Weakening economic activity resulting in low gross domestic product growth across the Gulf Cooperation Council is expected to apply further downward pressure on sovereign credit ratings of many countries, according to Standard & Poor’s.
Available data for 2016 show a weakening trend in GCC economic activity, reflecting the impact of low oil prices and the resulting fiscal consolidation and reduced banking sector liquidity.
“We expect average GCC GDP growth to slow to about 2 per cent in 2016, compared with closer to 4 per cent in 2015 and to remain around these relatively weak growth rates in 2017,” said S&P credit analyst Trevor Cullinan,
Overall sovereign creditworthiness in the Middle East and North Africa region has continued to deteriorate, according S&P.
Government’s across GCC implemented expenditure cuts and subsidy reforms which have weakened both corporate and household activity, while reduced government deposits in regional banking systems and increased government domestic borrowing have increased interbank rates and squeezed banking sector liquidity.
Economic activity in the oil and gas sector was weak across most of the GCC last year. Absent a sharp increase in oil prices — which is not our base case we expect further weakness in the hydrocarbons sector over 2017.
Despite the agreement by members of the Organisation of Petroleum Exporting Countries to cut production by 1.2 million barrels per day in concert with a reduction of 558,000 barrels per day by non-OPEC members, analysts do not expect a sharp recovery in oil prices.
The recently released third quarter 2016 GDP data for Qatar and Saudi Arabia shows accelerating hydrocarbon sector growth, related to slightly higher oil prices and increased production before the upcoming production cuts.
But the non-oil growth has slowed in most GCC countries and further fiscal consolidation measures by governments to curtail household and corporate spending in 2017.
Non-hydrocarbon output slowed in Abu Dhabi in 2016 compared with the previous year due to weak non-financial corporation and declining public sector activity. S&P expects overall economic growth of 2 per cent in 2017.
In Bahrain, the non-hydrocarbon sector is holding up relatively well due to the dynamic education and health sectors, and is also supported by the implementation of major infrastructure projects.
The same is broadly true for Qatar where non-hydrocarbon sector activity has slowed to closer to 5 per cent in 2016 from above 8 per cent in 2015.
We expect these relatively buoyant growth rates to be maintained, supported by ongoing construction of significant building and infrastructure projects in preparation for the Fifa World Cup 2022, and in order to meet the country’s National Vision 2030. We expect the national development strategy projects to improve the economy’s productive capacity.
With the government starting to pay off its arrears to the construction industry projects are expected to get a boost this year.
But the long-term sustainability of GCC economic growth and the ability of these economies to absorb future increases in their working populations and diversify government revenues away from the hydrocarbons sector will rely on the prospects for growth in the non-hydrocarbon sector.
Significant challenges remain in this regard and meaningful diversification will not happen in the short term, according to S&P.