A World Bank Group Publication for the Gulf Cooperation Council Economies Gulf Economic Monitor ISSUE 1/JUNE 2017 Sustaining fiscal reforms in the long-term Gulf Economic Monitor Sustaining fiscal reforms in the long-term ACRONYMS ADIA Abu Dhabi Investment Authority CDS Credit Default Swap IEA International Energy Agency GCC Gulf Cooperation Council GRE Government Related Entities IMF International Monetary Fund IPO Initial public offering KIA Kuwait Investment Authority KSA Kingdom of Saudi Arabia MENA Middle East and North Africa NPL Non Performing Loans OMR Omani Riyals OPEC Organization of Petroleum Exporting Countries PMI Purchasing Manager Index PPP Public Private Partnerships SAMA Saudi Arabian Monetary Authority SWF Sovereign Wealth Fund TFP Total Factor Productivity UAE United Arab Emirates ACKNOWLEDGEMENTS This report is the product of the Middle East and North Africa (MENA) unit in the Macroeconomics and Fiscal Management (MFM) Global Practice at the World Bank Group. It was led by Harun Onder and Tehmina Khan (both Senior Economists, MFM). Several authors contributed substantively to the report. The principal author is Tehmina Khan with contributions by Harun Onder, Sahar Sajjad Hussain (Economist, MFM), Cindy Audiger (Consultant) and Raj Nallari (Consultant). The principal authors of the Special Focus are Tehmina Khan, Sahar Sajjad Hussain and Auguste Kouame (Director, IEG). Thi Thanh Thanh Bui (Research Analyst, MFM) provided assistance with statistical data. The report was prepared under the direction of Eric le Borgne (Practice Manager MFM MENA), Nadir Mohammed (Country Director, GCC) and Praveen Kumar (Lead Economist, MFM). Publication design by Marie-Anne Chambonnier. Cover photography: Manu M Nair at Shutterstock.com. Ashraf Saad Allah Al-Saeed, Alya S.I.S. Askari and Andrew Kircher managed the media relations and dissemination. Several reviewers offered extensive advice and comments. These included: Nadir Mohammed, Firas Raad (Country Manager, Ku- wait), Eric Le Borgne, Praveen Kumar, Paul Moreno-Lopez (Program Leader, GCC), Maria Vagliasindi (Program Leader, GCC), Abdallah al Dardari (Senior Advisor, MENA) and Omer Karasapan (Senior Operations Officer). 2 Gulf Economic Monitor • Issue 1 TABLE OF CONTENTS 5 From the Director 6 Executive Summary 8 The Pulse of the Region 8 The global backdrop 10 Regional developments Overview Growth, economic activity and sentiment Prices Public finances and reform agendas Banking and financial sector External balances and buffers 17 Near term prospects 19 Risks and long-term challenges 21 Conclusion 22 Spotlight: Interview with Hafez Ghanem 24 In Focus: Fiscal Consolidation and Reforms in the GCC 24 GCC oil producers prior to the oil shock 26 Fiscal adjustment and reform priorities 29 Conclusion 30 Key Economic Indicators 30 Country summary tables 36 Commodity prices tables 37 Oil production table 38 References Gulf Economic Monitor • Issue 1 3 From the Country Director for the GCC Countries Middle East and North Africa Region, World Bank Group NADIR MOHAMMED FOREWORD The ground beneath Gulf Cooperation Council (GCC) economies has shifted dramatically in recent years with the fall in global energy prices and competition from shale producers in North America. In addition, global climate change efforts have created uncertainty over the longer term prospects of all energy ex- porters, including the GCC. These developments have forced policy makers to look afresh at longer term structural reforms aimed at putting public finances on a sustainable footing, and for laying the founda- tions for diversified economies. To highlight the key challenges facing the region and to stimulate debate among policy makers and oth- er readers on how best to confront the challenges, the World Bank Group has decided to produce the Gulf Economic Monitor, a series of half-yearly reports on the GCC. This first edition, which covers the period until June 1, 2017, takes a close look at recent economic developments and short -term prospects for Gulf countries (“The Pulse of the Region”). It also includes forecasts for the individual Gulf nations and an analytical (“In Focus”) section that explores structural reform priorities in the region. The Monitor describes a region where green shoots of recovery are emerging, helped by a partial recov- ery in global energy prices over the past year. The salutary effect on public finances, along with past fiscal consolidation efforts are providing the space for governments to slow fiscal austerity and also buoying investor sentiment. Accordingly, aggregate growth in GCC countries is expected to rise from 1.3 percent in 2017—the weakest pace since 2009—to 2.6 percent in 2019 supported by a gradual strength- ening of activity in the non-oil sector and as oil prices stabilize at close to current levels. Fiscal and cur- rent account deficits are also on the mend, but are unlikely to return to the double -digit surpluses of the commodity boom years. Still, there remain significant downside risks on the horizon. These include renewed weakness or volatili- ty in global oil prices and/or spillovers to commodity and financial markets from geo -political tensions. Any abrupt tightening in global financial liquidity or turbulence in financial markets could affect funding costs to the GCC region, where financing needs remain large. Perhaps the biggest challenge on the domestic front will be to implement and sustain structural re- forms. As fiscal pressures have lessened, policy attention is shifting away from fiscal retrenchment to- wards deeper reforms. As discussed in the “In Focus” section, key fiscal and public sector reforms in- clude improving the management of hydrocarbon wealth to insulate the budget from volatility in energy prices and to enhance fiscal sustainability, building more effective and inclusive public sector institu- tions, reconfiguring the way that oil wealth is shared with citizens to strengthen incentives for diversifi- cation, and building safety nets to alleviate the impact of reforms on citizens. Credible reform agendas will also go a long way towards boosting investor and market confidence, and potentially setting in mo- tion a virtuous cycle of stronger investment, including FDI, and output growth in the near term. Gulf Economic Monitor • Issue 1 5 Executive Summary The partial recovery in global oil prices over the past year, abundant global liquidity. Having suffered a major terms of supported by OPEC’s decision to curb oil supply, is helping to trade shock in 2014, GCC countries are also beginning to see support public sector finances in GCC countries. It is also help- an improvement in external balances in line with the recovery ing to buoy investor sentiment in the region. in oil prices over the past year. Accordingly, indications are that growth in the non -oil sector Spare capacity and lower food inflation have weighed on infla- has bottomed out, even though headline growth is anticipated tion in the region, despite energy subsidy reforms that lifted en- to remain weighed down by oil production cuts. Aggregate ergy prices. Although GCC central banks have begun to raise GCC growth in 2017 is projected at just 1.3 percent—the slow- interest rates in tandem with the US Federal Reserve Bank, mon- est since 2009 and down from 1.9 percent in 2016. However etary policy stance remains accommodative. Banking sector with the pace of fiscal austerity slowing and with major reform liquidity has improved in recent months in line with renewed plans being announced in the region, sentiment and activity in growth in government deposits. Bank asset books have some the non-oil sector are reviving. exposure to softening real estate sectors in GCC countries; how- ever banks in the region generally remain well-capitalized. On the fiscal front, deficits are beginning to narrow helped by fiscal consolidation efforts over the past two years. Fiscal On aggregate, the region’s growth is anticipated to gradually shortfalls, however, remain sizable in the smaller GCC coun- strengthen to (a still modest) 2.6 percent in 2019, as fiscal aus- tries. Across GCC countries, energy subsidy reforms are being terity slows and consumer and investor sentiment and spending undertaken. Countries are also attempting to increase non -oil lift. The contribution from net exports to growth is expected to revenues: a GCC-wide VAT is expected to be enacted in 2018. remain small over the forecast period, as investment spending Major reforms are on the cards—the Kingdom of Saudi Arabia supports import demand amidst weak exports. Regional fiscal (KSA) is leading the region with the announcement of ten stra- and current account balances are expected to improve, but are tegic reform programs encompassing comprehensive fiscal and unlikely to return to pre-2014 double-digit levels anytime soon. economy-wide structural reforms. Implementation challenges GCC currency pegs to the US Dollar means that monetary pol- remain, however. icy will also gradually tighten in line with the US over the me- dium-term. Recent GCC sovereign debt issuance is among the largest on record for emerging market economies. Demand for GCC debt The outlook is subject to a number of downside risks. The cur- has been supported by global investors’ search for yield amidst rent support to oil prices by OPEC production cuts may be 6 Gulf Economic Monitor • Issue 1 undercut by nimble non-conventional producers in North America. The tightening of US monetary policy and rising global geo-political risks could lead to bouts of turbulence in global financial markets and volatility in capital flows. GCC sovereign wealth funds have investments abroad, governments have large deficits to finance, and banks have direct and indi- rect exposures to real estate. Any sharp drop in asset values (for instance in a period of global financial volatility or tight- ening of global liquidity) will affect public and private sector balance sheets and costs of funding. Over the medium - to long- term, global climate mitigation efforts make for an increasingly uncertain outlook. On the domestic front, implementing broad based reforms is the key challenge. As fiscal pressures have lessened, policy attention will need to shift away from fiscal retrenchment to- wards deeper structural reforms. The “In Focus” section dis- cusses the need for fiscal and public sector reforms to be at the core of these efforts, to help secure long -term fiscal sustaina- bility and incentivize more productive, efficiency seeking be- havior by firms and citizens that is needed to support long -term economic diversification objectives. Strengthening public in- vestment management systems would help enhance the quality of investment and infrastructure spending in GCC countries, and in turn stimulate the long-term supply potential of econo- mies. Finally, by boosting investor and market confidence, credible reforms agendas can potentially set in motion a virtu- ous cycle of stronger investments, including FDI, and output growth in the near term. Gulf Economic Monitor • Issue 1 7 The Pulse of the Region The global backdrop to expectations that 2017 will likely mark the first year of a synchronized recovery in emerging and developed econ- omies. The improvement is most pronounced in China, A synchronized recovery has taken root in ad- where growth and consumer spending surprised on the vanced and developing economies upside in the first quarter and equity markets rallied. Commodity exporters, meanwhile, are benefiting from the The global economy is finally building momentum follow- partial reflation in global commodity prices over the past ing eight long years of a tepid recovery after the global year (Figure 3) and major commodity producers such as financial crisis in 2009. Incoming data in the first half of Russia, Brazil and Argentina are finally emerging from 2017 show global manufacturing accelerating and business painful recessions. confidence rising steadily. This, in turn, has been accom- panied by an upturn in business investment and global Financial conditions for emerging market economies have re- trade, both of which had been weak in recent years mained generally benign as major central banks’ accommoda- (Figures 1 and 2). tive stance and the search for yield by investors have supported capital flows to emerging economies. This has sustained the The strengthening in global activity and sentiment has been rally in global and emerging asset markets since mid-2016 and broadly based. In the US, activity and sentiment data suggest a tightening in 10-year bond spreads. that the economy remains on firm footing. In Europe and Ja- pan, there are signs that a cyclical recovery is underway, re- The supply overhang in energy markets has flected in both business and consumer sentiment. The US Fed- largely dissipated eral Reserve Bank has signaled that alongside raising interest rates it will also start shrinking its balance sheet over the com- In global oil markets, as global activity has steadily recov- ing year. Both the European Central Bank and the Bank of ered, so too has energy demand. On the supply side, produc- Japan remain reluctant to withdraw monetary support, but they tion cuts agreed by major OPEC and some non -OPEC pro- have begun to reduce or reposition themselves to reduce their ducers in December 2016—these have been extended until pace of asset purchases. the first quarter of 2018— have contributed to tightening in oil markets. Per International Energy Agency (IEA) esti- In major developing and emerging market economies, two mates, global oil markets have been close to balance since key shocks that had weighed on growth, namely tighter mid-2016; indeed, since the start of 2017 global oil demand financial conditions and the sharp fall in global energy has slightly exceeded supply. Oil prices, which had fallen to a prices due to oversupply, have begun to fade. This has led 13-year low of below $30/bbl in early 2016, have recovered 8 Gulf Economic Monitor • Issue 1 FIGURE 1 FIGURE 2 Composite business and service purchasing manager Global and advanced economy industrial production indices (PMIs) for output, +50 indicates expansion (IP) and exports, % 3m/3m saar* Sources: World Bank Group, Markit Economics. Sources and note: World Bank Group, Haver. *Seasonally adjusted annualized rate. 58 15 56 10 54 5 0 52 -5 50 -10 48 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Feb-14 Feb-15 Feb-16 Feb-17 Global IP Advanced economy IP Advanced economies Emerging market economies Global exports Advanced economy exports FIGURE 3 FIGURE 4 Major commodity price indices Vix index and Global Economic Policy Uncertainty index Sources and note: World Bank Group, CBOE, Haver. The Global Economic Policy Uncertain- 2005=100 ty (EPU) index is a GDP weighted index of national EPU indices for 16 major OECD and Emerging Market Economies. The VIX index is a measure of market expectations of near Source: World Bank Group. term volatility embedded in S&P 500 index option prices. 