In an exclusive interview with Muscat Daily Simon Williams HSBC Bank's chief economist for Central and Eastern Europe Africa and the Middle East talks about the possible impact of rising levels of budget deficits and government debts in the GCC. He also offers his opinion on the impact of oil prices on Oman's banking sector and the country's economic outlook.

Following the OPEC decision earlier this month to keep oil output unchanged the slump in oil prices has continued. How do you rate the current state of GCC economies?

Despite the problems the region faces in terms of slump in oil prices and a difficult geopolitical environment we do not see a crisis on the horizon. There has been no cyclical dip in oil prices but a change in cycle. A structural shift. The boom era may have ended and more difficult times lie ahead. Budget deficits are going to be larger but they are going to be funded. We believe the currency pegs to the US dollar will remain in place in the GCC countries.

However it is important that the absence of a crisis is not mistaken with business as usual. The major slump in oil prices will inevitably lead to a significant slowdown in economic growth in the Gulf region in 2016 and 2017. This will lead to a major increase in debts and a pick-up in interest rates. We anticipate public spending to be slow if not reversed in some countries.

GCC governments have increased borrowing to finance their widening deficits. What impact could this have on regional markets?

Borrowing by governments from the banking system will begin to push interest rates higher. We should recognise that despite not being a cyclical dip it might be a change in cycle. We are anticipating a multi-year period of weak economic activity if oil prices do not come to the rescue. And government balance sheets which are currently strong will likely start to deteriorate quickly due to rising debts and the drawing down of savings.

Is increased borrowing by governments likely to impact the private sector?

The current public debt in Oman and elsewhere in the Gulf is very low. Governments will be able to finance deficits through a combination of means. They will continue to draw on the savings accumulated in the good years. And the increase in borrowings from local as well as international sources should be reasonably straight forward.

We are not worried about the financing of deficits in GCC countries. What we are worried about for next year and 2017 is that rising government borrowings will make it harder for the private sector to borrow. So interest rates will rise and credit growth is likely to slow.

In such an environment when governments increase borrowings corporates have to compete for funding not just with each other but with government as well. This will push up the cost of funding. In fact we are already seeing interest rates beginning to rise and expect them to rise through 2016 and 2017 especially after the rate hike by the US Federal Reserve.

How will lower oil prices affect the banking sector in particular?

As has been said during the strong years when oil prices were high governments across the Gulf region were major providers of liquidity to the banking system. Governments previously did not borrow from the banking system because they were running good surpluses.

But in times of deficits they need to borrow from domestic banks and it can be seen with the issuance of bonds. This trend will only accelerate next year and will result in higher interest rates and less scope of borrowing for the private sector.

The overall banking system in Oman is healthy. I think the sector can withstand the lower oil price environment. But its capacity to support the private sector will be reduced.

Which among the GCC states will see more significant slowdown next year?

I think the most significant slowdown will be felt in Bahrain Saudi Arabia and Oman. These are the countries with quite large deficits and where monetary and fiscal squeeze will be most pronounced and growth is likely to weaken more sharply than others.

On the other hand the UAE Qatar and Kuwait are countries with small populations but with large amount of oil incomes. Though there will be difficulties they will fare better compared to Bahrain Saudi Arabia and Oman where we anticipate a pronounced decline in economic activity.

What are your estimates on Oman's GDP growth next year?

I believe much will depend on the adjustments the government will make in public spending next year in response to the drop in oil prices. Even if spending cuts are not big enough we still anticipate growth to slow sharply. I think you would feel a significant deceleration in the pace of growth in the sultanate. The rate of growth will be significantly lower compared to what we had seen over the past three to five years. The slowdown is expected to be broad-based and the energy sector in particular will find it difficult to attract new capital in an environment of weak oil prices. I expect Oman's budget to remain quiet heavily in deficit in 2016 and 2017 and possibly for some time to come.

Inflation in the sultanate has remained low this year and is in fact the lowest in the GCC. How do you see it trending next year?

We anticipate inflation to stay low in the sultanate next year as well. You may see some short-term spikes depending on what the government decides to do on subsidies. But in the current environment where expectations are for weakening global demand it is difficult for prices to rise for a sustained period of time.

Apart from the big decline in oil export revenues the value of Oman's non-oil exports and re-exports too significantly declined in the first seven months of this year. What are the factors contributing to the decline in non-oil trade?

The global economic weakness is having an impact not just on Oman or the Gulf region alone but the global economy as a whole. Growth is weakening in both emerging and developed markets. Global trade is particularly weak at the moment. So it should be no surprise that the value of exports from Oman has weakened too. It is a tough global environment for trade.