Doha / QATAR (by Dr. Theodore): The easing of stimulus measures in the US and a consequent stronger dollar are not a major threat to the Gulf region, which is expected to be a growth leader until 2020, according to Bank of America Merrill Lynch (BofAML).
However, there is a need for the Gulf Cooperation Council (GCC) region to enhance productivity growth, focus on higher value-added sectors such as infrastructure and undertake structural reforms, BofAML said in a report.
“We expect the spill-over from the eventual gradual Fed tapering of QE (quantitative easing) stimulus to be less pronounced for the GCC region as transmission mechanisms are less developed,” it said. Regional fiscal breakeven oil prices, though sticky at $80 a barrel, still offer comfort against current oil prices, it said, adding their likely path leaves some cushion to projected oil price levels, albeit a gradually shrinking one.
“We thus expect GCC fiscal policies to remain accommodative, though we see gradual fiscal consolidation in Dubai and Abu Dhabi, which is key to increasing fiscal space at the sovereign level,” the report said.
BofAML found that the GCC has undergone an economic transformation over the past few decades with oil proceeds being used to modernise infrastructure and spur development.
Finding that the GCC economies have essentially gone through a first phase of transformation through a highly labour and capital intensive model, it said the next step should be to increase productivity growth to create a self-sustaining non-oil economy and lessen volatility along the commodity cycle.
While the oil windfall means there is “no pressing need” to change this (labour and capital intensive) model over the next 10-15 years, BofAML believes that the region should begin to decouple from oil by increasing productivity growth and focusing on higher value-added sectors as the infrastructure build-up moves to completion, it said.
“We see average GCC growth of 4.3%, but faster implementation of structural reforms could deepen diversification and increase potential output to 5.5%,” it said. This would essentially entail bringing total productivity growth to 0.5%-0.7%, a level more commensurate with the Gulf region’s income per capita, allowing for a gradual concomitant decrease in investment levels needed to sustain growth, the report said.
This would, however, “obscure regional disparities”, particularly between less endowed (Bahrain and Oman) and more endowed countries (Saudi Arabia, Qatar and the UAE) – with the latter having a better chance to outperform over the long term, it said.
Among the areas of reform BofAML would expect the GCC to contemplate in the coming decades are increasing non-oil revenues; lowering implicit energy subsidies (striking a balance to maintain the role of cheap energy in industrial development policy) and speeding up labour reforms.
However, the GCC’s favourable demographics will support growth in coming decades, but the youth bulge, combined with potentially weaker political institutions, could provide an important challenge for policy-makers, given the structural labour market rigidities.
Unlike ageing economies where a stagnant labour force implies a greater need for productivity rises to sustain economic growth, the GCC is likely to exhibit strong labour force growth over the period to 2050, averaging 0.83%, the report said.
Highlighting that lessons from the previous era of petrodollar recycling were not lost on the GCC, BofAML said structural reforms to address the build-up of past imbalances were given a boost as this decade’s commodity boom considerably strengthened the macro outlook and equipped policymakers with new tools to address old challenges.
Sources: The Peninsula, Gulf Times, Caye Global News