Bold fiscal reform should see the GCC avoid recession although weaker oil prices and eight per cent government spending cut pose a serious challenge to the growth outlook of the region a leading group of financial and auditing professionals said.

Depressed oil prices will compound economic concerns in a region already facing issues over fiscal sustainability structural economic weaknesses and deepening military conflict in Iraq Libya and Syria ICAEW said in its reportEconomic Insight: Middle East Q12016

Oil prices are set to remain lower until at least 2017 due to the continuation of current Organisation of Petrol Exporting Countries policy and increasing concerns over growth in China and other emerging markets. "Opec's policy of keeping oil production high in order to maintain market share and squeeze higher-cost producers out of the market coupled by existing high stock levels and modest demand growth will see Brent crude average $32 per barrel this year and remain below $70 for the rest of this decade. Economic data from China suggests increasing problems with overcapacity further undermining expectations for resource demand growth" said the report.

"Sustained low oil prices will erode existing buffers like subsidies in oil-rich Gulf countries more rapidly threaten to undermine long-standing currency pegs and slow economic growth further as trade investment and capital flows fall back. Although recession should be avoided growth across the GCC will be just 2.1 per cent - it is lowest since the financial crisis" said Tom RogersICAEWEconomic Adviser and Economist at Oxford Economics. "With the exception of the UAE true economic diversification away from a heavy dependence on oil exports is yet to be achieved. Although non-oil growth averaged an impressive 7.2 per cent per year from 2003-2014 much of this growth was fuelled by oil-financed government spending on infrastructure key development projects public sector salaries benefits and subsidies. With government spending now set to be cut back these growth drivers will fade" said Rogers. TheUAEwas one of the more fiscally aggressive states towards the end of 2015 removing fuel subsidies and increasing electricity tariffs.

"Its reputation as a trade hub makes it one of the most diversified economies in the Gulf and continued infrastructure investment for World Expo 2020 should lead to growth of 2.7 per cent in 2016" saidICAEW report.

The report pointed out that in recent months GCC governments have given serious consideration to fiscal consolidation. The Saudi Government has announced a year-on-year decline in planned spending for the first timein 14 years while Oman has announced a 16 per cent cut in spending for 2016 and a rise in corporation tax.

"All GCC governments have also committed to establishing a region-wide Value Added Tax (VAT) over the medium term to lift non-oil revenues and most have already started on cutting energy subsidies. Overall government spending in the GCC region is expected to decline by eight per cent this year and rise more slowly in future years" said the report.

Pressure on long-standing currency pegs against the US dollar is posing another threat to stability and growth in the GCC. "For example markets expect an unprecedented 10 per cent depreciation of the Saudi riyal over the next year. Countries like Oman and Bahrain are particularly vulnerable due to low financial reserves. While de-pegging would generate greater government revenues by lifting the dollar oil revenues in local currency terms it would also impose heavy costs including rising inflation a loss of policy credibility and additional volatility in oil revenues" ICAEW report observed.

Sanctions relief in Iran also has implications for the region and the oil market. Following "Implementation Day" in January evidence shows that Tehran is in a strong position to increase its oil output rapidly in the first year. The biggest regional impact of the deal is to depress oil prices and keep them lower for longer. This will add to the need for painful fiscal adjustment programmes among the GCC countries.

"The near-term objective for GCC governments will be to maintain financial stability and avoid a deeper crisis. Weak growth will make the case for economic reforms in areas such as privatisation and competition policy housing the labour market education and the public sector bureaucracy even more complex on a country-by-country basis. A period of skilful policymaking will be required to balance the need for both growth and stability" saidMichael Armstrong FCA andICAEWRegional Director for the Middle East Africa and South Asia.

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