IMF regional director talks Saudi reforms, says oil to remain low

The International Monetary Fund (IMF) has once again revised downwards its GDP growth outlook for the GCC to 1.8 percent this year from 3.3 percent in 2015. During his latest visit to Dubai, Masood Ahmed, director of the IMF’s Middle East and Central Asia department, spoke to Argaam about the main risks associated with this forecast, as well as fiscal and economic reforms planned for Saudi Arabia and other Gulf states.

Q: What are the biggest risk factors that could change IMF's current outlook for Saudi Arabia and other GCC countries in the next few years?

A: If oil prices were to fall further that would have an impact on their fiscal situation and as a result, they must then decide if they need to accelerate the adjustment. So that would have a downside risk on growth.

The other risk runs in the opposite direction. If fiscal consolidation is delayed, it may actually show up in the near term as an upward movement in growth, but it may simply be postponing the adjustment that needs to be made in the medium term making it more difficult to achieve in the long run.

Q: How will the slowdown in the region this year impact key sectors such as banking, construction, and real estate in Saudi Arabia?

A: In construction and real estate, one of the areas where governments have cut back is in capital projects, slowdown in construction activity in a number of countries including Saudi Arabia. Within banking, as the government continued to draw down their deposits, while also borrowing from the banking system, this has led to a tightening in liquidity conditions, which could have an impact on the availability of credit in the private sector. But also remember that banks in the GCC have started from a strong point of liquidity and capital structure.

Q: How would you assess the planned fiscal and economic reforms in Saudi Arabia?

A: I think what we have seen so far in terms of the level of ambition and scope of the programs on the plans being discussed seem entirely appropriate given the challenges currently being faced by the Saudi authorities. Key issues going forward are making sure these plans can be implemented and the institutional capacity is there to deliver on them. Plans should not just set out an end point in terms of objectives, but also a roadmap and milestones to guide them along the way.

Q: Does the IMF plan to assist Saudi Arabia in the near future with such plans?

A: We have been providing advice and policy support to many countries in the GCC including Saudi Arabia in recent years. One of the things we will be doing in the year ahead is to support those countries, in particular in the areas where their capacity needs to be strengthened because they are relatively new. Such as the area of implementing taxes, subsidy reforms, or looking at trade-offs with regards to spending decisions.

Q: What economic impact is Iran having on the Gulf, particularly Saudi, in terms of crude prices, market competition and trade?

A: What you are seeing already is that Iran is beginning to increase its production and exports. If they manage to export 600,000 barrels this year, it will certainly have a positive impact on its economy. Yet, it will be a source of downward pressure on the global oil market, which is already oversupplied. How much of that is already reflected in the price is hard to say, because people have been expecting this; but clearly it provides an initial reason why we shouldn’t expect big increase in oil prices in the near term.

The main impact will be through oil markets, but there’s also the potential of trade. Iran will be looking at half a trillion dollars of imports over the next five years. I think that will be a substantial source of trade for many countries.

Write to Joumana Saad at joumana.saad@argaamplus.com