Most GCC economies expected to recover for 2017 following 2016 slowdown

Published February 6th, 2017 - 01:00 GMT
The GCC economies are forecast to recover in 2017, except Oman and Bahrain. (File photo)
The GCC economies are forecast to recover in 2017, except Oman and Bahrain. (File photo)

The GCC economies are forecast to recover in 2017, except Oman and Bahrain, from a sharp slowdown in 2016 amid public sector spending cuts, tightening liquidity, and investor uncertainty, Coface – the worldwide leader in trade credit management solutions and risk information services – said in its global and regional economic outlook and sector analysis. All GCC countries except Kuwait, had seen economic contraction in 2016.

Saudi Arabia’s economic growth is expected to accelerate to 1.8 percent in 2017 from 1.3 percent in 2016.

The Coface analysis shows that UAE growth will pick up in 2017 to reach 2.5 percent up from 2.3 percent in 2016 because this country is more diversified from oil than its neighboring GCC countries.

For Qatar, its huge financial reserves and still-strong revenues from its gas sector will ensure continued public sector spending ahead of the FIFA 2022 World Cup. This will keep the country’s growth trajectory relatively high in the region. Qatar’s economic growth is forecast to be 3.3 percent in 2017 up from 2.6 percent in 2016.
The Bahrain economy will shrink further going down to 1.7 percent in 2017 from 2 percent in 2016. Growth in Oman will also dip slightly again to be 1.7 percent in 2017 from 1.8 percent in 2016.

Kuwait’s economy had more than doubled from 2015 to 2016 going from 1.1 percent to 2.4 percent. In 2017, the country will grow more and reach 2.6 percent.

Massimo Falcioni, CEO of Middle East Countries at Coface, said “the UAE has remained relatively resilient in the face of lower hydrocarbon prices because of its economic diversity, but the lower oil revenues left government spending constrained and this had a spillover effect on all economic activities. The slight rise in oil prices now should give a corresponding impetus to the UAE economy.”

Abu Dhabi, being the most oil-dependent emirate will continue to see a slowdown in 2017. Dubai should be more resilient but some non-oil economic activities could still falter. Overall, the country’s growth will be driven by the tourism and financial sectors, while difficulties in the construction sector will remain,” Falcioni said.

“The stable political and security climate of the UAE helps it stand out in the region. The country’s business climate, already the most favorable in this region, is improving further. The expected passing of the new UAE insolvency law will make the country still more business-friendly, giving companies in difficulty a reliable mechanism to restructure their operations,” said Falcioni.

The UAE was rated the top country in the Middle East and North Africa in ‘Doing Business Ranks, Most Improved Globally’, according to a World Bank report published at the end of October last year. According to the World Bank, the UAE led the GCC in terms of the number of reforms implemented and it jumped 39 ranks in the reform category of ‘Protecting Minority Investors’.

Liquidity remains an issue. In the UAE, there is a 4 percent rise in delay of payments, because of a lack of bank lending and a liquidity crunch. “Notifications of overdue have increased in key sectors of the country’s economy. Comparing figures of third quarter 2016 from the previous quarter of the same year, the highest increase of overdue notifications in the UAE was registered from the metal traders and building materials or construction sector (+26 percent), followed by the general trading sector (+22 percent),” Falcioni reported.

Based on Coface’s monitoring activities of 23,000 companies in the UAE and Saudi Arabia, a total of 814 runaway cases of UAE-based businesses was registered from Q3 2015 to Q4 2016 (six quarters), yielding a 200 percent increase from the previous year. More than half (55%) of these runaway cases were businesses in the general trading sector.

Nevertheless, UAE is still in a stronger position compared to most other nations in the region due to the diversified economy and political/governance stability. In a Coface country risk of business defaulting assessment overview published in January, the UAE is categorized as A4 (acceptable risk). The overall Middle East sector risk assessment is that three-fourths of the region’s sectors are considered “high” or “very high” risk.

Globally, growth weakened for the second consecutive year in 2016 to reach 2.5 percent based on Coface data. A slight improvement (+2.7%) is expected for 2017 especially with the upturn in activity for emerging economies (+4.1%, up from +3.7%) and the economic recoveries in Brazil and Russia which will offset China’s gradual economic deceleration. Activity in advanced economies will hold steady (+1.6%), with the slowdown in the United Kingdom being compensated for by the resilience of the eurozone and the slight improvement in US economic activities.

In 2017, the trade may be negatively impacted by protectionism which is the stated policy of the recently elected Republican government in the United States of America.

In Europe, Coface’s political risk indicator in the past year increased by an average of 13 points for Germany, France, Italy, Spain and the United Kingdom. The main threats to growth include the expected economic consequences of Brexit and the probability of political unrest in Continental Europe on a scale similar to the UK referendum.

Overall, global risks to be considered are of two kinds as per Coface analysis. First, the political risk and protectionism risk. Second, the banking risk, which includes very high corporate debt in China and bad debt in the banking sector in the Brazil, Russia, India, China (BRIC) economies. “Any business that is not strictly limited to local boundaries should protect its trade credit. Risk management and trade credit protection are vital for businesses to deal with any liquidity squeeze arising from unforeseen developments,” Falcioni added.

“Oil prices are not expected to return to the previous high levels immediately, that is why public spending in the GCC will remain cautious. A wide range of factors that would impact regional and global consumption patterns calls for greater measures to protect business assets,” Falcioni noted.

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