350 350 90 300 300 80 70 250 250 60 200 200 50 150 40 150 100 30 100 50 20 50 10 0 2005 2007 2009 2011 2013 2015 2017 0 0 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Coal Crude oil, average spot Copper Iron ore Global Economic Policy Uncertainty index Vix Index to close to $50/bbl and are anticipated by the World Bank A positive outlook for the global economy Group to average $55/bbl during 2017, an increase of 26 per- cent over 2016 levels. This assumes an extension of the Overall, the outlook is for further improvement in the global OPEC/non-OPEC agreement which has now been confirmed, economy, led by sustained growth in the US and cyclical re- and an overall global scenario of rising oil demand and fall- covery in the Euro Area and Japan. Emerging market econo- ing stocks. In the near -term, the recent recovery in oil prices mies should benefit from rising demand in advanced econo- will also offer encouragement to nimble shale producers to mies and from the improvement in terms of trade in commodi- enter the market, which will likely limit upside potential to ty exporting countries. Both the World Bank Group and the oil prices. IMF anticipate global GDP growth close to 3 percent in 2017. Upside risks stem from financial deregulation, tax reform and Global political uncertainty has increased infrastructure spending related stimulus in the US, and a stronger than expected recovery in the Euro Area. However, political uncertainty is also on the rise at the global level. Despite uncertainty levels appearing to be at a decade- Over the past few years GCC countries, along with other high, market expectations of near-term volatility in financial emerging markets, have benefited from relatively easy global markets are close to historical lows (Figure 4) possibly due to financial conditions associated with the asset purchases and still high levels of global financial liquidity. balance sheet expansion of the central banks of the US, Euro Gulf Economic Monitor • Issue 1 9 2016e 2017f 2018f 2019f World Bank World 2.4 2.7 2.9 2.9 global GDP projections Advanced economies 1.7 1.9 1.8 1.7 Emerging market and developing economies 3.5 4.1 4.5 4.7 Memo item: IMF global GDP projections 2.4 2.9 3.0 3.0 Sources: World Bank Group, IMF (2017). Notes: GDP projections are on a market exchange rate weighted basis. World Bank projections are available in the Global Economic Prospects report published on June 6, 2017 (World Bank, 2017). Area and Japan. Looking ahead, as these central banks start to Regional developments scale back their balance sheets and normalize monetary policy, global liquidity—and associated funding costs for emerging OVERVIEW market economies, including the GCC—should gradually tighten. Higher US interest rates will also translate into a tight- Improving external conditions for GCC countries since the start ening of monetary policy in GCC countries whose exchange of the year are in large measure due to a major shift in the poli- rates are pegged to the US Dollar. cy stance of OPEC. Following two years of unrestrained output to gain market share, OPEC and major non-OPEC producers The counterpart of tightening global liquidity is strengthening agreed to curtail supply in December 2016, the first production growth and import demand in advanced economies, which cuts since 2008, and the first joint OPEC/non-OPEC curtail- will serve as an important tailwind for the rest of the world. ment since 2001. Since then, the GCC members of OPEC This is likely to benefit the smaller, more diversified GCC (Kingdom of Saudi Arabia, Kuwait, Qatar and the United Arab economies for whom the US and Euro Area are important Emirates) have cut production by close to 0.7 million bbl/day trading partners. In addition, strengthening global activity will during the first quarter of 2017 (relative to Q4 2016 levels), the also support global energy demand. With oil supply likely to bulk by Saudi Arabia, which is the largest producer. Collective- remain constrained by the decision by OPEC and some non - ly the aim is to reduce output by almost 1.8 mn bbl/day, and OPEC members to sustain oil production cuts of 1.8 mn bbl/ thus far, OPEC members have reduced output slightly more day until the end of Q1 2018, energy prices are also likely to than promised, while non-OPEC producers have only partially remain supported. complied with agreed cuts (Figure 5 and 6). This outlook is, however, predicated on continued benign con- On the domestic front higher oil prices have supported a recov- ditions in global financial markets, and the absence of shocks ery in oil receipts, easing pressures for fiscal austerity, and also to global confidence from geo-political events. Medium- to buoyed business confidence as reflected in the rally in domes- long-term challenges remain, notably the ability of countries tic equity markets since December 2016. Still, there remains (both advanced and developing) to sustain structural economic considerable heterogeneity across GCC countries in terms of reforms needed to lift productivity growth over the long -term macro-economic trends and prospects, vulnerabilities and (World Bank, 2017; IMF, 2017). Rising trade protectionism risks, as discussed below. and high debt levels in some major emerging market econo- mies also pose downside risks to global growth. GROWTH, ECONOMIC ACTIVITY AND SENTIMENT In addition, fundamental shifts are occurring in global energy A weak 2016... markets. In particular the ability of non -conventional oil pro- ducers in North America to enter and exit the market and With the GCC business cycle closely tied to commodity prices, government policy actions related to climate change efforts 2016 marked the weakest pace of growth in the Gulf region in limit potential upside risks to energy prices over the medium several years (Figure 7). The slowdown also reflected the indirect and long-term. This suggests the need for continued adjust- impacts of the fall in global energy prices, in particular fiscal re- ment for commodity producers to structurally lower com- trenchment and its impact on non-oil activity, and lower liquidity modity prices. in the banking sector as government deposits were drawn down. 10 Gulf Economic Monitor • Issue 1 FIGURE 5 FIGURE 6 Oil production, GCC and OPEC countries Compliance with oil production targets Sources: World Bank Group, OPEC oil market report, April 2017. Sources: World Bank Group, Bloomberg. Million bbl/day 33.14 32.01 1000 bbl/day 35 1400 30 1164 1168 1200 25 1000 20 800 15 3.08 2.93 558 600 10 10.54 9.92 5 400 289 0 2.87 2.71 200 Q4 2016 Q1 2017 Q4 2016 Q1 2017 0 OPEC GCC Total OPEC OPEC Non-OPEC Kuwait KSA Qatar UAE Targeted Actual production in Q1 2017 (average) FIGURE 7 FIGURE 8 Aggregate GCC GDP growth and change in oil prices GDP growth: GCC countries Sources: World Bank Group, Haver. Sources: World Bank Group, Haver. Percent Percent Percent 10 60 10 9 8 40 8 7 6 20 6 4 0 5 4 2 -20 3 2 0 -40 1 0 -2 -60 2014 2012 2014 2012 2014 2016 2012 2014 2016 2012 2016 2012 2014 2016 2012 2014 2016 2016 2004 2006 2008 2010 2012 2014 2016 Aggregate GCC GDP growth Change in oil prices (rhs) Bahrain Kuwait Oman Qatar KSA UAE A particularly sharp slowdown occurred in the Kingdom of in 2016. Non-hydrocarbon GDP growth is estimated to have Saudi Arabia (KSA) where growth fell to 1.4 percent, from 4.1 dropped to 2 percent in 2016 from 7 percent in 2015 as public percent in 2015 and the slowest among GCC peers (Figure 8). spending declined with knock-on effects on investment and Despite record oil production during the year (which climbed consumption. In the UAE, austerity measures weakened busi- to 10.7 million bbl/day), the deceleration mainly reflected de- ness and consumer confidence and slowed growth in credit to pressed activity in the non-oil sector that is estimated to have the private sector in 2016. Hydrocarbon GDP growth is esti- grown only 0.2 percent due to the impact of fiscal austerity, mated to have slowed down to 3 percent in 2016 from an esti- tighter banking liquidity and the effects of a slowdown in the mated 4.6 percent in 2015. issuance in new project contracts that led to a contraction in the construction sector. Saudi unemployment rose to a 4-year high In Qatar, growth eased to 2.2 percent, the slowest in several of just over 12 percent in Q3 2016, heavily weighing on con- years, reflecting stagnant growth in the hydro -carbon sector in sumer spending. recent years largely due to a self-imposed moratorium on addi- tional output from the giant North Field and weaker non -oil Growth also weakened in Oman, the UAE and Qatar (Figure 8), sector growth. Strong population growth (mainly migrant reflecting both slower growth in the hydrocarbon and non -oil inflows), a key driver of non-hydrocarbon sector activity in sectors as fiscal austerity impacted domestic demand. Oman’s recent years, appears to have plateaued. The government economy slowed sharply from 5.7 percent in 2015 to 2.2 percent also began to rationalize public spending in 2016, paring back Gulf Economic Monitor • Issue 1 11 FIGURE 9 non-essential public investment projects although those related Business and consumer confidence to the FIFA 2022 World Cup continue to support growth. +50 indicates expansion for PMIs While growth accelerated in Kuwait and Bahrain, overall rates Sources and note: World Bank Group, Markit Economics. Composite PMI output indices. remained modest. In Kuwait, despite uncertainty related to elections last November, growth in 2016 is estimated to have 62 120 accelerated to 3 percent due to higher oil production and fiscal stimulus from the implementation of major infrastructure pro- 60 100 jects related to the Development Plan. In Bahrain, growth sur- prised on the upside, supported by strong public investment 58 80 that has buoyed construction sector activity and offset weaken- 56 60 ing private consumption and investor confidence. However the fiscal support to growth has come at the cost of deteriorating 54 40 fiscal balances and buffers as discussed later. 52 20 … followed by a stronger start for non-oil pri- Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 vate sector activity in 2017 KSA PMI UAE PMI Oman economic conditions (rhs) Recent high frequency data show that business confidence has improved and non-oil activity has somewhat strengthened FIGURE 10 in line with the recovery in oil prices. Purchasing Manag- GCC equity market indices ers’ (PMI) indices – a key indicator of the health of the busi- Jan 2015=100 ness sector – have been signaling faster output growth in the UAE and KSA since Q4 2016 (Figure 9). In KSA, sentiment Sources: World Bank Group, Haver. has also been buoyed by indications that the fiscal impulse to 120 the economy will be broadly neutral during 2017; one reason for reviving confidence among PMI respondents is the expec- 110 tation of a resumption of government construction projects. In the UAE, PMI data indicated a sharp improvement in busi- 100 ness conditions across Dubai ’s private sector in Q1, which 90 was sustained into Q2. Nevertheless, data also indicated soft job creation and limited pricing power for firms, suggesting 80 that there remains slack in the economy. Improving economic sentiment is also reflected in the rebound in local stock mar- 70 kets since Q4 last year (Figure 10) and tightening CDS 60 spreads (Figure 11). Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 MSCI UAE Tadawul- KSA Qatar SE MSCI Kuwait PRICES FIGURE 11 Deceleration of inflation across GCC countries Sovereign CDS spreads Weak growth amidst spare capacity has weighted on inflation basis points across the Gulf economies, despite energy subsidy reforms that lifted energy prices. Headline inflation averaged 2.5 percent in Sources: World Bank Group, Haver. the region in 2016, ranging between 1.1 percent in Oman and 600 3.5 percent in KSA. Since the start of 2017, average GCC -wide inflation has trended lower as base effects related to the in- 500 crease in energy prices have gradually receded (Figure 12). 