The GCC (Gulf Cooperation Council) could potentially carve out a competitive advantage by pursuing “structural” reforms to improve the fiscal and economic landscape in the region, according to Indosuez Wealth Management.
Finding that low oil prices will support the global economy over the short to medium term, while continuing to inflict pain on the exporting countries; Marie Owens Thomsen, chief economist, Indosuez Wealth Management, said: “Only structural reform is capable of easing that pain and, as such, the low oil price scenario is presenting a huge opportunity for the GCC countries.”
Reforms do work, and should not be limited to restoring fiscal balances but rather broadened to promote an efficient allocation of resources in the economy, boost job creation, and nurture non-oil sectors, she said, adding this will be necessary to restore the region’s GDP (gross domestic product) growth to the levels it is accustomed to.
Terming structural reform as a key selection criterion for asset allocation, she said: “Of all the many macro-economic variables one can use for choosing where to invest, we believe that structural reform is one of the most important.”
Investors around the globe would do well to seek exposure to the countries that undertake structural reforms, according to her.
Owens said many GCC countries have already reacted to low oil prices with policy announcements such as subsidy cuts and taxation. As a result, inflation has risen and will rise further when value added tax is introduced.
Highlighting that currently GDP growth is still positive and inflation is under control; she said however, there is arguably a time limit to this — the longer the oil price stays at extremely low levels, the more precarious the situation for the economies in the region.
“This is clearly a time to push for change in the GCC countries, as there is immense pressure on state revenues due to lower oil prices.,” she said adding challenging situations like this are often the time when significant reforms take place.
There is a greater urgency for regional economies to embark upon wider diversification and potentially lift the non-oil growth rate, she said.