GCC Macro-Outlook: Great in the Mid-Term, but What about the Long Run?





GCC Macro-Outlook: Great in the Mid-Term, but What about the Long Run?

Steffen Hertog
London School of Economics

 

No other rich region in the world has grown as fast as the GCC in recent years and none has as rosy an outlook for the near future: IMF estimates of real GDP growth for 2012 range from 2 percent (Bahrain) to 6.3 percent (Saudi Arabia), with a regional average of 4.9 percent. Average growth for 2013 is expected to again reach above 3 percent - all the while all countries bar Bahrain are expected to rack up sizeable fiscal surpluses between 5.8 and 26 percent of GDP thanks to continuing high oil prices. Consumer confidence is at an all-time high and privately driven sectors like retail and construction are expanding rapidly.

GCC real GDP growth rates: 2012 estimate and 2013 forecast

Source: IMF

It all feels like the heady days of the 1970s oil boom again - which is exactly what should give us pause. Most of the growth of the last decade has been driven by ever-expanding state spending. While GCC governments started into the last decade with more prudent budgetary policies than after the 1973 oil price spike, they have increasingly thrown fiscal caution to the wind. The oil prices at which Gulf governments break even have grown between 30 and 100 percent from 2008 to 2012, now reaching above $80 in most cases.

Thanks to large overseas surpluses, this is manageable in the mid-term, but if growth remains dependent on continued increases in state expenditure, it is only a matter of time before the GCC countries start running deficits and eat up their savings. There is still no local revenue basis to speak off, as politically sensitive taxation plans are repeatedly postponed. Without oil and gas income, the annual fiscal deficits of the GCC countries would currently reach an astonishing 30-80 percent of their non-oil GDPs.

While the austere 1980s and 1990s led to a gradual weaning of local business from state dependence - albeit at the price of economic stagnation - the private sector has become fully reliant on oil-financed government stimulus again. Not only does the hydrocarbon sector again constitute more than half of nominal GDP in most cases, the non-oil economy too has become more dependent on government-driven recycling of oil rent.

The ratio of government to private consumption is very high in the GCC region - about 2-3 times higher than in non-oil emerging markets and developed economies like Turkey, the US, or Germany.

Ratio of government to private consumption, GCC and other countries (2011)

Source: Calculated with UNSTATS data

After the GCC private sector had taken over leadership in investment in the 80s and 90s, capital formation too is now again led by government, accounting for more than half of total investment again in Saudi Arabia for the first time since the early 1980s. Some of this investment might help in generating private growth in the future, but much of it is just to satisfy the basic infrastructure and utility needs of growing populations; in some cases, just like in the 1970s, resources also go into prestige projects of questionable economic value.

Most worryingly, much of private demand in GCC economies remains indirectly state-driven: Different from almost all other economies in the world, the majority of the wage share in GDP typically consists of public sector wages, meaning that most household demand for goods and services is indirectly state-financed. The majority of locals remain state-employed, a pattern that has become further entrenched with recent waves of government recruitment.

In Saudi Arabia, public sector wages account for some 15 percent of GDP, while private sector wages amount to between 7 and 9 percent of GDP depending on the source - and much of the private wages accrue to expatriates, who remit the bulk of their income to their home countries, taking it out of the local economic circuit. In mature economies, by contrast, private wages constitute up to 50 percent of GDP and are largely spent locally.

It is hard to convince business and citizens of sacrifices when the times are good - but these are the only times when there are sufficient resources to prepare for an inevitable future scenario in which oil prices will not suffice to cover growing spending needs and GCC economies have to become more self-sustaining. In the long run, private business will have to contribute its share to national development by employing more nationals to generate sustainable local demand and also by paying taxes to contribute to a sustainable non-oil budget.

Quite understandably, GCC capitalists might be ready to do so only if budgets become more transparent and citizens and business have more of a say in how resources are allocated - meaning that long-term economic reform might be predicated on fundamental political reforms. But these too are easier to phase in as long as the pie is expanding.


 














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