400 The deceleration in inflation has been most pronounced in 300 KSA where headline inflation turned modestly negative in 200 recent months on the back of declining food prices and lower transport and rental inflation (Figure 13). In Kuwait, inflation 100 eased to 2.6 percent yoy in March from a high of 3.7 percent 0 last September mainly due to declining housing inflation and 2010 2011 2012 2013 2014 2015 2016 2017 persistently weak food price inflation, although core inflation Abu Dhabi Bahrain Dubai (excluding food) remained elevated at 4.1 percent. In Qatar Kuwait Qatar KSA inflation fell below 1 percent in recent months, reflecting 12 Gulf Economic Monitor • Issue 1 moderating housing/rental price inflation, and falling food and FIGURE 12 recreation prices. It has trended similarly lower in Bahrain, Average headline inflation in GCC standing at 0.8 percent in March. In contrast, in the UAE inflation is building momentum. This Sources: World Bank Group, Haver. is being driven by rising housing and utilities prices along with % yoy change regular upward adjustments in domestic fuel prices in line with 6 international prices following the deregulation of prices in the second half of 2015. An increase in utility and water charges in 4 Abu Dhabi that came into effect in January has also had an effect. Similarly rising transport, housing and fuel prices 2 pushed inflation in Oman to 2.8 percent in March from 1.2 percent in December. 0 Monetary policy accommodative but tightening -2 Despite low inflation, central banks have tightened mone- tary policy to support currency pegs to the US Dollar. 1 GCC-wide Average Saudi Arabia Since December 2015, the US Federal Reserve Bank has raised interest rates thrice in an effort to normalize policy rates in line with the economic recovery, with the most re- FIGURE 13 cent increase in March, and further rate increases are in the Headline inflation pipeline. Regional central banks have raised domestic poli- cy rates in tandem, so that real interest rates in the region are gradually turning positive (Figures 14 and 15). By and Sources: World Bank Group, Haver. large, however, monetary policy still remains highly accom- % yoy modative, given extremely low (or still negative) real inter- 4.0 est rates in some countries. 3.5 3.0 PUBLIC FINANCES AND REFORM AGENDAS 2.5 2.0 Fiscal policy bearing the burden of adjustment 1.5 to the oil shock 1.0 0.5 0.0 2015 and 2016 saw a significant deterioration in public sector -0.5 finances as the fall in oil prices endured. Lacking monetary Bahrain Kuwait Oman Qatar Saudi UAE GCC policy levers, fiscal policy has been the main policy tool used Arabia average to aid adjustment. With fiscal receipts dropping sharply, fiscal Dec 2016 Mar 2017 balances have shifted from large surpluses (an average of 9.2 percent of GDP in 2013) to equally large deficits (of 10.4 per- FIGURE 14 cent of GDP in 2016), with particularly large shortfalls in KSA, Bahrain and Oman (Figure 16). Governments in turn Key central bank policy rates have used a variety of tools to fund budget shortfalls, including percent drawing down conventional foreign exchange and SWF re- Sources and note: World Bank Group, Haver. KSA ’s benchmark repo rate has remained steady but the central bank has raised the reverse repo rate in recent months. serves,2 reducing government deposits in the banking sector and issuing debt. 3.0 Over the past two years, governments have also undertaken 2.5 fiscal consolidation, curbing current spending particularly on 2.0 1.5 1/ In Kuwait the peg is to an undisclosed basket of currencies including the US Dollar. 1.0 2/ GCC SWFs sold off equity investments in order to rebalance toward more liquid assets in 2015. 0.5 http://www.arabianbusiness.com/oil-dependent-saudi-abu-dhabi-swfs-selling- european-shares-608761.html 0.0 http://www.arabianbusiness.com/abu-dhabi-sovereign-wealth-fund-assets-fall- Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 by-5-by-end-2016-fitch-620585.html US Bahrain Kuwait Oman KSA UAE Gulf Economic Monitor • Issue 1 13 FIGURE 15 FIGURE 16 Real interest rates Fiscal balances percent 2013-16 Sources and note: World Bank Group, Haver. Fiscal deficit for Kuwait is shown on a Sources: World Bank Group, Haver. general government basis in bars, and excluding investment income in yellow dots. 3 % of GDP 40 2 30 1 20 10 0 0 -1 -10 -2 -20 2013 2014 2015 2016 2013 2014 2015 2016 2014 2015 2016 2013 2015 2016 2013 2014 2016 2013 2014 2015 2013 2014 2015 2016 -3 Bahrain Kuwait Oman Qatar KSA UAE Bahrain Kuwait Oman Qatar KSA UAE Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Fiscal Balance Balance ex.g investment income subsidies. In all six GCC countries, fuel prices have been par- The 2017 Saudi budget indicates plans to fully liberalize fuel tially deregulated, and government spending has been scaled prices in 4 years. Value-added taxes will be introduced in 2018 back through electricity and water tariff/subsidy reforms and some fees are also expected to be levied on expatriate (Oman, UAE, Kuwait3), scaling back of capital transfers and workers, as part of efforts to reduce dependency on oil reve- rationalization of expenditures of Government Related Entities nues. The 2017 budget also contains plans for cash transfers (UAE) and state-owned enterprises (Qatar), and cutting non- targeted at low and middle-income households to help them essential public investment (Qatar). Countries have also at- cope with lower subsidies. Overall, it projects a deficit of 7.7 tempted to increase non-oil revenues, for instance by raising percent, payment of all arrears and a commitment to narrow fees for various government services, raising tobacco and alco- the deficit to below 5 percent in 2018 and to zero by 2020. The hol excises (Bahrain), and raising the corporate income tax rate Balanced Budget 2020 Program announced in 2016 aims to (Oman). A GCC-wide VAT is also expected to come into force eliminate the fiscal deficit by 2020 and to reform public sector by 2018 and will help in raising revenues from the non - finances by rolling back subsidies while strengthening social hydrocarbon sector. protection and diversifying revenue sources. Slowing pace of fiscal austerity in KSA Public investment spending lifting in Kuwait, Fiscal reforms in KSA have also been significant. In end -2015, UAE leading on subsidy reform the government started raising the price of fuel, including an increase in the price of gasoline by a minimum of 50 percent. On a general government basis, Kuwait’s public sector remains In addition, projects worth US$ 267 billion were cancelled in close to balance, although down from double digit surpluses a few October 2016. The government also introduced cuts to govern- years back. Excluding investment income from its sizable SWF, ment payrolls and bonuses last year, by far the most significant however, the government posted its first budget deficit in 17 years recurring spending item. KSA posted an estimated 18.1 percent of 13.6 percent of GDP in FY 2015/16. Conservative oil price as- fiscal deficit in 2016, as actual spending far outweighed budg- sumptions in the budget and significant savings from fuel subsidy eted amounts. reforms last September suggest similar outcomes for FY2016/17. Investment spending has been extremely low in recent years. How- However budgetary performance in the first quarter of 2017 ever, the government is prioritizing capital spending, as part of the has been better than expected, with actual spending reaching 2015-19 Development Plan which includes large infrastructure only half the budgeted expenditures due to fiscal consolidation projects. VAT preparations are well underway. efforts last year. Combined with the rebound in oil prices, this has provided the space to the Kingdom to slow fiscal austerity. The UAE has led the region on subsidy reform, including the In March, bonuses and allowances were restored for Saudi raising of electricity and water tariffs, the removal of fuel sub- state employees, some 6 months after they were cancelled sidies and the scaling back of capital transfers to Government amid efforts to cut spending. Related Entities (GREs). Despite these measures, the drop in hydrocarbon revenues has pushed the fiscal balance down from a comfortable surplus of 10.4 percent of GDP in 2013 to an 3/ Kuwait is planning to implement water and electricity tariff reforms later in 2017. estimated 3.5 percent deficit in 2016. 14 Gulf Economic Monitor • Issue 1 FIGURE 17 FIGURE 18 10 largest emerging market bond sales General government gross debt 1995-2017 Sources: World Bank Group, the Financial Times. Source: IMF. Deal value, $bn % GDP Russia, Apr 2010 90 5.5 Mexico, Jul 1996 6 80 China , Apr 2005 6 70 China, Nov 2007 6.1 60 Russia, Sep 2009 7 50 Russia, Mar 2011 7 40 Qatar, May 2011 7 Qatar, May 2016 9 30 KSA, Apr 2017 9 20 Kuwait, Mar 2017 10 10 Argentina, Apr 2016 16.5 0 KSA, Oct 2016 17.5 Bahrain Kuwait Oman Qatar UAE KSA 0 5 10 15 20 2014 2015 2016 Large fiscal imbalances in Bahrain and Oman In KSA, for example, the local bond program was suspended in October 2016 over concerns regarding tighter liquidity in the In Bahrain, an expansionary fiscal stance over the past decade banking system, which had led interbank interest rates to spike. has resulted in persistent deficits, with the fiscal position dete- (Domestic issuance is expected to resume in a few months). riorating further after the 2014 oil price shock: the fiscal deficit amounted to just over 12 percent in both 2015 and 2016. Alt- Accordingly, GCC governments are increasingly shifting the hough public spending has helped support growth at 2.9 per- deficit funding mix towards international debt; by type of debt, cent, it has lowered reserves to less than 3 months of imports sukuk issuances are increasing in importance. The Saudi gov- and increased public debt to over 60 percent of GDP in 2016. ernment raised $17.5bn in October last year, the largest issue on record for an emerging market, followed by the sale of $9bn Fiscal deficits were also sizable in Oman. Despite fiscal con- Islamic bond in April this year. Qatar meanwhile tapped $9bn solidation efforts, the fiscal deficit widened to an estimated from international debt markets last year, with more issuance 20.3 percent of GDP in 2016, from 16.5 percent the previous expected this year. Three GCC countries have tapped interna- year. Major fiscal reforms have been initiated. The deregula- tional markets thus far this year, including Kuwait which issued tion of petrol prices began in mid -January 2016, with diesel an inaugural $10bn international bond in March, Oman ($5bn) and petrol prices increasing by up to 33 percent. An increase in and Bahrain ($600 million). In Bahrain, the government has the corporate income tax rate from 12 percent to 15 percent for also raised the public debt ceiling to Bahraini Dinar 10 bn companies earning over Omani Riyals (OMR) 30,000 of taxa- (around 80 percent of GDP) to enable additional borrowing. ble earnings, and from zero tax to 3 percent tax for those earn- ing less than OMR 30,000 has been issued by royal decree. BANKING AND FINANCIAL SECTOR International debt issuance rising amid strong Bank liquidity pressures easing appetite Governments are large depositors in the banking system in GCC sovereign debt issuances in recent years are among the GCC countries, and banks are also major purchasers of govern- largest on record for emerging market economies (Figure 17). ment debt. Accordingly, banking sector liquidity has tightened Overall, GCC countries issued $38.9bn in international debt considerably in recent years - particularly in countries with the markets last year, pushing public debt higher (Figure 18). De- weakest fiscal positions, such as Oman, Bahrain and KSA – as mand for GCC debt has been supported by global investors government deposits were drawn down (Figure 19) and domes- search for yield amidst abundant global liquidity and the im- tic debt issuance increased. In response, regional central banks proving GCC outlook (due to the recovery in global oil prices. revised reserve requirements leaving more money in the hands Strong market appetite, in turn has been reflected in oversub- of banks to facilitate lending requirements (Oman). In parallel, scribed order books. For Gulf countries, the cost of internation- the GCC region as a whole slowed or paused domestic debt al funding remains relatively low despite past ratings down- issuance, and began to tap international debt markets. grades for some countries. The ability to fund deficits in do- mestic markets has been constrained by the lack of deep do- In recent months, however, funding conditions have begun to mestic capital markets and banking sector liquidity pressures. improve, helped by positive growth in government deposits Gulf Economic Monitor • Issue 1 15 FIGURE 19 FIGURE 20 Government deposit growth Private sector credit growth percent yoy percent yoy Sources: World Bank Group, Haver. Sources: World Bank Group, Haver. 