Weaker oil prices will stunt economic growth in the GCC region to its slowest pace since the global financial crisis, according to a new report.
However, the Institute of Chartered Accountants in England and Wales (ICAEW) also said that serious fiscal reform should see the region avoid recession.
According to the its Economic Insight: Middle East Q1 2016, 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, Syria and Yemen.
The report, produced by Oxford Economics and commissioned by ICAEW, said oil prices are set to remain lower until at least 2017, due to the continuation of current Organisation of Petrol Exporting Countries (OPEC) policy and increasing concerns over growth in China and other emerging markets.
It forecast that Brent crude will average $32 per barrel this year and remain below $70 for the rest of this decade.
"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 percent - its lowest since the financial crisis," said Tom Rogers, ICAEW economic adviser and economist at Oxford Economics.
He said that 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 percent 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, the report said, adding that with government spending now set to be cut back, these growth drivers will fade.
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 time in 14 years, while Oman has announced a 16 percent 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 8 percent this year and rise more slowly in future years.
The report said that another threat to stability and growth in the GCC has emerged from pressure on long-standing currency pegs against the US dollar, with markets expecting an unprecedented 10 percent depreciation of the Saudi riyal over the next year.
The ICAEW said 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.
Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said: "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."
The report also forecast that GDP growth in Saudi Arabia over 2016 is expected to reach 1.2 percent while continued infrastructure investment for World Expo 2020 should lead to growth of 2.7 percent in the UAE in 2016.
The Bahrain economy is expected to expand by 1.9 percent this year while Qatar's economy is expected to grow by 4.3 percent, driven by substantial infrastructure investment. Expected GDP growth of 2.3 percent is forecast in Kuwait in 2016.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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