Better financial access seen critical for economic diversification in GCC

Date

10/5/2016 1:04:36 AM

(MENAFN- Muscat Daily) Muscat-

Governments in the GCC need to step up efforts to improve the financing environment, according to the Institute of Chartered Accountants in England and Wales (ICAEW).

The accountancy and finance body warned that access to finance will be a key driver for economic diversification across the region - urgently needed in light of the radical shift in global oil markets.

According to a report produced by Oxford Economics, ICAEW's partner and economic forecaster, as lower oil prices affect the role played by governments as direct and indirect drivers of GCC business investment, ensuring companies' access to finance is becoming critical. 'This requires ambitious policy, including prioritisation of public spending, a more competitive banking sector, development of the financial sector and greater openness to foreign direct investment (FDI).'

The 'new normal' for oil prices has made diversification more urgent but also more difficult - by tightening financial conditions across the region. The report outlines three specific channels in this context. Most crucially, lower oil revenues mean governments have less funding to support investment and development. Total government spending is reported to have fallen by 15 per cent to 20 per cent in Saudi Arabia, Kuwait, Oman and Bahrain between 2014 and 2016, with further expenditure restraint expected in the coming years.

Second, lower oil revenues mean a lower stock of government deposits in the local banking system, and therefore a shortfall in cash to lend to households and firms. Finally, the damage that lower oil prices have inflicted on public finances and credit ratings mean ongoing expenditure restraint is crucial. Government debt stocks remain low by international standards, but with deficits at double-digits of GDP, those debt stocks are rising steeply. This has led ratings agencies to downgrade Saudi Arabia, Oman and Bahrain through the first half of 2016. Local banks, which hold government debt as assets, have therefore had to increase capital buffers, restricting their ability to lend.

The overall impact is that bank lending, coupled with the overall money supply in GCC economies, has gradually slowed over the past couple of years and begun to contract in some.

Tom Rogers, ICAEW economic advisor and associate director of Oxford Economics' macroeconomic consultancy for Europe, Middle East and Africa (EMEA), said, 'A tighter financing environment may mean GCC firms struggle to get the finance they need in order to invest or expand, or if they do get it it will be at higher interest rates. However, there are ways in which this challenge can be overcome. For example, governments should try and prioritise growth-enhancing policy areas when rationalising public spending, improve the environment for inward foreign investment, and in some cases boost competition within the banking sector.'

If governments are successful in attracting greater inward foreign direct investment, this would have multiple benefits - access to foreign liquidity, transferring technology, and supporting exchange rate pegs. Although the UAE, Bahrain and Qatar are among the world's 20 most FDI-friendly economies, Oman, Saudi Arabia and Kuwait are in 80th, 107th and 137th place respectively.

Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said, 'Attracting FDI will not only provide an additional source of financing, it will also create healthy competition that should ultimately benefit the financial sector and the economy. Banks and finance providers may find their profitability under pressure from any moves to boost competition in their sectors, and develop other financial sector areas.

'While the business environment in the GCC region has improved in recent years, limitations to foreign ownership, poor investor protection and punitive bankruptcy laws still pose challenges to attracting FDI.'

A balance in the oil market is expected in 2017. Brent crude oil prices are forecast to average US$44 per barrel in 2016, edging up to US$50 per barrel in 2017 respectively, thanks to the success of OPEC's strategy to keep production high and try to freeze out higher cost producers, particularly those in the US.

GDP across the Middle East region is expected to grow by 2.4 per cent this year and 2.8 per cent next year, compared to 2.8 per cent in 2015, the ICAEW report said.

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