25 30 20 25 15 20 10 15 5 10 0 5 -5 0 -10 -5 -15 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Bahrain Kuwait Qatar KSA UAE Oman Kuwait KSA UAE Average, 2015 Average, 2016 Average Q1, 2017 Qatar Oman Bahrain (Figure 19). Higher oil revenues are supporting government Private sector credit growth turned slightly negative in Bahrain spending and the clearance of arrears to the private sector, lift- in recent months. Although the banking system has remained ing private sector activity and boosting corporate and retail sound, slow growth is weighing on its liquidity and profitabil- deposits. Among GCC countries, Omani and Qatari banks are ity coupled with a challenging operating environment. Bah- characterized by the highest loan to deposit ratios, leaving little rain’s wholesale and retail banking sectors are large with siza- room to accelerate bank lending. In Oman however, credit to ble regional exposures, and could be affected by global finan- the private sector is still growing at a healthy pace (Figure 20), cial market volatility and shocks in other GCC countries. Both while in Qatar it has slowed appreciably, in particular to con- the wholesale and retail banking sectors are also highly con- sumers and the real estate sector. centrated as a few banks dominate each market segment. Across the region, central banks have been effective in pre- EXTERNAL BALANCES AND BUFFERS serving financial stability through regulatory and macro - prudential policies. Typically, banks are well -capitalized Having suffered a major terms of trade shock in 2014, GCC coun- (with capital adequacy ratios of over 15 percent), and low tries are beginning to a see an improvement in line with the recov- NPL ratios. They also tend to enjoy high ratings, in line ery in oil prices. Nevertheless, the era of large current account with sovereign credit profiles. However, the weakening surpluses appears to be at an end: by the end of 2016, current ac- profile of sovereigns, reduced inflows of government li- count balances across the region had shifted into the red or dimin- quidity and risks to bank asset quality from slowing non -oil ished considerably compared to the years prior the 2014 oil price activity had led to credit downgrades for banks across GCC shock. Currency pegs meanwhile have been supported through the countries during 2016, increasing funding costs. Bank asset use of foreign exchange reserves, policy rate adjustment and ef- portfolios in the private sector tend to be concentrated in forts to compress import demand through fiscal consolidation. real estate. For instance, in Kuwait, direct and indirect lending (via households) accounts for nearly 50 percent of Quarterly data indicate improvement. In Kuwait, a modest sur- total loan book of local banks, and 40 percent of the total plus on the balance of trade in goods and services improved in collateral of banks (IMF, 2015). With property markets the second half of 2016 as oil receipts recovered. Import softening across the region, this is of concern. However no growth remained muted, although capital goods imports, which systemic risks are anticipated given the generally healthy help gauge the level of investment in the economy, has re- conditions of banks. mained robust. Similar trends are visible in KSA and Qatar. Bahrain’s trade balance has remained in deficit but has gradu- Saudi and UAE authorities are in the process of implementing ally begun to narrow reflecting a recovery in non -oil exports Basel III capital standards. In addition, KSA has been making and stable import demand. strides in regulating the non-bank financial sector (by issuing licenses, in particular to mortgage lending institutions) and Sizable asset buffers in the larger GCC countries enhancing consumer protection and financial inclusion. In the helping to anchor investor confidence UAE, a new central bank and banking law is under preparation and the authorities plan to review the regulatory framework for Several GCC countries have sizable assets in SWFs and in non-bank financial institutions. foreign exchange reserves, that has anchored confidence in 16 Gulf Economic Monitor • Issue 1 FIGURE 21 FIGURE 22 Trade balances Saudi Arabia monetary authority assets LCU million US$bn Sources: World Bank Group, Haver. Sources: World Bank Group, Haver. 6000 120000 800 757 5000 100000 700 4000 80000 600 557 500 526 3000 60000 400 2000 40000 300 349 1000 20000 200 0 0 100 -1000 -20000 0 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 2004 2006 2008 2010 2012 2014 2016 Kuwait Bahrain Oman Qatar (rhs) KSA (rhs) Total assets Investments in foreign currency their economies and their currency pegs. Qatar’s FX reserves On aggregate, the region’s growth is expected to slow further are estimated at $38bn, while its SWF is estimated to hold from 1.9 percent in 2016 to 1.3 percent in 2017 (Table 1)– the $335bn in assets. The stock of foreign assets under manage- weakest since 2009– weighed down by modest or negative ment by the Kuwait Investment Authority (KIA) is meanwhile hydrocarbon sector growth. However growth should lift to 2.6 estimated at about US$600 billion. In the UAE, according to percent in 2019, as the pace of fiscal austerity slows and con- Fitch Ratings, assets dropped to US$475 billion by year end, sumer and investor sentiment and spending strengthen. The compared with an estimated US$502 billion at the end of 2014. contribution from net exports to growth is expected to remain modest over the forecast period, as investment spending sup- KSA has seen assets held by its monetary authority (SAMA) ports import demand amidst a weak export recovery. Regional fall by $230bn since Q3 2014 but the outflow has been fiscal and current account balances are expected to improve, stanched in recent months. It’s asset position is arguably much but are unlikely to return to pre-2014 double-digit levels any- better, due to its huge stock of public assets.4 Bahrain’s SWF is time soon. much smaller than in other GCC countries. The SWF (Mumtalakat) is in fact a holding company for public enterpris- Strengthening growth in the larger GCC countries es – implying comparatively little fiscal space and the need for external borrowing when pressure arises – with assets valued at Economic growth in KSA, which has shouldered the largest about 30 percent of GDP. cuts in oil production, is projected to remain modest in 2017 at just 0.6 percent. However, because the 2017 fiscal budget Near term prospects moderately eases consolidation measures, the non-oil economy should recover as the pace of fiscal adjustment eases, and grow by 2.1 percent in 2017. Baseline projections are for growth to Modest recovery in regional growth supported rebound to over 2 percent in 2018 and 2019, as reforms relat- by stable oil prices and reforms ing to the National Transformation Program take hold and oil production resumes. With slower recovery expected in imports With oil prices expected to stabilize close to current levels, activi- compared to exports, the current account should revert to small ty across the GCC countries is expected to slowly recover. Alt- surpluses from 2018 onwards. Efforts to raise non -oil revenues hough global oil stockpiles are still high and production from will likely yield some (albeit modest) revenues and expendi- major swing producers such as the US has been rising, OPEC and ture cuts will occur gradually, focusing primarily on the capital major non-OPEC oil producers have extended their agreement to budget. These measures are projected to reduce the overall limit supplies beyond the June 2017 expiry to ensure that another fiscal deficit-to-GDP ratio. supply overhang does not rebuild. As regional currency pegs to the US Dollar continue, monetary policy will gradually tighten in In Kuwait, low headline growth in 2017 reflects the impact of tandem with the US, which may weigh on domestic growth. weak oil sector growth. The outlook however remains positive. It assumes rising oil output from 2018 onwards and successful passage and implementation of reforms and the Development 4/ This is reflected in Saudi government plans to monetize a portion of the equity Plan. The government will invest heavily in the oil sector over of Saudi Aramco, which has estimated value of US$ 2 trillion, through an IPO. the next five years, which should boost oil output. With further Gulf Economic Monitor • Issue 1 17 TABLE 1 2015 2016e 2017f 2018f 2019f MENA GCC AGGREGATE GCC COUNTRIES GDP at market prices 3.8 1.9 1.3 2.3 2.6 forecast summary Contributions to growth Private consumption -0.1 0.7 0.9 0.9 1.0 (annual percent change, Government consumption 0.3 -1.0 0.3 0.2 0.3 unless otherwise specified) Fixed investment 1.5 0.7 1.2 1.3 1.8 Net exports, GNFS1 1.1 1.0 -1.1 0.5 0.3 Current account balance (% of GDP) -2.3 -3.3 -1.6 0.9 1.8 Fiscal balance (% of GDP) -8.3 -10.4 -6.1 -3.8 -1.0 Terms of trade 1.9 1.4 -2.3 0.1 -0.3 INDIVIDUAL GCC COUNTRIES GDP at market prices United Arab Emirates 3.8 2.3 2.0 2.5 3.2 Bahrain 2.9 3.0 1.9 1.9 2.3 Kuwait 1.8 2.9 0.2 2.7 2.9 Oman 5.7 2.2 0.9 2.4 2.9 Qatar 3.5 2.2 3.2 2.6 2.5 Kingdom of Saudi Arabia 4.1 1.4 0.6 2.0 2.1 Source: World Bank Group. Notes: e = estimate, f = forecast. GDP at market prices is measured in constant 2010 U.S. Dollars. 1/ Exports less imports of goods and non-factor services (GNFS). support coming from public investment spending, growth nearly all of Qatar’s gas production and nearly two -thirds of its should rise close to 3 percent in 2019. Both current account export revenues, after more than a decade. While new output is and budgetary pressures should decrease on the back of a par- likely to take several years to come onstream, it should support tial recovery in oil prices and rising output. The baseline as- growth in the post-FIFA period. sumes gradual implementation of spending and revenue re- forms including a VAT in 2018. In the UAE, OPEC-mandated oil production cuts are expected to limit growth in 2017, to 2 percent. In 2018 oil production is Despite plans to diversify the economy, the hydrocarbons expected to rise due to investments in oilfield development. sector in Kuwait will continue to drive growth. The govern- Non-oil growth is projected to rebound as the expected im- ment is seeking to bolster refining capacity through the con- provement in oil prices and its positive effects on confidence struction of a new refinery and existing refinery upgrades. and financial conditions dampen the effects of fiscal consolida- Production at the Neutral Zone oilfields, which Kuwait shares tion. Further down in the forecast period growth is expected to with KSA, should also restart in the near term. Kuwait is also recover slightly, reaching 3.2 percent in 2019. Megaproject seeking to attract major international oil companies to devel- implementation is also rising ahead of Dubai ’s hosting of Expo op its ageing fields in order to boost heavy -oil output in the 2020. Expo 2020 is expected to draw in a large number of visi- north of the country. tors, boosting private consumption and services exports. Fiscal and external balances are expected to improve over the medi- Qatar is projected to continue growing at a moderate pace. The um-term; with a marked improvement in the fiscal deficit to 1 country is currently in the midst of a multi -year infrastructure percent of GDP and an expected rebound in the current ac- upgrade ahead of hosting the FIFA World Cup. The 1.4 billion count surplus to 3.4 percent of GDP by 2019. The uptick in cubic feet per day Barzan gas project is also set to start produc- fuel prices, new levies and the introduction of the VAT are tion later this year. This should boost growth to 3.2 percent in expected to push inflation to 3.3 percent. 2017. With FIFA related investment beginning to plateau, growth is expected to gradually stabilize around 2.5 percent in 2019. Growth is expected to slow further during 2017 in Oman but Fiscal and current account balances should gradually improve, should recover over the medium-term as oil prices rebound and as gas production increases and oil prices recover. In April, pro-business reforms pay off. Overall, real GDP growth is pro- Qatar lifted a self-imposed moratorium on developing North jected to slow further in 2017 to just under 1 percent owing to the Field, the world’s biggest natural gas field which accounts for agreement reached with OPEC producers to cut oil production 18 Gulf Economic Monitor • Issue 1 into the first quarter of 2018 and the dampening effects of gov- of public investments, raise the private sector’s share in the ernment spending cuts on investment and private consumption. economy, and rationalize government expenditures. Key re- Over the medium-term, however growth is expected to recover forms include an ambitious subsidy reform program, increased gradually reaching around 3 percent by 2019, as the recovery transparency and government efficiency, and partnerships with of oil prices improves confidence and encourages investment. private investors to localize renewable energy and industrial Pro-business reforms such as the foreign ownership law and equipment sectors. An initial public offering (IPO) of about 5 the FDI law, and the lifting of sanctions on Iran are expected to percent of ARAMCO—KSA’s state-owned oil company— increase trade and investment opportunities. with an estimated value at US$2 trillion, is also planned. Fiscal consolidation in Oman is expected to continue in 2017. In May 2017, the KSA government announced ten strategic Starting in 2018, the VAT, higher corporate income tax and programs aimed at achieving the aspirations of Vision 2030. increasing excises and fees for government services are ex- These follow the Balanced Budget 2020 program announced in pected to narrow the fiscal deficit to below 10 percent in 2016 which aims to achieve fiscal balance by 2020, by ration- 2018. The current account deficit is projected to improve to alizing government spending and diversifying revenue sources. 