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

1. 26 November 2017
Macro-Financial Vulnerabilities:
The Way Forward for GCC
Research and Statistics Dept. CBUAE

2. 1
2
1Macroeconomic vulnerabilities
Financial vulnerabilities
3 Risks and Policy Response

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. 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. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS
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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. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS
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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. 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. 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. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS
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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. 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. 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. 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. 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. 1
2
1Macroeconomic vulnerabilities
Financial vulnerabilities
3 Risks and Policy Response

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. 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. 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. 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. 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. 1
2
1Macroeconomic vulnerabilities
Financial vulnerabilities
3 Risks and Policy Response

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. 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. Chapter 1 INTERNATIONAL ECONOMIC DEVELOPMENTS
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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. 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
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. Thank you!
Research and Statistics Dept. CBUAE