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Lower oil prices mean critical need for both fiscal and environmental sustainability

UAE. Economic Insight: Middle East Q2 2015 is produced by Cebr, ICAEW’s partner and economic forecaster. Commissioned by ICAEW, the report provides a snapshot of the region’s economic performance.

The report undertakes a quarterly review of the Middle East, focusing on the Gulf Cooperation Council (GCC) member countries (United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5).

Lower oil prices mean GCC economies must respond by finding alternative revenue sources or by reducing expenditure. While most GCC oil-exporting countries have enough of a fiscal buffer – mainly in the form of currency reserves – to avoid extensive cuts to government spending in the short term, the extent of the oil price fall means adjustments will be necessary if prices remain subdued going forward.

Over the next three years, GCC economies will need to generate substantial growth from non-oil sectors, with tourism in particular offering promise in terms of diversification. All GCC countries, with the exception of Saudi Arabia, saw their international tourist arrivals increase year-on-year in 2013.

The UAE, in particular, has worked hard to solidify its position as one of the world’s cultural centres, while neighbouring Qatar is also emerging as a substantial and expanding force in the world art scene.

GCC economies could take advantage of lower oil prices to justify fuel subsidy reductions since diminishing government revenue will create a more pressing need to limit spending. Also, if fuel subsidies are removed during a period of subdued oil prices, the inflationary impact will be felt less sharply by the population.

Scott Corfe, ICAEW Economic Adviser and Associate Director at Cebr said: “Many GCC countries are on the right path for diversifying their economies, but with lower oil prices here to stay, more action needs to be taken. The situation can be conducive for implementing much-needed subsidy reforms in a range of countries. We expect more countries will follow in Bahrain’s footsteps, which recently cut fuel, utility and food subsidies for foreign expats.”

It is not just fiscal sustainability that will be a priority for the GCC over the coming years; environmental sustainability is also crucial. GCC countries currently have some of the highest rates of carbon dioxide emissions in the world. While government-backed initiatives to promote environmentally-friendly business practices are being implemented, these alone will not sufficiently lower per capita CO2 emissions.

The report outlines the need for the business community to self-regulate – and for action to be taken at industry level to help curb the GCC’s carbon footprint. It also highlights the role of the accountancy profession in helping modify business’ behaviour by setting benchmarks.

It notes that governments or environmental ministries in the region can then use this approach to rank companies within a particular industry in terms of their carbon footprint, which in turn could encourage underperformers to re-evaluate their operations without actually imposing regulations.

Resource sustainability is another important consideration for the sustainability of economic activity in the region. With population growth in the GCC region expected to expand at a rate above the world average, accompanied by rapid urbanisation, many countries will struggle to meet water demands.

 Since the GCC countries place substantial pressure upon their internal water resources for domestic and industrial use, in the interests of longer-term sustainability there is an urgent need for a region-wide water management strategy.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “The great fall in the global oil price need not reduce the impetus use energy efficiently. Many of the GCC countries are now recognising the urgency of the situation to secure their future development.

“The UAE, for example, has outlined its ambitions to become a global hub for sustainable development and green economy. This approach has the potential to strengthen and underpin economic growth in emerging markets – which have an opportunity to ‘leapfrog’ to more resource-efficient, environmentally sound and competitive technologies. Over the longer term this could be a tremendous benefit.”

The report also shows:

• Lower oil prices will have a greater impact on Saudi Arabia’s economic growth in the medium rather than the short term. The Kingdom has confirmed that for the remainder of 2015, government expenditure on education, healthcare, transport, and water infrastructure will remain a priority. However adjustments lie further ahead, as oil prices are expected to remain low for some time, financial reserves will gradually be depleted.

• The UAE’s GDP growth in 2015 should reach 3.9% thanks in part to its diversifying strategy. In the last couple of years, the country has also invested greatly in setting up satellite campuses of world-renowned educational institutions such as New York University (NYU). This will not only draw international, tuition fee-paying students to the country but it should also boost the local labour force by giving Emirati populations access to world-class education.

• Despite a slight boost after hosting the Formula One Grand Prix in April, Bahrain’s economic growth in 2015 as a whole is expected to slow to 2.7%, down from 4.0% last year. Given that 90% of government revenues come from oil and gas, the country will be severely impacted by the drop in oil prices. However, infrastructure spending should prove to be a source of growth in the short term.

• Qatar’s GDP is expected to grow 7.1% over 2015 as the country is less dependent on its hydrocarbons resources than many of its fellow GCC members. The continued investment in ambitious projects such as Education City as well as less stringent restrictions on foreign firm ownership will support growth also.

• Despite Kuwait’s comparatively low fiscal break-even oil price, the country’s economy grew by just 1.4% in 2014. In 2015, the country’s GDP is expected to grow to 1.8%, fuelled by a sustained level of spending on job creation and youth development. In addition to this, the Capital Markets Authority’s plans to further align the regulations of the Kuwaiti stock exchange with international norms are expected to improve the country’s investment environment.

• Oman’s economy is expected to expand by 3.5% in 2015. Helping economic growth will be infrastructure investment into ports, roads, and railways. Assuming a deal with Iran is reached this year, the country also stands to gain from welcoming an international expansion of Iranian businesses.
 
The full Economic Insight: Middle East report can be found here: http://www.icaew.com/en/middle-east/economic-insight.

Photo Caption: Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA),

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