14.4 percent in 2017 and continue to narrow as oil prices rise, The remaining programs aim to support private sector develop- non-oil exports grow, and the gas pipeline with Iran increases ment and the business climate, for instance through supporting LNG exports. the development of local companies, improving infrastructure and logistical services, developing the financial sector and the In Bahrain, economic growth is expected to remain slow in the privatization program. Implementation challenges could, how- forecast period. Real GDP growth projections have been re- ever, be considerable. vised downwards to 1.9 percent in 2017 and 2018, reflecting continued fiscal pressures which will weigh on government The past two years have also seen a number of reform initia- consumption. Some infrastructure investments are also likely tives in Kuwait. In March 2016, the government approved a 6 - to be put on hold. point plan aimed at rationalizing public spending and increas- ing non-oil revenue, and supporting the development of vibrant External and fiscal imbalances will continue in Bahrain. Aver- private sector. In addition to subsidy reforms, the National age inflation is expected to decrease to 2.1 percent in 2017 Assembly also amended labor laws that would see increased reflecting the cooling off in economic activity and phasing out penalties for employers violating expatriate worker laws in the of temporary price-boosting effects of subsidy reforms. The private sector. In 2015, parliament approved the 2015-19 De- current account deficit will partially narrow to 3.8 percent of velopment Plan prioritizing large infrastructure projects, in- GDP in 2017 and remain about there for the forecast years to cluding upgrading and building new refineries and major come, with the exception of a small adjustment. International transport projects. A new Economic Policy and Reforms pro- reserves are expected to follow a declining trend, and reach 1.5 gram is also being currently discussed within government, months of import equivalent in 2018. Public debt is projected which should help renew focus on the country’s efforts for to reach about 100 percent of the GDP in 2018. In the absence economic diversification. of significant upfront fiscal adjustments, Bahrain will remain vulnerable to fiscal risks. Elsewhere in the region, Oman has launched the Tanfeedh Ini- tiative in 2016 to help with the implementation of the country’s Reforms high on the policy agenda 9th Development Plan and spearheading diversification away from hydrocarbons. This is expected to lead to a significant Significant reforms have been announced or are planned across improvement in the business environment of the country in the the region. As part of fiscal consolidation efforts, governments medium-term. The UAE is continuing to spend heavily on in- are attempting to cut waste and inefficiency in public spending frastructure in relation to hosting the World Expo in 2020, and and to strengthen public financial management. To reduce de- reforms to fiscal, financial and oil management have been pendence on hydrocarbon revenues, GCC countries plan to mooted in Abu Dhabi, which contributes the bulk of the UAE ’s implement a VAT in 2018. To bolster private sector activity, hydrocarbon production. governments are considering reforms to strengthen the busi- ness environment. In Kuwait, for instance, amendments to the Risks and long-term challenges Capital Markets Authority law in mid -2015 have strengthened investor protection, allowed greater foreign ownership, in- creased transparency and brought regulations more into line Weak and uncertain prospects for oil, risks from with international standards. Further reforms are planned, global financial volatility which should help level the playing field for firms. The region faces a number of external risks. On the downside, KSA has shown considerable leadership in the region on re- these include spillovers from geo-political tensions and conflict form, announcing a major shift in policies in the second quarter and/or protracted weakness or volatility in global oil prices. of 2016 as reflected in the Vision 2030 and The National The current support to oil prices by OPEC and non -OPEC Transformation Program. The Vision aims to revamp the scope production cuts may be undercut by nimble non -conventional Gulf Economic Monitor • Issue 1 19 producers in North America. On the upside, global oil markets envisioned by the Paris Agreement, there will be an increased could tighten much more than anticipated, particularly if global focus on renewables. Saudi Arabia and the UAE have already growth is better than anticipated (for instance due to substantial begun to explore renewable energy technologies, particularly fiscal stimulus in the US). With global oil markets close to solar power. Abu Dhabi has the largest concentrated solar balance according to the IEA, stronger energy demand could plants in the world, while Dubai’s Solar Park achieved record help stabilize oil prices at current (or higher levels). low photovoltaic costs in May 2016, followed by even lower costs in September 2016 for the Abu Dhabi solar project in The tightening of US monetary policy and a spike in global Sweihan. geo-political tensions could lead to bouts of turbulence in glob- al financial markets and volatility in capital flows. GCC SWFs Most GCC countries have already embarked on subsidy reform have investments abroad, governments have large deficits to which will reduce per capita energy consumption and their finance, and banks have direct and indirect exposures to real most recent national plans have also included alternative ener- estate and equity markets. Any sharp drop in asset values (for gy targets. In addition, GCC countries also may need to attend instance in a period of global financial volatility or tightening to the climate change adaptation agenda, namely preparing of global liquidity) will affect public and private sector balance domestic economies to cope with and build resilience to rising sheets and costs of funding. GCC countries with large external global temperatures, extreme weather patterns (and rising heat and domestic financing gaps over the medium-term (Oman, and water stress) and rising sea levels. Bahrain), and high levels of debt (Bahrain) are particularly exposed to risks that funding costs rise steeply during such Implementing broad based reforms the key do- periods. mestic challenge; public sector reforms at the core of these efforts Reform delays and fiscal vulnerabilities key do- mestic challenges The current growth model in the region has been based on the redistribution of resource rents by the government with high While reform momentum has picked in the past 2 years, there levels of spending and importation of foreign labor financed by is the risk that the rebound in oil prices and large financial rising oil revenues. This has thus far achieved rapid economic buffers in the larger Gulf economies could generate compla- development along with significant progress in social indica- cency on reforms. In KSA, despite the announcement of ambi- tors. However, the “low for long” oil price environment has tious policy reforms, there is the risk that implementation is made this unsustainable. In addition, this implicit “social con- protracted. Successful subsidy reforms in the region may de- tract” also led to distortions incentivizing rent seeking at the pend on the design of appropriate and well -targeted compensa- cost of more productive, efficiency seeking behavior by firms tions reforms; Kuwait’s parliament for instance supports ener- and citizens, with implications for the long-term productivity gy subsidy reforms accompanied by compensation mecha- and growth. nisms for citizens. In addition, a comprehensive 6 -point reform agenda unveiled last year requires significant legislative re- Indeed, despite the rapid growth in the past, average labor form, which will likely take time. productivity growth was weak or negative and total factor productivity (TFP) growth has been negative (only KSA had Bahrain is vulnerable to shocks to growth, commodity prices, slightly positive TFP growth in the non-hydrocarbon sector and interest rates. Public debt levels crossed 80 percent of GDP (IMF 2013)). A sectoral decomposition of employment and in 2016 and, unlike the wealthier members of the GCC, Bah- average labor productivity in KSA finds that employment is rain holds much smaller fiscal buffers to mitigate emerging increasingly moving toward sectors with relatively low produc- fiscal risks, so that upfront fiscal consolidation remains critical. tivity – such as construction and nongovernment services (Fayad and Rasmussen, 2012, IMF, 2014). Figure 23 shows Infrastructure investment is expected to be a key support to that average potential growth is declining over time and that growth in Qatar, Kuwait and Oman. While Kuwait has credibly the contribution by TFP has been declining or negative. stepped up implementation, Oman’s infrastructure spending program is likely to encounter delays as the government con- All countries in the region have launched national visions and tinues to be fiscally strained. prepared long-term development strategies in the region in recent years. These have rightly focused on public sector and Global climate change mitigation efforts make regulatory reforms for increasing the efficiency and productivi- for an uncertain long-term outlook ty of their economies, economic diversification, low levels of participation of Gulf nationals in the private sector activity and Even though fossil fuels remain the main energy source, they their high levels of reliance on the public sector for jobs, subsi- face an uncertain period of adjustment to new market condi- dies and transfers. tions and to a new policy environment following the Paris Agreement on Climate Change. With the competitiveness and However, sustained implementation will be critical for achiev- economics of renewables seeing a rapid improvement in recent ing long-term objectives. Efforts to diversify the Gulf econo- years and to steer the world into a new low carbon future as mies will be intimately tied to efforts to reshape public sectors, 20 Gulf Economic Monitor • Issue 1 FIGURE 23 Contributions to potential GDP growth percentage points Source: World Bank Group, authors ’ estimates . 20 15 10 5 0 -5 Qatar Kuwait KSA Bahrain UAE Oman -10 1995- 2002- 2011- 1995- 2002- 2011- 1995- 2002- 2011- 1995- 2002- 2011- 1995- 2002- 2011- 1995- 2002- 2011- 02 08 14 02 08 14 02 08 14 02 08 14 02 08 14 02 08 14 TFP Capital Stock Working-Age Pop. Potential Growth including employment and wages, subsidies and transfers. This The outlook is subject to a number of downside risks. The cur- is needed to put public sector finances on a sustainable footing, rent support to oil prices by OPEC production cuts may be and to create incentives for saving, investment and entrepre- undercut by nimble non-conventional producers in North neurship. These reforms will go hand in hand with other struc- America. The tightening of US monetary policy and rising tural reforms to education and labor markets, capital markets global geo-political risks could lead to bouts of turbulence in and to the business environment. global financial markets and volatility in capital flows. On the domestic front, ambitious reforms have been unveiled in some Labor market reforms are key as the ‘youth bulge’ faces a countries, particularly Saudi Arabia. However implementation slowdown in public sector hiring that has traditionally been the remains a key challenge. Forging ahead will reforms will not employer of first resort for nationals. World Bank Group sur- only help achieve GCC ambitions to diversify domestic econo- veys show that GCC businesses consistently rank restrictive mies and build vibrant private sectors in the longer term, but, labor regulations and inadequately-trained workforces as major by boosting investor sentiment, they could also potentially set hurdles. These challenges have prevented the private sector in motion a virtuous cycle of rising private investment and from significantly expanding its national workforce at a time output growth in the near term. when the growth of nationals employed by the public sector has been slowing. Narrowing the large gap between public and private sector wages would make private sector employment relatively more attractive for nationals. A related challenge holding back talent utilization in the region pertains to the low female labor force participation rate. Though the gender gap in education has diminished, there is scope to improve labor regu- lations affecting educated women. Conclusion The agreement to manage oil supply by OPEC and some non - OPEC producers in 2017 is expected to weigh on headline growth, which is anticipated at 1.3 percent for the GCC coun- tries in aggregate –the weakest since 2009. However indica- tions are that activity and sentiment in the non -oil sector are beginning to recover, supported by the increase in oil prices over the past year. Fiscal pressures have also lessened, but fis- cal deficits remain large in several GCC nations, and reform priorities appear to be shifting toward deeper structural re- forms. Efforts to strengthen fiscal and public financial manage- ment will remain a core part of these policy reforms, as dis- cussed in the “In Focus” section. Gulf Economic Monitor • Issue 1 21 Spot light Interview with Hafez Ghanem How did the fall in oil prices affect the GCC countries? more diversified economy, both on the revenue side and the In the short-run, obviously the fall in oil prices has had a nega- production side. Let me be more specific about the difficult tive impact on GCC economies since they depend on oil for challenges that these countries face in the short run. When we their exports and for government revenue. We saw immediate- talk about the budgets, they have less revenue from oil which ly after the fall in oil prices that the government’s fiscal bal- implies that they need to adjust their spending patterns and ances moved from surplus to deficit. their sources of revenue. Adjusting spending patterns means that they cannot provide subsidies as they did before. They Therefore, in the short-run, the effects of an oil price drop are need to reduce subsidies and to move towards a more modern painful in a typical oil exporting country. However, I tend to transfer system, where rather than subsidizing prices, for ex- believe that this also provides an opportunity. This is especial- ample, governments provide cash transfers to those who real- ly true for the GCC countries, who need to diversify away ly need it. from oil to create more jobs and opportunities for their citizens. This can be done by further developing their industries and The constraints on the budget also mean that governments service sectors, especially tourism for the GCC countries. cannot create more and more jobs in the public sector. Obvi- ously these measure will have social and political implica- In fact, we already see this positive impact. For instance, GCC tions. On