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Macro-Financial Vulnerabilities: The Way Forward for GCC

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Magda Kandil - Central Bank of the UAE
ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order”

Kuwait, November 26-27, 2017
www.erf.org.eg

Published in: Government & Nonprofit
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Macro-Financial Vulnerabilities: The Way Forward for GCC

  1. 1. 26 November 2017 Macro-Financial Vulnerabilities: The Way Forward for GCC Research and Statistics Dept. CBUAE
  2. 2. 1 2 1Macroeconomic vulnerabilities Financial vulnerabilities 3 Risks and Policy Response
  3. 3. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 3 Figure 1.1: Brent price and OPEC production Figure 1.2: World liquid petroleum production and consumption Thanks to the OPEC agreement, Oil prices reached recently the psychological level of $60 per barrel, although risks of a counter- effect persist given the expected rebound in oil production in the US. Macroeconomic vulnerabilities Source: Bloomberg and OPEC Source: EIA
  4. 4. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 4 Figure 1.3: Oil Dependence in the GCC in 2016 Table1.1: Fiscal Breakeven Prices The hydrocarbon sector continues to dominate the economic fabric of the GCC countries Macroeconomic vulnerabilities 2000- 2013 2014 2015 2016 2017(p) 2018(p) GCC Average 51.8 84.1 79.6 74.2 69.5 66.3 Kuwait - 54.5 47.2 43.1 46.5 47.1 Qatar 43.1 56.1 50.9 50 46.8 47.2 UAE 43.3 91 64.7 60.7 68 61.7 Oman - 94 101.9 88.9 83.6 76.3 Saudi Arabia - 105.7 94 96.6 73.1 70 Bahrain 68.9 103.3 118.7 105.7 99 95.2 Source: IMFSource: GCC-Stat
  5. 5. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 5 Figure 1.4: Economic Growth (%) in the GCC Countries (2013-2016) Economic slowdown in GCC economies due to the adverse oil price shock. Macroeconomic vulnerabilities Source: IMF, REO October 2017
  6. 6. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 6 Economic Diversification helped countries offset the adverse impact of oil production cut and low oil prices Macroeconomic vulnerabilities Source: FCSA & CBUAE Figure 1.5: Economic Growth (%) in the UAE (2010-2017) Figure 1.6: Economic Growth (%) in Qatar (2010-2017) Source: IMF, REO October 2017
  7. 7. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 7 Macroeconomic vulnerabilities Figure 1.7: Developments of Oil production in the GCC countries (%) Figure 1.8: Oil production in the GCC countries in 2017 (%, Q-o-Q) GCC countries confirmed their commitment to OPEC agreement for oil production-cut, boosting oil prices and enhancing the resiliency of the non-oil sector. Source: OPEC, IEA, Bloomberg
  8. 8. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 8 Macroeconomic vulnerabilities Figure 1.9: FDI Inflows in the GCC countries (USD, Billion) Figure 1.10: FDI Outflows in the GCC countries (USD, Billion) Persistence of the adverse impact of the decline in oil prices on FDI inflows to the GCC economies. Source: UNCTAD
  9. 9. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 9 Macroeconomic vulnerabilities Figure 1.11: The Average Annual Inflation Rate for GCC Countries (%) Inflation picked up in response to the subsidies’ removal and, but has moderated on account of economic activity slowdown. Source: UNCTAD, IMF Subsidies Cut Oil price drop
  10. 10. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 1 0 Macroeconomic vulnerabilities Figure 1.12: The Nominal Effective Exchange Rate for GCC Countries Currencies’ appreciation continued in nominal and real effective terms in line with the direction of monetary policy in the US Source: BIS and IMF
  11. 11. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 1 1 Macroeconomic vulnerabilities Appreciation hurts competitiveness, but the drive for diversification sustained the increase in total capital spending in the tourism sector Source: World Travel and Tourism Council, November 2017 Figure 1.13: Growth of the Total Real Spending by International tourists for Business and Leisure in the GCC countries Figure 1.14: Growth of the Real Capital Investment in Tourism in the GCC countries
  12. 12. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 12 Macroeconomic vulnerabilities Appreciation adversely impacted competitiveness and slowed down export growth, while imports became cheaper, rebounding with improved growth Source: IMF, October 2017 Figure 1.15: Average Growth of the Volume of Exports of Goods and Services (%) Figure 1.16: Average Growth of the Volume of Imports of Goods and Services (%)
  13. 13. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 13 Macroeconomic vulnerabilities The decline of oil revenues triggered fiscal consolidation, diversifying non-energy revenues and decreasing spending. Source: IMF, October 2017 Figure 1.17: Average General Government Revenues and Expenditure as percentage of GDP for the GCC countries (%) Total Revenues Total Expenditure
  14. 14. 1 2 1Macroeconomic vulnerabilities Financial vulnerabilities 3 Risks and Policy Response
  15. 15. Source: GCC countries authorities Figure 2.1: Total credit growth in GCC Figure 2.2: Private and Public Credit (in % of total credit) Private Public Financial vulnerabilities Total credit slowed down since 2015, due mainly to a deceleration in Private credit
  16. 16. Figure 2.3: Private credit growth in GCC (%) Source: GCC countries authorities Figure 2.4: Public credit growth in GCC (%) Financial vulnerabilities Credit to the private sector has slowed down, while Credit to the public sector keeps growing.
