Higher interest rates in Saudi Arabia, the UAE, and other Gulf economies following the recent rate hike by the US Federal Reserve are unlikely to completely offset the impact of the fiscal stimulus these economies are moving forward with, Ziad Daoud, Chief Middle East Economist, Bloomberg Economics, told Argaam in an exclusive on Wednesday.
He said this trend is in contrast with 2016, when higher rates coincided with declining oil prices and large fiscal deficits. This led to tighter liquidity in the banking system and contributed to the decline in non-oil growth.
However, he said, with oil still below $100 a barrel, government spending remains constrained by fiscal limits.
The full interview is below:
Q: In its latest World Economic Report, the IMF revised up Saudi Arabia’s growth forecast to 2.4 percent next year from 2.2 percent in 2018 (up 0.3 percentage points from its July projections). What’s your assessment of Saudi Arabia’s growth outlook in the short and medium term?
A: Government spending remains the main driver of economic activity in Saudi Arabia. The 2018 budgets showed a switch from austerity to stimulus. This was supplemented by a further boost to public spending through the royal handouts and additional spending in 2019.
While non-oil growth will probably increase from the lows 2016-17, it’s unlikely to hit the highs recorded in 2010-14. With oil still below $100 a barrel, government spending remains constrained by fiscal limits.
Q: Rising interest rates and global trade tensions are in focus for investors worldwide, including in the Gulf countries. Do you believe these factors majorly impact investor sentiment in the region, or is it more of region-specific issues that are weighing on investor sentiment in the Gulf?
A: We believe the GCC is likely to be shaped by three forces: oil, higher interest and reforms. The GCC economies still tell an oil story. When oil prices fell in 2014, government spending declined with it, taking growth down too.
Conversely, with crude prices rising by nearly a quarter this year, non-oil growth is likely to pick up to 2.5-3.0 percent in 2018-19.
Higher rates are unlikely to completely offset the impact of the fiscal stimulus. This is in contrast with 2016, when higher rates coincided with declining oil prices and large fiscal deficits. This led to tighter liquidity in the banking system and contributed to the decline in non-oil growth.
Rising oil prices are a boon for growth in GCC countries, but they’re also blunting incentives to reform. The labor market is particularly problematic.
When the World Economic Forum surveyed executives from the GCC about hurdles to doing business, three out of the top five most problematic factors related to the labor market.
Some policies have been implemented to address this, like lifting the ban on women driving, the announcement of long-term residency and removing restrictions on foreign ownership of companies.
Other policies, such as imposing higher quotas to hire locals or charging levies on recruiting expatriates, will probably exacerbate the problems.
Q: Since the mid-1980s, the GCC economies have pegged their currencies to the US dollar, except Kuwait. However, sceptics say pegging should be done away with as it doesn’t match with Gulf economies’ domestic needs. What’s your opinion?
A: The peg to the U.S. Dollar provides economic benefits to GCC countries. Without the peg and with volatile oil prices, the currencies would have oscillated significantly. This has happened even in the more diversified oil-exporting countries like Russia and Canada.
Given that a significant component of consumer spending is on imports, inflation would have been volatile without the peg -- clearly not a desirable macroeconomic outcome.
The region also depends on attracting foreign labor for growth. Having volatile currencies, a logical outcome of depegging, would make it more difficult to attract talents into the GCC.
Some countries benefit from depreciating currencies which make their exports more attractive. This doesn't apply to the GCC -- most exports are hydrocarbon-based, which are priced in dollars.
Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com
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