the revenue side if they are not getting revenue from policy makers now focus on new strategies like Saudi Arabia’s oil, they need to look at other sources of revenue. They will Vision 2030. But this is not the only example. Other GCC coun- need to raise taxes. The GCC countries now are looking at the tries like Oman, Kuwait, Qatar are also working to further diver- value-added tax. So the challenge in the short -run is to man- sify their economies and expand sources of fiscal revenues, aim- age this cost of transition from a rent economy to a more di- ing to create more jobs and opportunities for their youth. versified economy. That is very encouraging. Can you tell us about the challenges Now, another major challenge will be getting more investments these countries are facing? Are they prepared to face these into sectors other than oil. What would success look like? These challenges? are difficult questions and while there is no one clear model, The main challenge is to transition from an economy and a GCC countries need to choose their own path and initiate re- budget system that is dependent on the rents from oil, into a forms and policy changes that are best suited to their own indi- 22 Gulf Economic Monitor • Issue 1 vidual challenges. Now, to me the slowdown in growth for our region is a danger- They also need to look afresh at the social contracts that cur- ous sign. We have the largest percentage of unemployed youth rently prevail in their individual countries. It may no longer be compared to other regions. It is important for the economies in sufficient (or sustainable) for government to provide young our region to create more opportunities, to create more jobs for people with jobs, or with subsidized goods and services. The those young people. To do that you need to focus a lot on get- GCC economies also need to create incentives for the youth to ting growth going and getting investments going. And that seek jobs in the private sector. They have to look for more pro- goes back to my point about economic diversification because ductive opportunities, and maybe we need to be encouraging growth that creates opportunities for youth happens in the non- more and more of our young people in the Gulf to be entrepre- oil sectors. The service sectors, the industrial sectors, agricul- neurs. And that will also mean that they cannot depend on the ture, tourism those are the sectors that create jobs. My advice government for subsidized housing, for subsidized consump- for these countries is really to focus on policy changes and tion goods, etc. incentives structures to help bring in more investments into those sectors. Okay, now, let me move to what will benefit young people from this change in the social contract. You know, changing What is the World Bank doing in these countries to help? the social contract means that young people are no longer de- The Bank has a long history of providing advice and technical pendent on government for jobs and they’re no longer depend- support to the Gulf countries. We started with Saudi Arabia, ent on government for access to different services. This gives over 40 years ago with our office in Riyadh and we are now them much greater freedom, much greater flexibility in where working all across the GCC. Our technical support program is they work, greater access to technology and to what is happen- demand-driven and based on what governments require and ing around the world. request from us. We are in the 21st Century. People around the world and in One of the key priorities governments and the World Bank agree their work places are evolving and becoming much more flex- on is education. You find that the World Bank is doing a lot of ible and providing many more opportunities for people with analytical and technical support to education across the GCC. imagination, for people to develop new ways and new ap- Why is education a priority? Education is a priority because proaches which typically you would not see in the public sec- we’re talking about youth unemployment. Creating more invest- tor. And so, just moving ahead, and increasing your set of ments and jobs is fine, but you also want our people, our young opportunities, the set of possibilities, this is what the changing people from the GCC countries to have the abilities and the edu- of the social contract will do for the youth in the GCC. It will cation necessary to get those jobs, to benefit from those jobs. So give them greater control of their lives, give them greater education is an important area where we provide support. Anoth- voice and decision-making in their societies and in the lives of er important area is tax and public expenditure policies. We’re their communities. also doing a lot of work on labor markets, looking into the type of labor policies needed to encourage more employment. So this really is a shift in our mindsets, and we have to view this fall in oil prices as an opportunity rather than a problem. We have also been working with several other countries on developing their vision for the future. How can they diversify The latest World Bank forecasts show a modest recovery in activi- their economies? What kind of policy framework or what kind ty in the GCC, but growth is still far below what we saw over the of investments do they need to put in place to diversify? These past decade. How do you think that these countries are going to are some examples of the type of advice that the World Bank cope with this phenomenon? And what do you recommend as brings to the GCC. There are several reasons the World Bank is policy for spurring growth? well placed to offer this advice. The first is that we are a global First of all, it is important to realize that falling oil prices not institution; we can bring experiences from around the world and only affect oil producers in the Middle East North Africa region share them with colleagues and counterparts in the Gulf. but also affect oil importers in the region in two ways. Because many of those oil importers actually have workers in the GCC For example, when we talk about Saudi Vision 2030, we did countries, and as oil prices fall, and growth in GCC countries the same vision exercise for China and Vietnam. So we are decline, workers’ remittances to their home countries will also able to bring to Saudi Arabia examples of what other countries decline which will impact growth in the receiving countries. have done. When we’re talking about education reform, we were bringing in experiences from education reform in Latin The second aspect is that many oil importers such as Jordan America, where we worked on education reform in Chile and and Egypt depend on investments from oil producing coun- Peru. We also worked on education reform in East Asia. So tries. So the fall in oil prices leads to a decline in GCC invest- that is the first reason why the World Bank is valued. ments abroad and this has an impact on the oil importing coun- tries. Therefore, when we talk about the impact of oil prices, The second reason why countries come to the World Bank is we have to realize it’s not just the oil exporters who are affect- that the Bank provides objective advice. We are an internation- ed, but it’s the whole region that’s affected by that. al organization owned by our shareholders. We have no profit motive and the GCC countries are shareholders of the World Gulf Economic Monitor • Issue 1 23 In focus Fiscal Consolidation and Reforms in the GCC GCC oil producers prior to the oil roughly five -fold in GCC countries, excepting Qatar where it rose ten-fold. Rising public expenditures underpinned shock growth in the non -hydrocarbon sector but also raised fiscal breakeven prices and widened non -oil fiscal deficits. Non - A major windfall... oil fiscal deficits exclude oil related revenues and expendi- tures from the overall fiscal balance and are key indicators The commodity boom during the 2000s induced a massive of the fiscal stance and injection of government demand in redistribution of global income towards oil exporters. For oil exporting economies. A comparison of these across the GCC countries, the windfall – measured as the increase in MENA region and relative to other oil exporters in the Cen- fiscal resources available to governments 5 – was sizable rela- tral Asia region shows that non -oil deficits increased signif- tive to the size of their own economies and also compared to icantly and were much higher than in non-GCC oil export- other major oil exporters such as Russia, Ecuador and Nor- ing countries. In addition, by 2014, fiscal break even prices way (Figure 24). The large fiscal and current account sur- were close to or just above average oil prices of $96/bbl in pluses that accrued also enabled GCC countries to rapidly most GCC countries (save Qatar and Kuwait) indicating accumulate assets, and to establish new SWFs or increase limited fiscal room for maneuver in case global energy pric- the size of existing ones (Figure 25). By the end of 2016, es fell (Figures 26, 27). combined assets under management in MENA SWFs amounted to nearly $3 trillion (40 percent of global SWF Oil rents channeled into public spending assets under management). Higher commodity revenues sustained rising expenditures on … mostly spent salaries and an expansion in public sector employment (IMF, 2014). In GCC countries, public sector wage bills have aver- A significant portion of the increase in fiscal revenues from aged nearly 10 percent of GDP in recent years. More than the hydrocarbon sector was also spent (refer back to Figure two-thirds of employed nationals are employed by the state 24). Between 2000 and 2014, government spending rose and paid large markups over the private sector (IMF, 2014). Public investment spending was also scaled up during the commodity boom as part of efforts to build national infra- structure and support diversification efforts, and remained 5/ Fiscal windfall here refers to the increase in revenues from the hydrocarbon sector available to the governments. It includes the impact of changes in hydrocar- high as part of fiscal stimulus provided during the 2008/09 bon prices and production over the period 2000-2014 (Figure 24). global financial crisis. 24 Gulf Economic Monitor • Issue 1 FIGURE 24 FIGURE 25 Increase in hydrocarbon revenues and proportion SWFs Assets under management spent, 2000-14 US $ bn Sources and note: World Bank Group, IMF. Fiscal windfall in this figure measures the total increase in fiscal resources over the period 2000-14, and includes commodity price and volume Sources: World Bank Group, Sovereign Wealth Fund Institute. Increase in government spending as a % of fiscal windfall 3000 700 Ecuador 600 500 2000 Russia 400 300 Norway 200 Algeria 1000 UAE Azerbaijan Oman 100 Bahrain Kuwait Qatar KSA 0 0 500 1000 1500 2000 2500 3000 0 Fiscal windfall (cum. increase in hydrocarbon revenues, as % of 2000 GDP) 2011 2015 2017 FIGURE 26 FIGURE 27 Fiscal breakeven oil prices, 2008 and 2014 General government non-oil fiscal balance US$ % of non-oil GDP Source: IMF. Source: IMF. 125 0 100 -20 75 -40 50 -60 25 -80 0 Qatar Kuwait UAE KSA Oman Bahrain 2008 2014 Average oil price in 2014 2000–12 2014 FIGURE 28 FIGURE 29 Real effective exchange rate appreciation Size of manufacturing sectors, 1990 vs. 2014 Percent change Source: World Bank Group. Source: United Nations Statistics Division. 60 Manufacturing as % of GDP, 2014 20 50 40 Bahrain 15 30 Iran Oman KSA 20 10 Qatar 10 UAE Yemen 0 Kuwait 5 -10 Algeria Libya Iraq -20 0 Oman Bahrain KSA Kuwait Qatar UAE 0 5 10 15 20 2000-15 2011-15 Manufacturing as % of GDP, 1990 Gulf Economic Monitor • Issue 1 25 FIGURE 30 FIGURE 31 Breakeven and actual oil prices, 2017. US$ Probability that oil prices exceed fiscal breakeven Sources and note: World Bank Group and IMF for fiscal breakeven data and estimates, International Energy Agency (IEA) and Economist Intelligence Unit for oil production prices in 2017 and 2018. Percent estimates and forecasts. Breakeven prices and fiscal gap projections ’ calculations exclude investment income and transfers to SWF for Kuwait. Source: World Bank Group. 