  17. 17. Figure 2.5: Total Deposit growth in GCC (%) Source: GCC countries authorities Financial vulnerabilities Following a sharp decline, total deposit growth started to increase in 2016, due to the Oil price recovery
  18. 18. Figure 2.6: Total Credit, in % of Total Deposit Source: GCC countries authorities Financial vulnerabilities Loan to deposit ratio increased since 2014, but slightly stabilized in 2016, reflecting slower credit and faster deposit growth
  19. 19. Figure 2.7: Average Capital adequacy ratio (CAR) in GCC (%) Source: GCC countries authorities Figure 2.8: Average Tier 1 capital in GCC (%) Financial vulnerabilities Banks operating in the GCC remain highly capitalized, in support of Financial Stability
  20. 20. 1 2 1Macroeconomic vulnerabilities Financial vulnerabilities 3 Risks and Policy Response
  21. 21. 2 1 Mobilize non-energy sources of government revenues to reduce pro-cyclical movement of spending with oil prices Risks and Policy Response Current Status Risks Policy Response • Oil revenues in the GCC remain dominant in total government revenues, leading to pro-cyclical fiscal stance in line with movements in the oil price. • Continued reliance on oil revenues, without a framework for medium- term, and rule-based fiscal policy, will leave GCC economies vulnerable to the oil price cycle. • Diversify non-energy sources of revenues in the budget. • Introduce VAT as planned in 2018 • Establish an efficient tax management system.
  22. 22. 2 2 Pro-cyclical cuts in priority spending threaten to undermine non-energy growth and diversification Risks and Policy Response Current Status Risks Policy Response • Significant cuts by 5.4% in GCC government spending in 2015 to accommodate the decline in oil revenues. • Such cuts have adverse impacts on private investment and FDI in non oil activities. • Prioritize spending to increase efficiency. • Restructure budgets to support priority spending, particularly on infrastructure • Encourage private provision of public services • Continue to create fiscal space. • safeguard priority spending and moderate the pace of fiscal consolidation, where appropriate.
  23. 23. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 23 Diversify sources of financing to increase the scope for counter- cyclical fiscal measures and reduce pressures on the domestic banking system Risks and Policy Response Current Status Risks Policy response • Spending cuts and increased reliance on the banking sector to finance the budget deficit • GCC governments generally reduced deposits and increased borrowing from the banking system. • Priority spending should be maintained to support diversification and non- energy growth • Increased reliance on the banking sector reduced liquidity and could crowd out resources in support of the private sector. • Develop domestic debt market to reduce reliance on the banking sector. • Mobilize external debt issuance while ensuring adequate coverage of foreign reserves. • Coordinate policies and establish liquid buffers at SWFs, underpinned by fiscal rules to maintain adequate liquid assets to finance the deficit, as needed.
  24. 24. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS 24 Enhance the scope of pro-active monetary policy to stem the risk of external shocks and maintain adequate liquidity in support of non-energy growth and diversification Risks and Policy Response Current Status Risks Policy Response • Bank liquidity tightened with the fall in oil prices and further drawdown of government deposits. • Monetary policy in the US imposes further tightening counter the directions of the oil price cycle. • The policy response induces further appreciation of local currencies in tandem with the US dollar, consistent with the • Tightening financial conditions could further slowdown economic activity and crowd out resources in support of private sector growth. • The appreciation of local currencies against non- dollarized trading partners could reduce price competitiveness and thereby the growth of non-oil exports. • Enhance liquidity forecasting and management at central banks, in line with the business cycle. • Increase the scope for independent monetary policy by targeting activation of the macro-prudential tools and increase capacity for liquidity management. • Increase the scope of monitoring and coordination between fiscal and monetary policies to stem the risks on the banking sector.
  25. 25. 25 Current Status Risks Policy response • Increased reliance on public sector jobs for nationals. • Dominance of the energy sector and related industries in GCC economies. • Challenges to increase private sector employment and boost non-energy exports. • Capacity of the government may not be adequate to maintain public sector jobs for growing employment. • The economy may shrink in line with the fall in oil prices and reduction in public spending, absent a drive to increase the share of the private non-energy sector. • Reform education to respond to the requirements of a competitive globalized labor market and the buoyant private activities. • Incentivize employment in the private sector and increase the scope of adaptability to private sector requirements. • Enhance training and build capacities to meet the job requirements of the private sector • Establish Small Business Administration to enhance the support to SMEs and their access to finance and linkages to the market. • Target improvements in the pillars that would enhance the rankings of GCC economies in Doing Business and Conclusion Adopt far-reaching structural and institutional reforms to move to a more competitive, knowledge based economy, led by the private sector
  26. 26. Thank you! Research and Statistics Dept. CBUAE

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