By Ed Attwood
Governments and the private sector both face a difficult year, although 2016 may not be as bad as the headlines would suggest
For the Gulf, it’s not been an easy start to 2016. Conflagrations – both political and physical – have dominated the headlines. Tremors in the Chinese stock market are trickling through to local bourses already frail from the effects of the low oil price. Uncertainty is everywhere.
In Saudi Arabia, you don’t have to look far to read reports of the imminent collapse of the local economy. Yet for all the media furore about the vultures circling the kingdom, I am yet to be convinced that a country with next to no sovereign debt, $650bn in cash and the world’s largest oil reserves does not at the very least have the levers required to steer its way clear of this crisis.
Yes, it will be painful, and this year will see even more focus on the riyal’s peg to the dollar as traders continue to sell the currency short. My understanding is that the Saudis will do everything they can to maintain the peg, and they certainly have the firepower – at least in the medium term – to do so. The benefits of the peg are such that it’s possible that policymakers could revoke the current oil policy and turn off the taps, rather than lose the link to the dollar. While that remains unlikely, and would constitute a major loss of face, it does again show that Saudi Arabia still has options it can draw on.
For those who were prepared to look for them, the kingdom’s 2016 budget announcement showed some crumbs of comfort. The IMF had projected that Saudi Arabia would post a 20 percent budget deficit last year – instead this came in at 15 percent. The country’s largest ever deficit may not be something to celebrate, but it does at least show that reforms undertaken last year have already had an effect. Reduced spending and the gradual reduction of some subsidies (such as utilities and fuel) announced in this year’s budget should help to ease the deficit further in 2016.
None of this takes into account the many other problems facing the kingdom – unemployment, the skills gap, unrest in various parts of the region – but from an economic perspective, I believe the coming year does not look quite as bad as the headlines would suggest.
Elsewhere around the Gulf, the pattern is similar. Budgets are being re-evaluated, subsidies removed, and taxes considered. In Bahrain and Oman, where relatively limited hydrocarbon reserves have resulted in correspondingly greater pressure on budgets, the need is most urgent. In the former, expats and large companies will see their utility fees double from March, and a subsidy on meat has already been removed. At some point this week, Oman is expected to announce higher prices for fuel, aiming to withdraw the subsidy entirely over a five-year period.
If last year was the year of subsidies, 2016 will be the year in which the region focuses on taxes. The implementation of a GCC-wide value-added tax is unlikely to take place before 2018, but more details as to what will actually be taxed should be available this year. Kuwait is considering a new flat corporation tax of 10 percent in the near future. There is also likely to be further speculation about a tax on remittances for expatriates living in the region. In some countries, such as the UAE, this would appear to do more harm than good, but it’s possible that other Gulf states may take further steps towards this end.
And what of the UAE? It remains the most diversified economy in the region, and is actually projecting a budget surplus, albeit a small one, in 2016. The 10-year anniversary of Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum’s accession last week has afforded an opportunity to look back on a decade that has seen real change in the UAE economy, results that are reflected in the country’s strong economic standing today. But no-one in government will be resting on their laurels. The UAE’s greater exposure to international markets brings it both challenges and opportunities. The low oil price means that consumers in other parts of the Gulf – a large market for the UAE – may have less to contribute to the country’s three pillars of trade, tourism and retail.
Noone is predicting an easy year ahead. But if governments and companies prepare for the worst, they will be in good shape to profit from the better times that hopefully lie ahead.