100 35 30 80 25 60 20 40 15 20 10 5 0 Bahrain Kuwait* Oman Qatar KSA UAE 0 Fiscal Breakeven prices (2017) Bahrain Kuwait* Oman Qatar KSA UAE Oil (US$/bbl, WB 2017 projections) 2017 2018 Development of other tradable sectors stymied Fiscal adjustment and reform by poor business environments and real ex- priorities change rate appreciation. The commodity boom also contributed to significant supply Continued financing needs amid high fiscal side pressures. Rapid growth and high levels of government breakeven prices spending led to inflationary pressures and real exchange rate pressures. Evidence suggests that open immigration When the oil shock hit, initially countries were able to cushion policies and access to an elastic supply of foreign labor the impact by drawing down buffers. In Saudi Arabia and to a have helped to alleviate supply side bottlenecks and relative lesser extent in Kuwait, record high crude output also helped price pressures associated with Dutch Disease (Espinoza et. cushion the impact from lower oil prices. Nevertheless, as the al., 2013). Nevertheless, between 2011 and 2015, most GCC external environment became increasingly challenging and low countries have seen a real appreciation in exchange rates of oil prices endured, fiscal space dissipated rapidly. As a result, over 15 percent, and even more in the UAE and Qatar fiscal consolidation and broader structural reforms to support (Figure 28), likely reflecting overheating pressures resulting growth have become increasingly important across the GCC. from the implementation of large public investment pro- jects. With the exception of Oman and Bahrain, GCC coun- Most GCC countries face breakeven prices that are close to or tries along with other MENA oil exporters have seen manu- well above the average projected oil prices this year (Figure facturing sectors share of GDP fall over the past two dec- 30). An analysis of the past volatility in oil prices shows that ades: in Kuwait, this has fallen below 5 percent in recent they are unlikely to exceed break-even levels over the medium- years (Figure 29). term too.6 Figure 31 indicates that the likelihood of prices Alongside the loss of competitiveness implied by the apprecia- 6/ Not only have oil prices experienced a material downshift in recent years, tion of real exchange rates, poor business and regulatory envi- but volatility has also increased (Baffes et. Al. 2015). With fiscal break-even ronments have also held back the development of non -oil trad- prices trending higher in GCC countries, it becomes important to assess the able sectors. This is particularly evident in the larger Gulf likelihood that oil prices will rise above break-even prices. The probabilities are derived using stochastic simulations following a two-step process. First, economies, notably Kuwait and to a lesser extent Saudi Arabia. the distribution of oil prices is characterized on the basis of their historical For instance, in the 2017 World Bank Doing Business Report behavior (in particular, their volatility) using the Geometric Brownian Motion model of Caceres and Medina (2015). More precisely, the behavior of oil Kuwait and Saudi Arabia were respectively ranked 173rd and prices is assumed to be driven by the following stochastic differential equation: 147th (among 190 countries and also amongst the worst perfor- dyt = αyt dt + yt σ dBt mance in the broader Middle East region) on the ease of start- ing a business. where yt is the log-oil prices at time t; Bt is a standard Brownian motion (or Wiener process); and α and σ are “drift” (trend) and “volatility” parameters, estimated using maximum likelihood. Second, the probability that oil prices exceeds a predetermined level of break-even prices at any forecast horizon (for example, by end-2017) is computed from the empirical distribution of possible future oil price paths, which are in turn generated from stochastic (Monte Carlo) simulations based on model estimates. 26 Gulf Economic Monitor • Issue 1 reaching break-even in 2018 is 1 in 7 or less (except for Qatar The interactions of fiscal policy with monetary policy and the and UAE). Accordingly, GCC countries will continue to have broader structural reform agenda are also worth noting. First, large financing needs over the medium -term. As country fore- GCC exchange rate pegs mean that the burden of demand man- cast tables at the end of this report, fiscal deficits are agement falls solely on fiscal policies. Second, ensuring coher- expected to remain large in 2017 and 2018, particularly in ence in fiscal and monetary operations is needed to avoid tight- Oman, Bahrain and KSA. ening of domestic liquidity. Third, GCC countries are gradual- ly moving towards increased private sector participation to However, governments face a number of challenges with re- broaden the non-oil economic base and to deliver essential spect to financing. First, their ability to fund themselves in services. However generous subsidies have distorted incentives domestic debt markets is constrained by the lack of deep do- to innovate and increase efficiency in the non-oil sector. In mestic capital markets and banking sector liquidity pressures. addition, high levels of current spending and high levels of Second, many countries lack established tax systems, as they employment of nationals in the public sector, have added con- exempted firms and households from taxation. In addition, in siderable inertia into government spending, crowding out more many countries, the non-oil tax base is narrow. As a result, productive investment and diluting incentives to pursue private although countries are considering or have announced tax sector employment. measures, they will likely prove insufficient to cover budget deficit shortfalls. Building fiscal institutions Meanwhile, drawdowns from SWFs erode long -term sav- In resource rich economies, the uncertainty and volatility of oil ings and undermine intergenerational equity. External bor- prices is often blamed for their poor macroeconomic outcomes. rowing is therefore attractive, as countries try to diversify The resulting Dutch Disease and inefficient investment are also their pool of creditors, and risk appetite has remained strong associated with macroeconomic volatility, excessive borrowing for GCC debt. Nevertheless, global financial conditions can during downturns, and excessive consumption. However, evi- be subject to bouts of volatility, affecting costs and availa- dence from recent literature suggests that weak institutions are bility of funding. 7 a key factor underlying the oil curse and that resource -rich economies with strong institutional checks and balances are able to turn the resource curse into a blessing. Recent empirical Sustaining fiscal consolidation and reforms and work has provided strong support for this conditional resource strengthening fiscal management curse hypothesis (See Collier and Goderis (2009), Schmidt - Hebbel (2012), Ahmadov (2011)). Policymakers have adopted a mix of spending cuts and revenue -raising measures to reduce fiscal deficits. These include (i) all Institutions shape incentives and affect how rents are collected GCC countries raising domestic fuel prices; (ii) some countries and distributed. As a consequence, they largely determine have started—or are planning—to take measures to rein in the policy choices, making it an important dimension of macroe- public sector wage bill, including through hiring freezes conomic policy. Fiscal policy is the principal instrument for (Oman) and streamlining overtime and benefits (Oman, Saudi distributing rent and a pro -cyclical fiscal policy indicates that Arabia) and slowing wage growth (Kuwait);8 (iii) most coun- rent is distributed in a way that maximizes public consent. 10 In tries reduced capital spending; (iv) several countries have in- the GCC, 40-60 percent of public budgets are spent on wages creased fees, charges and excise duties; and (v) several coun- and social services. GCC economies typically exhibit pro - tries are further diversifying revenues.9 cyclical fiscal policy,11 i.e. policies that are expansionary dur- ing booms and contractionary in recessions. Such policies are Saudi Arabia is particularly notable for the launch of its recent commonly considered as detrimental to welfare for various Balanced Budget 2020 program, that aims to rebalance spend- reasons; macroeconomic volatility increases and investment in ing away from low-productivity subsidies, enhancing the effec- real and human capital is depressed, thus hampering growth tiveness of government spending and diversifying revenue and harming the poor.12 Pro-cyclical policies also tend to be sources. The program is complemented with other strategic associated with significant deficit bias causing debt unsustain- programs aimed at invigorating private sector growth that will ability (IMF, 2006). help to support activity and offset any drag from continued fiscal consolidation. 7/ Bahrain for instance, was forced to cancel a $750 million bond sale in Feb- More broadly, however, as resource abundant and exporting ruary 2016 following its ratings downgrade (although it has since successfully issued debt). economies, GCC nations face key critical challenges related to 8/ Sommer and others (2015) discuss the adopted deficit -reduction measures the management of their hydrocarbon wealth. The first is how to in detail. decouple the budget from short-term volatility in commodity 9/ IMF, 2016. prices. Over the long run, they need to ensure that commodity 10/ Malik , 2015. revenues are spent in a manner that is fiscally sustainable, pre- 11/ El-Gamal and Selim, 2012. serves intergenerational equity (given the exhaustible nature of 12/ Serven, 1998; World Bank, 2000; IMF, 2005; IMF 2005b. resource wealth) and does not contribute to the “Dutch Disease.” Gulf Economic Monitor • Issue 1 27 BOX 1 higher tiers of residential consumption and by varying amounts for commercial and industrial users. Energy subsidy reforms in GCC countries Energy subsidies for both firms and households have historically been high in the GCC. But with oil prices reaching new lows, governments have increasingly had to consider subsidy reform as a means for ad- dressing large fiscal deficits. The content of the reforms undertaken to Bahrain announced at the end of December 2015 increases of date, starting from the pioneering announcement by the UAE in July 60 percent for low-grade gasoline and 20 percent for transport 2015 to the most recent announcement by Kuwait is summarized diesel. Fisheries and bakeries were exempted from the tariff in- below. crease. For water and electricity, the increase was limited to higher tiers of consumption and for commercial and industrial UAE introduced in July 2015 a monthly adjustment to the price users. The government had earlier raised gas prices to industrial of transport fuel. New electricity tariff increases were announced users by about 10 percent per year from April 2015 with phased in January 2016 with the tariff for expatriates in Abu Dhabi in- increases planned to take the gas price to $4/MMbtu in 2022. creasing by 50 percent for electricity and 6.6 percent for water. This followed a tariff increase of 40 percent and 170 percent Oman increased by a third the price of low -grade gasoline from applied for electricity and water respectively in January 2015. 13 January 2016 as well as raising by 10 percent the price of die- However, natural gas, accounting for the bulk of UAE subsidies, sel. The aim is to cut subsidies for petroleum products, electricity remains well below international levels. and other goods by over 60 percent. Oman also doubled gas tariffs for industrial producers and the power industry in January KSA announced at the end of December 2015 a 5-year plan to 2015. raise prices of fuels including natural gas, gasoline, diesel, and electricity as well as water. The largest price increases are 133 Kuwait was the last GCC country to increase transport fuel pric- percent for ethane, 79 percent for transport diesel, and 67 per- es by 83 percent for high grade gasoline and 42 percent increase cent each for natural gas and low-grade gasoline. Prices of elec- for low grade gasoline prices, from 1 September 2016. An in- tricity and water have also been raised by up to 60 percent for crease in electricity charges is to be implemented this summer, with plans to raise power charges from the current flat rate of 2 A pro-cyclical fiscal policy is thus an indication of a lack of to strategic national objectives and strengthening public pro- strong fiscal institutions. Most oil producers in the region lack curement would help in increasing allocative (“spending in the any fiscal rules which could have helped maintain larger buff- right areas”) and technical (“value for money”) efficiency for ers as well as insulate budgets from the volatility in oil prices. investment projects. Kuwait has a fiscal rule, only related to the share of oil reve- nues transferred into the Kuwait investment Authority; there PPPs are also becoming increasingly attractive to GCC govern- are no structural deficit rules in place. ments from the perspective of generating fiscal savings, and to leverage innovation, technology and funding that may not be Strengthening the institutional framework of fiscal policy will available within the public sector. entail adopting several measures including fiscal responsibility laws, effective budget management reform, extended budget However legal and governance frameworks in some GCC planning horizons (e.g. through Medium -Term Expenditure countries are still nascent (in a few countries, there is already Frameworks), enhancing fiscal accountability and transparen- a comprehensive legal and regulatory framework). Moreover, cy, and allowing for external control and audit. Furthermore it is important to remember that PPPs are just an alternative appropriate fiscal rules should be identified and adopted. way of financing viable and good investment projects. In the end they are only as good as the degree to which they meet Strengthening public investment systems the needs of the client (the government and citizens), are sup- ported by agreements reflecting PPP best practice, and have GCC governments have also begun putting long -term or more the appropriate legal and governance mechanisms in place to secondary infrastructure projects on hold or are shifting to deal with such agreements, including operational and com- PPP financing. In part this reflects the difficulty of reducing mercial issues, and clarity on the degree of fiscal risk borne current expenditure. Although efforts are being made to pro- by both parties. tect capital expenditures, there is increasing focus on getting “more value for money” and prioritization of projects that will Diversifying revenue sources help diversify the economy (Kuwait, Saudi Arabia, Qatar), increase oil and gas production (Oman, Kuwait, Qatar) or help The current tax system in GCC countries is characterized by a diversify energy sources. Strengthening public investment limited number of non-oil tax instruments, which generally management systems, e.g. by improving systems for project feature low rates and narrow bases. This has reinforced de- selection, appraisal and costing, ensuring that they are linked pendence on volatile hydrocarbon resources and also limited 28 Gulf Economic Monitor • Issue 1 the number of tax levers by which to conduct demand manage- Sustaining progress on fiscal reforms has the potential to gen- ment