(MENAFN- Khaleej Times) The impact of persisting oil price weakness could put considerable pressure on GCC economies and affect real economic growth unless they step up diversification efforts, a leading organisation of chartered accountants warned.
The Institute of Chartered Accountants in England and Wales, or ICAEW, in its latest Economic Insight report observed that falling oil prices - driven by weaker demand, increased supply and a more powerful US dollar - would pose significant challenges to GCC markets.
"With substantial dependency on commodity exports, GCC economies are expected to face major implications from a decline in oil prices," it said.
According to the International Monetary Fund, the projected 2015 breakeven prices, at which oil must sell in order to balance the budget, put Bahrain and Oman under the greatest pressure at $116 and $108 per barrel, respectively. Saudi Arabia, Qatar, the UAE and Kuwait are better placed, thanks to large and mature domestic banking systems, access to international markets and large sovereign wealth funds generating ample investment income.
IMF managing director Christine Lagarde, while cautioning that falling oil prices would affect financial and external balances in oil-dependent Gulf economies, argued that the future success of GCC economies would be closely tied to on-going efforts to boost the employment of nationals in the private sector and to increase economic diversification. Many policies are being implemented to achieve these objectives and important progress is being made, she noted.
On average, energy revenues for the six GCC states constitute 46 per cent of their gross domestic product and three quarters of their exports. Total GDP of the GCC states hit $1.64 trillion last year. Therefore, a prolonged decline in oil prices will likely slow the economies of the Gulf states and impact their massive infrastructure projects, Standard & Poor's Ratings Services said.
The ICAEW report said the UAE's annual GDP growth is likely to be 4.6 per cent in 2014, slowing marginally to 4.4 per cent in 2015. The Emirates' progress in diversifying away from oil means it should be relatively protected from the worst impacts of falling oil prices. However, recent downturns in equity markets - with Dubai's property index down over 15 per cent since September - underline risks to this outlook.
"A cut in production levels could be considered in response to falling prices, as done in the past by Saudi Arabia. However, the spending plans suggested by the breakeven prices imply that most GCC hydrocarbon exporters do not have the flexibility to endure sustained reductions in either output or revenues," said the report.
Michael Armstrong, the ICAEW's regional director for the Middle East, Africa and South Asia, said weakening of oil prices show how vital it is to grow economies away from total dependence on commodities. A sustained focus on further diversifying economies will help to ensure sustainable economic growth and stability, said Armstrong.
Latest projections for 2016 government net borrowing in the GCC countries show Kuwait, the UAE and Qatar with the highest surpluses; 24.1 per cent, 9.8 per cent and 6.6 per cent of their respective annual GDP. Bahrain is the only GCC country with a current fiscal deficit of 4.8 per cent, although Oman's government net borrowing is forecast to reach 1.8 per cent of GDP in 2016.
"Large shares of government budgets in the GCC are swallowed up by public spending, such as generous public sector wages, subsidies for food and fuel and direct cash to households. Reforming these subsidies could also help to reduce the strain on public finances as they face lower oil revenues," said Douglas McWilliams, ICAEW economic adviser and executive chairman of the Centre for Economics and Business Research.
Although government spending plans are substantial, they are not necessarily unsustainable. Ambitious plans for investment and infrastructure building across the region should stimulate growth in the short term, and could also raise long-term productivity. Also there is good news in increased demand from emerging markets, particularly in the Asean region.
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