin with the usual degree of apprehension, there is a little more certainty about some of the key issues facing the world and the region. This provides some confidence that 2016 could actually be a year of progress despite headlines again being dominated by risks.

In particular, with the path of US interest rates this year looking more certain and “lift-off” now behind us, the question becomes how much the Federal Reserve will raise rates instead of whether it will.

The fact that the era of zero rates is behind it may well create confidence in the US economy, but it might also translate into better overseas activity, too, as uncertainty is reduced, especially with euro-zone crises also diminished.

Markets are now likely to find an anchor in accommodative monetary policy in other parts of the world and from recovering US-led global economic growth.

This year is still expected to be a challenging one in the GCC, with low oil prices, uncertain geopolitics and higher US rates weighing on the macroeconomic outlook.

A halving of oil revenue since 2014 is likely to lead to a more cautious approach to spending by governments, with some countries, such as Saudi Arabia, already announcing spending cuts for this year. Moreover, measures to boost non-oil revenues, such as a value added tax or corporate income tax, may also be announced next year, although implementation is unlikely before 2018.

With governments in the region needing to borrow more to fund expenditure, some businesses may find it more difficult, and more expensive, to obtain credit, particularly as the costs of bank funding rises. Higher US interest rates will also feed through to increased borrowing costs in the region. Against this background, it is unsurprising that businesses might be wary.

Regional outlook

Nevertheless, there are several reasons to remain cautiously optimistic about the GCC, and the UAE in particular. The resilience of the UAE’s and Saudi Arabia’s non-oil sectors last year bodes well for this year. Oil production is expected to remain elevated, despite the price outlook, underpinning activity in the manufacturing sector in particular. Fiscal reserves accumulated over the past decade will allow governments in the region to manage the pace of fiscal consolidation in a measured way. The UAE and Qatar have committed to ambitious infrastructure projects, which must be delivered by 2020 and 2022 – in time for the Expo and Fifa World Cup – respectively, which will continue to underpin growth and activity in the non-oil sectors.

Outside of the GCC, it is setting up to be another year of below-trend growth for most of the Middle East’s smaller oil importing economies. Continuing conflicts in Libya and Syria are likely to have negative spillovers for into neighbouring countries, which are all struggling to restore investor confidence and boost moribund tourism industries. While these economies can theoretically benefit in an environment of weaker global commodity prices, they are also likely to suffer to the extent that lower oil prices begin to curtail aid, investment and remittances from the Arabian Gulf.

Fortunately, as these economies tend to have limited reliance on short-term portfolio flows, they will be somewhat insulated from any market turmoil that might hit other emerging markets around the world caused by rising interest rates in the US, while financial support from institutions such as the IMF will help cover their external financing requirements. For the oil exporters, there is likely to be a sharp slowdown in growth through the year, including Iraq and Algeria, as governments slash public spending to rein in ballooning budget deficits.

Most attention, however, is likely to be focused on Iran, as a potential lifting of international sanctions in the first quarter paves the way for the country’s reintegration into the global economy.
Source: The National

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