policies. Compared to non-GCC hydrocarbon producers erate pay-offs both in the short-term and the long-term. The the number of taxes levied is extremely limited (IMF, 2016). adoption of fiscal rules for example can help insulate the budg- These patterns reflect both the prevailing social contract and et (and thereby the economy) from short -term volatility in some element of tax and “yardstick competition” with neigh- commodity prices, and over the longer term, help with anchor- boring tax jurisdictions that have made it hard to levy taxes ing fiscal sustainability. Likewise, the gradual introduction of unless coordinated across GCC countries. new tax instruments can free up resources for more productive spending and also reduce dependence on hydrocarbon receipts. Potential tax handles include property taxes, and over the me- Strengthening public investment management systems would dium- to long-term, corporate and personal income taxes. help enhance the quality of investment and infrastructure However, this requires not just a shift in policy, but also a spending in GCC countries, and in turn stimulate the long -term strengthening of tax administration capabilities. In the near supply potential of economies. term, the introduction of the VAT requires a significant in- crease in staff and training, so that the country is ready to im- plement it in 2018. These measures would free up resources for more productive spending and reduce dependence on volatile hydrocarbon revenues. GCC countries are preparing for the implementation of a VAT in 2018. It should be stressed that the VAT, unlike any other tax, exposes the state to the possibility of collecting negative revenue if Ministries of Finance have weak adminis- trative capacity (this can arise with large -scale fraud on VAT refunds). All countries implementing a VAT system suffer from this risk, and GCC countries too should remain focused in ensuring that administrative systems are being strength- ened accordingly. Conclusion GCC countries received a substantial windfall from the surge in global commodity prices during the commodity boom years. However these years were also a period characterized by high levels of government spending. High and rising fiscal breakeven prices meant that there was limited fiscal room for maneuver when global energy prices eventually fell in 2014. Moreover, non-oil sectors remained small, held by real appre- ciation of exchange rates and also by relatively poor business environments. With oil prices unlikely to return to the plus -$100/bbl level anytime soon, GCC countries continue to face a period of sus- tained fiscal adjustment, with countries with lower buffers and higher debt needing to remain focused on frontloading fiscal consolidation to ensure fiscal sustainability. The partial recov- ery in oil prices over the past year and fiscal austerity already undertaken has reduced fiscal pressures somewhat in the larger GCC countries. However the need for fiscal reforms remains, including strengthening the fiscal management of natural re- source revenues through the adoption of rules based fiscal poli- cies, building strong fiscal institutions and strengthening public financial and investment management, and diversifying sources of revenues. Among the GCC countries, the UAE has shown leadership in adopting subsidy reforms, while the Saudi Arabia has also begun to move ahead in terms of adopting comprehensive structural reforms, including in public sector finances and management. Gulf Economic Monitor • Issue 1 29 COUNTRY SUMMARY TABLES BAHRAIN SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 26 29 30.7 32.5 33.4 31.1 31.6 34 39 Real GDP, % change 4.3 2.0 3.7 5.4 4.4 2.9 3.0 1.9 1.9 Hydrocarbon1 2 0.1 3.6 -8.5 15.3 3.0 -0.1 -0.1 .. .. Non-hydrocarbon 5.5 1.6 7.1 3.1 4.7 3.6 3.7 .. .. CPI Inflation Rate, Average, % 2.0 -0.4 2.8 3.3 2.7 1.8 2.8 1.3 3.4 Government Revenue, % GDP 22.7 26.3 26.4 24.6 25.0 18.2 14.9 17.1 17.4 Government Expenditure, % GDP 28.5 27.8 29.6 27.6 28.4 31.0 27.9 26.9 26.3 Fiscal Balance, % GDP -5.8 -1.5 -3.2 -3.0 -3.4 -12.8 -13.0 -9.8 -8.9 General Government Gross Debt, % GDP 3 29.7 32.8 36.2 43.9 44.4 66.0 82.1 88.6 96.2 General Government Net Debt, % GDP3 29.7 32.8 36.2 43.9 44.4 66.0 82.1 88.6 96.2 Merchandise Exports % change 16.5 44.0 15.9 10.9 -8.2 -29.6 -3.3 10.8 14.8 Merchandise Imports, % change 16.4 8.2 62.8 8.0 -7.0 -20.6 -1.9 12.6 14.0 Current Account, % GDP 3.7 12.2 8.4 7.4 4.6 -2.4 -4.6 -3.8 -3.5 Official Reserves, $ bn1 5.1 4.5 5.2 5.4 5.2 .. .. .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 85.1 87.9 87.2 88.3 86.2 78.1 .. .. .. Hydrocarbon exports, % of GDP1 39.6 53.8 49.4 47.0 43.4 .. .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Haver. 2/ Includes Crude Petroleum & Natural Gas. 3/ IMF, April 2017. 30 Gulf Economic Monitor • Issue 1 KUWAIT SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 115 154 174 174 163 114 108 126 137 Real GDP, % change -2.4 9.6 6.6 1.1 0.5 1.8 2.9 0.2 2.7 Hydrocarbon1 .. 15.6 10.3 -1.8 -2.1 -1.7 3.5 .. .. Non-hydrocarbon .. 3.4 3.4 4.2 4.8 1.3 1.9 .. .. CPI Inflation Rate, Average, % 4.5 4.9 3.2 2.7 2.9 3.2 3.2 4.2 3.6 2 Government Revenue, % GDP 70.7 72.1 72.1 72.9 67.4 52.6 51.3 55.3 54.5 2 Government Expenditure, % GDP 44.8 39.1 37.4 37.7 49.3 53.0 50.7 50.6 49.6 Fiscal Balance, % GDP 25.9 33.0 34.7 35.1 18.0 -0.4 0.5 4.7 4.9 General Government Gross Debt, % GDP 3 11.3 9.2 7.3 6.5 7.6 11.5 18.58 19.8 22.2 General Government Net Debt, % GDP3 .. .. .. .. .. .. .. .. .. Merchandise Exports % change 23.3 53.2 16.3 -3.3 -9.5 -47.2 -13.3 10.0 10.0 Merchandise Imports, % change 5.6 15.5 7.3 5.5 7.1 -0.2 5.2 5.0 4.5 Current Account, % GDP 32.0 42.9 45.5 39.9 33.2 7.5 1.9 2.9 3.5 Official Reserves, $ bn1 21.2 25.8 28.9 29.4 32.1 28.3 31.0 .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 92.8 94.5 93.6 92.1 90.3 88.6 .. .. .. Hydrocarbon exports, % of GDP 53.5 62.8 64.9 62.3 60.0 42.5 .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Includes only the oil sector. 2/ Fiscal years end in March. 3/ IMF, April 2017. Gulf Economic Monitor • Issue 1 31 OMAN SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 59 68 77 79 81 70 68 74 78 Real GDP, % change 4.8 -1.1 9.3 4.4 2.5 5.7 2.2 0.9 2.4 Hydrocarbon1 2 5.4 2.0 3.0 2.7 -1.0 4.2 .. .. .. Non-hydrocarbon 4.3 -3.8 15.1 5.7 5.4 6.7 .. .. .. CPI Inflation Rate, Average, % 3.3 4.0 2.9 1.2 1.0 0.1 1.1 4.1 3.0 Government Revenue, % GDP 39.4 40.7 45.7 45.7 45.1 34.5 28.1 27.4 35.4 Government Expenditure, % GDP 33.9 41.1 46.0 46.1 48.7 51.0 48.4 41.3 44.6 Fiscal Balance, % GDP 5.5 -0.4 -0.3 -0.4 -3.6 -16.5 -20.3 -13.9 -9.2 General Government Gross Debt, % GDP 2 5.7 5.2 4.9 5.0 4.9 15.3 34.3 38.5 41.2 General Government Net Debt, % GDP2 -29.2 -29.7 -29.0 -43.8 -44.1 -42.5 -29.3 -16.1 -7.2 Merchandise Exports % change2 9.1 4.9 10.3 10.1 1.0 -1.7 -12.8 -5.3 4.7 Merchandise Imports, % change2 2.7 12.2 19.2 29.4 -11.1 1.2 -16.8 6.1 4.8 Current Account, % GDP 8.3 13.0 10.2 6.6 5.2 -15.5 -16.2 -14.4 -9.8 Official Reserves, $ bn 13.0 14.4 14.4 16.0 16.3 17.5 20.3 .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 69.1 73.4 73.0 75.0 72.3 62.4 .. .. .. Hydrocarbon exports, % of GDP1 37.8 43.5 41.9 41.8 38.2 25.6 .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Petroleum sector. 2/ IMF, April 2017. 32 Gulf Economic Monitor • Issue 1 QATAR SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 124 168 187 199 206 165 146 163 172 Real GDP, % change 19.6 13.4 4.7 4.4 4.0 3.5 2.2 3.2 2.6 Hydrocarbon1 28.5 15.0 1.2 0.1 -0.6 -0.5 .. .. .. Non-hydrocarbon 8.6 11.0 9.9 10.4 9.8 8.2 .. .. .. CPI Inflation Rate, Average, % -2.4 2.0 1.9 3.1 3.4 1.8 2.7 2.6 5.7 1 Government Revenue, % GDP 31.7 33.8 37.0 47.6 45.7 36.6 29.0 31.3 33.0 1 Government Expenditure, % GDP 26.7 28.6 23.3 28.3 33.4 38.4 38.0 33.6 32.3 Fiscal Balance, % GDP 5.0 5.2 13.8 19.3 12.3 -1.9 -9.0 -2.3 0.7 General Government Gross Debt, % GDP 2 41.8 36.0 37.2 33.1 32.3 34.9 47.6 50.2 50.8 General Government Net Debt, % GDP2 -34.4 -43.7 -58.9 -83.3 -97.2 -131.9 -133.3 -115.0 -99.9 Merchandise Exports % change 56.2 52.7 16.2 0.3 -5.0 -39.0 -13.7 -2.6 11.2 Merchandise Imports, % change -6.7 28.6 14.3 2.2 -1.0 -8.5 5.1 8.6 8.6 Current Account, % GDP 19.4 31.1 33.2 30.4 24.0 8.3 -2.6 -1.1 0.9 Official Reserves, $ bn1 30.6 16.2 32.5 41.6 42.7 36.5 30.8 .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 85.2 81.3 77.2 86.2 81.9 81.8 .. .. .. Hydrocarbon exports, % of GDP 44.8 52.6 52.8 51.5 .. .. .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Mining and Quarrying. 2/ IMF, April 2017. Gulf Economic Monitor • Issue 1 33 SAUDI ARABIA SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 527 671 736 747 756 652 612 660 708 Real GDP, % change 4.8 10.3 5.4 2.7 3.7 4.1 1.4 0.6 2.0 Hydrocarbon1 -0.1 12.2 5.1 -1.6 2.1 5.3 .. .. .. Non-hydrocarbon 9.1 8.8 5.7 6.2 4.9 3.2 .. .. .. CPI Inflation Rate, Average, % 3.8 3.7 2.9 3.5 2.7 2.2 3.5 3.8 5.1 Government Revenue, % GDP 37.5 44.4 45.2 41.3 36.8 25.3 24.0 30.0 30.7 Government Expenditure, % GDP 34.0 33.3 33.2 35.5 40.2 40.4 42.1 40.6 37.4 Fiscal Balance, % GDP 3.6 11.1 12.0 5.8 -3.4 -15.1 -18.1 -10.6 -6.7 General Government Gross Debt, % GDP 2 8.4 5.4 3.6 2.1 1.6 5.0 12.4 15.6 19.1 General Government Net Debt, % GDP2 4.0 11.3 11.8 5.4 -4.0 -17.8 -20.5 -11.3 -7.7 Merchandise Exports % change 30.7 45.4 6.3 -3.1 -9.0 -40.9 -13.9 15.5 26.6 Merchandise Imports, % change 11.9 23.2 18.3 7.7 3.3 -1.9 -12.9 -3.0 -3.2 Current Account, % GDP 12.6 23.7 22.3 18.2 9.7 -8.6 -6.5 -4.0 0.5 Official Reserves, $ bn1 444.7 540.7 656.5 725.3 731.9 616.0 535.4 .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 90.4 92.5 91.8 89.5 87.5 72.3 .. .. .. Hydrocarbon exports, % of GDP1 .. .. .. .. .. .. .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Includes only the oil sector. 2/ IMF, April 2017. 34 Gulf Economic Monitor • Issue 1 UNITED ARAB EMIRATES SELECTED ECONOMIC INDICATORS 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Nominal GDP, $ billion 286 349 373 389 402 370 376 404 428 Real GDP, % change 1.6 5.2 6.8 4.7 3.1 3.8 2.3 2.0 2.5 Hydrocarbon1 -7.1 -2.4 -8.9 3.8 6.6 7.6 .. .. .. Non-hydrocarbon 9.3 6.0 -3.5 0.7 4.5 6.4 .. .. .. CPI Inflation Rate, Average, % 0.9 0.9 0.7 1.1 2.3 4.1 1.8 2.8 3.7 Government Revenue, % GDP 34.7 37.7 40.1 40.8 37.3 28.5 26.4 27.2 28.1 Government Expenditure, % GDP 32.7 31.4 29.2 30.4 32.3 30.6 29.9 29.3 29.9 Fiscal Balance, % GDP 2.0 6.3 10.9 10.4 5.0 -2.1 -3.5 -2.2 -1.9 General Government Gross Debt, % GDP 2 22.2 17.6 17.0 15.8 15.6 18.1 19.3 19.1 19.0 General Government Net Debt, % GDP2 -227.9 -200.9 -209.9 -215.3 -221.9 -243.6 -247.7 -232.1 -223.8 Merchandise Exports % change2 2.3 16.8 17.5 7.6 -4.3 5.2 9.1 -0.7 3.9 Merchandise Imports, % change2 -4.8 10.5 10.1 11.8 5.3 1.4 6.5 5.3 2.9 Current Account, % GDP 3.5 14.0 17.2 19.1 10.1 3.3 1.3 3.0 3.2 Official Reserves, $ bn1 32.8 37.3 47.0 68.2 78.4 93.7 85.1 .. .. MEMORANDUM ITEMS Hydrocarbon revenue, % of total revenue 60.2 69.1 67.7 63.6 59.7 41.4 .. .. .. Hydrocarbon exports, % of GDP 21.0 26.0 27.6 27.5 17.9 8.5 .. .. .. Source: World Bank Group, Macroeconomics and Fiscal Management Global Practice, unless otherwise indicated. Notes: e = estimates; f = forecasts. 1/ Haver 2/ IMF, April 2017. Gulf Economic Monitor • Issue 1 35 COMMODITY PRICES TABLES NOMINAL US DOLLARS ENERGY Unit 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 Coal, Australia $/mt 70.1 57.5 65.9 70.0 60.0 55.0 55.4 55.9 56.3 56.8 57.2 57.7 60.0 Crude oil, avg. $/bbl 96.2 50.8 42.8 55.0 60.0 61.5 62.9 64.5 66.0 67.6 69.3 71.0 80.0 Natural gas, Europe $/ 10.1 7.3 4.6 5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.7 8.0 Natural gas, US $/ 4.4 2.6 2.5 3.0 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 5.0 Source: World Bank Group. Natural gas LNG, Japan $/ 16.0 10.4 6.9 7.3 7.4 7.6 7.8 8.0 8.2 8.4 8.6 8.8 10.0 CONSTANT US DOLLARS* ENERGY Unit 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 Coal, Australia $/mt 64.9 58.9 70.2 73.9 61.7 55.4 54.8 54.2 53.7 53.2 52.6 52.1 49.5 Crude oil, avg. $/bbl 89.1 52.0 45.7 58.1 61.7 61.9 62.2 62.5 62.9 63.3 63.7 64.2 66.0 Natural gas, Europe $/ 9.3 7.4 4.9 5.3 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.6 Natural gas, US $/ 4.0 2.7 2.7 3.2 3.6 3.6 3.7 3.7 3.8 3.8 3.8 3.9 4.1 Natural gas LNG, Japan $/ 14.8 10.7 7.3 7.7 7.6 7.7 7.7 7.8 7.8 7.9 7.9 8.0 8.2 Source: World Bank Group. Note: Real price indices are computed from unrounded data and deflated by the MUV index. INFLATION INDICES, 2010=100 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 MUV index* 108.0 97.6 93.8 94.7 97.2 99.2 101.2 103.1 105.0 106.8 108.7 110.6 121.2 % change per annum (1.5) (9.6) (4.0) 1.0 2.6 2.1 2.0 1.9 1.8 1.8 1.8 1.8 1.9 Source: World Bank Group. Note: Unit value index of manufacture exports (MUV) in US dollar terms for fifteen countries (Brazil, Canada, China, Germany, France, India, Italy, Japan, Mexico, Republic of Korea, South Africa, Spain, Thailand, United Kingdom, and United States). 36 Gulf Economic Monitor • Issue 1 OIL PRODUCTION TABLE CRUDE OIL PRODUCTION Unit 1000b/d 2010 2011 2012 2013 2014 2015 2016 2017Q1 Bahrain 182 190 172 198 202 202 198 193 Kuwait 2031 2239 2463 2549 2599 2751 2884 2707 Oman 865 888 919 947 943 982 1004 968 Qatar 738 737 740 729 704 651 650 600 Saudi Arabia 7910 9060 9512 9404 9525 10124 10416 9903 United Arab Emirates 2311 2505 2653 2762 2773 2933 3027 2942 Source: International Energy Agency. Gulf Economic Monitor • Issue 1 37 REFERENCES Ahmadov, Anar. 2011. A conditional theory of the ‘political resource curse:’ oil, autocrats, and strategic contexts. PhD thesis, The London School of Economics and Political Science (LSE). Baffes, John , M. 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World Bank, 2017, ‘Global Economic Prospects Report,’ Washington: World Bank. June 2017. 38 Gulf Economic Monitor • Issue 1