Qatar’s economy is slated to grow 4.3% this year, driven by substantial infrastructure investment; even as economic diversification remains “elusive” in the Gulf Cooperation Council (GCC) with much of the non-oil growth still being fuelled by oil-financed government spending, according to ICAEW.
“A boost from the Barzan gas-to-liquids project coming online from early 2016, and stabilisation of crude oil production will support oil sector growth and drive total GDP (gross domestic product) growth of 4.3% in 2016,” the Institute of Chartered Accountants in England and Wales (ICAEW) said in its report.
Qatar’s greater diversification of revenues, large policy buffers and immovable infrastructure requirements associated with the 2022 World Cup will mean government spending cutbacks will be modest compared to other GCC countries, it said.
On the diversification efforts in the region, although there has “undoubtedly” been some progress; true economic diversification away from a heavy dependence on oil exports is yet to be achieved, it said.
Strong growth in oil revenues in 2003-14 fuelled large, signature investments in the region and rapid growth in sectors such as construction, trade, tourism, real estate and business services, it found.
Non-oil GDP growth averaged an impressive 7.2% per year through this period and repeatedly reached double-digit levels, lifting the non-oil sector’s share of overall GDP from 48% to 60% in real terms.
Meanwhile, governments implemented structural reforms that improved the ease of doing business (although much remains to be done) and the post-millennium boom put Dubai on the global map as a regional business hub.
“Although positive, these developments overstate the true extent of economic diversification in the region,” ICAEW said, adding much of the growth in the non-oil sector was still fuelled by oil-financed government spending - including on infrastructure, key development projects, public sector salaries, benefits and subsidies - which was in turn recycled through the financial system, benefiting capital markets and the banking sector.
With government spending now set to be cut back, these growth drivers will fade, it cautioned. And although oil’s contribution to GCC economic output has shrunk, it still accounts for around 80% of total budget revenues and 50% of all export receipts, implying a “major deterioration” in both the fiscal position and the terms of trade, it added.
“Overall, we expect government spending in the GCC region to decline by 8% this year and to rise much more slowly in future years than it has done in the past,” it said, adding this will leave the aggregate budget deficit at 11% of GDP in 2016: as large as 17% in Saudi Arabia and Kuwait and 16% in Bahrain, with only Qatar recording a much-reduced surplus of 4% of GDP.
Expecting that a gradual recovery in oil prices will narrow these balances only slowly; it said “though there is a risk of permanent deficits, cumulative region-wide surplus should be restored by 2022.”