Speaking exclusively to Banker Middle East, Seltem Iyigun, Economist for Middle East & Turkey at Coface, provides an overview of where GCC sovereigns stand economically
How do you view the economic growth of the GCC region over the last 18 months?
Helped by the recovery in oil prices and political stability across the region, the GCC show signs of a better growth dynamics. But there are some differences amongst the countries. Those having a higher degree of economic diversification such as the UAE enjoy more this recovery in oil prices as their economies are already supported by the strengthening of the non-oil sector. On the other hand, Saudi Arabia, the biggest economy of the region is expected to get out of the economic recession it had in 2017 because of lower energy prices and the introduction of fiscal austerity measures.
How have the non-oil sectors helped in the recovery of the UAE economy?
The activity in the construction sector is an important pillar of the economic diversification of the UAE as well as the service sector. The construction activities led by the investments ahead of the Expo 2020 supports the non-oil activity through the infrastructure investments as well as new construction projects. The commercial building segment particularly seems to be stimulated by these investment inflows. With the economic diversification accelerating and the country moving into higher-value service industries, construction sector growth will remain and in turn will increase domestic demand for petrochemical products.
But, with tighter and more expensive liquidity conditions which increase borrowing costs for companies, payment terms may get longer both in construction and petrochemical sectors. The introduction of the VAT will also add to the non-hydrocarbon revenues for the government and the latter will use it to finance infrastructure projects. Services sector is expected to continue a growth performance of around five per cent in 2018 which will contribute to the country’s GDP as this sector accounts for around 50 per cent of GDP.
What effects do you think UAE’s diversification triumphs have on neighbouring countries and how has this impacted MENA as a whole?
All oil exporters in the MENA region try to implement economic diversification programmes. It helped them to reduce their dependence on oil compared with their levels in 1990s and early 2000s. But there is still some way to go as countries like Saudi Arabia and Kuwait can be considered as dependent on oil in terms of budget and export revenues.
What kind of challenges do you foresee for the region going forward? The geopolitical dynamics in the region have wavered. How do you see this affecting the investment climate in key regional markets such as UAE and KSA?
The most important challenges would be about the payment terms and liquidity conditions. Although we are optimistic about growth perspectives in the upcoming period, these risks require the adoption of a cautious behaviour. The volatility in the oil prices are one of those risks. Indeed, the recovery in prices may not be sustainable if an increasing number of US shale gas producers decide to get in the market. This would drag down prices again. On the other hand, the rate hikes from the US federal reserve would be followed by the GCC central banks due to the currency peg regimes in the GCC region. Therefore, interest rates on loans would go up, which would increase borrowing costs for companies as well. In addition, global liquidity becomes less abundant and more expensive with the rate hike from the US Fed.
This situation may push GCC banks to become more selective while providing loans to the private sector. This may also tighten financial resources available for companies. The current economic and business landscape in the region calls for better risk management by companies to ensure business continuity against a backdrop of longer payment terms and tightened liquidity conditions. The focus should be on prudent cost and financial risk management. It is imperative for companies to prepare themselves during uncertain times and manage cash flows to run the business smoothly.
During such periods, companies are advised to remain cautious in protecting their receivables and their open credit trade. Coface recommends companies to outsource due diligence processes to expert agencies that could support businesses in making informed decisions. It is also crucial for companies to mitigate risks in doing business by seeking companies that could provide them with precise information, access to funding as well as property protection for their receivables and payment defaults.
What sectors should GCC countries focus on to improve their economic standing?
We do not suggest economic policies. The non-oil sector remains an important pillar for the economic growth in the region as it represents a buffer during the periods when oil prices become volatile. On the other hand, oil sector will continue to remain the key sector of activity together with the petrochemicals and construction sectors.