Fiscal consolidation looks set to slow across the Gulf Cooperation Council (GCC) in 2019 as governments focus increasingly on growth-supportive policies, despite oil prices levelling off, Fitch Solutions has said in a report.
In particular, the report noted "there appears to be a g rowing emphasis on the use of fiscal stimulus to encourage non-hydrocarbon private investment and business activity — an integral part of the various member states’ economic diversification programmes and crucial for job creation."
"GCC governments are continuing to invest heavily in infrastructure," Fitch Solutions said. Most notably, Qatar and Dubai are carrying out large-scale investment development programmes as they prepare to host the FIFA World Cup 2022 and the 2020 World Expo, respectively.
“That said, this does not represent a return to fiscal expansion on the kind of scale seen prior to 2014. Oil prices look set to remain comparatively lower, placing a ceiling on revenue gains, and all GCC governments are signalling a continued commitment to the containment of recurrent spending, particularly on public wages and subsidies,” Fitch Solutions said.
As such, although the pace of fiscal consolidation will slow relative to the last couple of years, it will still represent an improvement from 2018, likely leading to a further slowdown in public debt accumulation.
Fitch Solutions expect economic growth to hold up in the Mena region over 2019, remaining around the 2.7% y-o-y level recorded in 2018. GCC growth will be propped up by government spending, while North African countries such as Morocco and Tunisia are likely to see an uptick in consumption as a result of easing fiscal consolidation and moderating inflation.
Meanwhile, the Levant will benefit from improving security conditions — particularly as the reopening of border crossings into Iraq and Syria helps to facilitate exports, it said.
Fitch Solutions consider the Mena region to be "reasonably well insulated" against the ongoing global monetary tightening and higher financial market volatility.
Further US interest rate hikes in 2019 and a continuation of the shift away from quantitative easing will reset market dynamics to a ‘new normal’ of higher volatility and sharper sell-offs, as "idiosyncratic factors" are more likely to lead to contagion that hits risk assets such as EMs first.
Rising borrowing costs and greater risk aversion present some challenges to the Mena region’s investment and growth outlooks. However, Fitch Solutions view risks to wider macroeconomic stability as broadly contained.
In much of the GCC, vast foreign exchange reserves and sovereign wealth fund assets, coupled with still-solid oil revenue inflows, will underpin investor confidence, the report said.
“Moreover, wealthier GCC countries will continue to provide financial support to their weaker counterparts in order to prop up regional stability. Some of these countries will further benefit from inclusion in EM bond indices next year, which will substantially increase passive investment flows that have the potential to suppress borrowing costs,” Fitch Solutions said.