- Samya Beidas-Strom, Tobias Rasmussen, and David Robinson
- Published Date:
- October 2011
© 2011 International Monetary Fund
Gulf Cooperation Council Countries (GCC): Enhancing Economic Outcomes in an Uncertain Global Economy
Prepared by a team led by Samya Beidas-Strom, Tobias Rasmussen, and David O. Robinson of the Middle East and Central Asia Department
Cataloging-in-publication record is available at the U.S. Library of Congress.
Call Number: HC415.3.G85 2011
Disclaimer: The views expressed herein are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
The authors would like to thank Masood Ahmed, Director of the Middle East and Central Asia Department (MCD) and Alfred Kammer, Senior Advisor in MCD, for their guidance and comments on several drafts of the paper. We would also like to thank the authorities in the countries of the Gulf Cooperation Council (GCC) for their useful comments and suggestions.
Special thanks are due to Carolina Parodi for her tireless efforts in bringing this paper to fruition; to Diana Kargbo-Sical for assistance with formatting and document preparation; to Arthur Ribeiro da Silva and Renas Sidahmed for excellent research assistance; and to Kia Penso for her excellent editorial contributions. Thanks are also due to Joanne Blake of the External Relations Department for her support in the production process.
The opinions expressed in this publication are solely those of the authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the authorities of the countries of the GCC region.
This paper covers a range of topics relating to key economic policy issues in the GCC countries1 The individual chapters present analytical work exploring options to foster growth, enhance the effectiveness of fiscal and monetary policies, and reduce vulnerabilities—all with a view to strengthening macroeconomic outcomes and promoting the attainment of the GCC countries’ development objectives. The analysis highlights the interconnectedness of policy making and economic outcomes in the GCC countries with the global economy—not just through the price of oil, but also through the role of expatriate labor, spillovers from global financial markets, and the impact of fiscal and monetary policies pursued in the advanced economies and emerging Asia.
Chapter 1, on growth strategies, outlines the GCC countries’ development plans and progress made. Reflecting common goals and similar starting points, the national development strategies share many common themes, including a focus on economic diversification and the creation of employment for nationals. Over the past decade, all GCC countries have experienced relatively strong growth in the non-oil economy, particularly in services, but hydrocarbon dependence—measured in relation to nominal GDP and as a source of fiscal revenues—has increased in many countries as a result of higher oil prices. In several countries unemployment has become a concern and with more than 4 million nationals likely to enter labor markets over the next five years—compared to approximately 5 million nationals employed in 2010—issues surrounding employment creation are a clear priority. Meeting national development objectives will therefore require not just an acceleration of economic growth, but a reorientation of the growth model to ensure the creation of employment opportunities for nationals. Key components will be improving productivity, fostering the emergence of the private sector, and in some cases ensuring that labor market policies support the employment of nationals.
Chapter 2, on GDP and welfare, explores the issue of identifying an appropriate measure of welfare in the GCC (or other commodity-based economies). Reflecting the dominant role of the oil sector and the preponderance of expatriate labor, GDP—whether total or non-oil—in these countries is only weakly linked to variables such as employment and consumption that are central to economic well-being. Indeed, the sharp reduction in imports seen in some countries during 2009 suggests a greater adverse shock to consumption levels at that time than would be apparent from looking only at non-oil GDP measures. The analysis reinforces the need to assess progress in major policy areas against a series of dimensions: for employment objectives, the number of jobs created, in which sectors, and at what qualifications could be the principal indicators; and for living standards, the volume and composition of consumption.
Chapter 3, on fiscal policy, analyzes the key role of fiscal policy in converting the GCC countries’ revenues from natural resources into expenditure decisions that shape social and economic outcomes for both current and future generations. The volatility of oil prices and the persistence of oil price shocks create an unusual degree of uncertainty in government revenues, and have produced large (and sustained) swings in fiscal balances. Spending levels have generally followed oil prices—increasing on the upswing and decreasing as prices fell—but have typically been adjusted by less than the change in revenues. The policy response to the global crisis was somewhat of a watershed, with many countries implementing fiscal expansions in response to the fall in revenue. After reviewing past fiscal policy implementation, two important issues for the future are considered—possible anchors for fiscal policy over the medium term, and the role of fiscal multipliers and automatic stabilizers in adjusting the fiscal stance in response to short-term fluctuations in the non-hydrocarbon economy.
Chapter 4, on the monetary transmission mechanism, evaluates the degree of monetary policy independence in GCC countries. Consistent with the pegged exchange rates to the U.S. dollar and the openness of the GCC countries’ capital accounts, the results show that GCC policy rates largely move in line with U.S. interest rates in the long term. In the short term, however, there is some deviation, as countries have employed their available tools—such as reserve requirements, loan-to-deposit ratios, and other macroprudential instruments—to influence domestic liquidity and credit conditions. Going from policy to retail rates, the link becomes weaker in all countries, with less than full pass-through in the long term and a generally slow speed of adjustment. Overall, the estimations suggest that U.S. monetary policy has not, surprisingly, an important impact on broad money, non-oil activity, and inflation in the GCC. Continued efforts to develop domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.
Chapter 5, on financial distress dependence, examines the evolution of credit default swap (CDS) spreads for the GCC, in order to derive measures of contagion. The results identify a sharp increase in risks at the time of the global financial crisis—probably driven by global risk aversion—but relatively limited contagion from regional events such as the Dubai World debt restructuring and, more recently, from political and social unrest in the some countries in the Middle East during the early part of 2011.
Chapter 6, on international spillovers, explores the linkages between fiscal policy decisions in Saudi Arabia and the global economy as well as the impact on the Saudi economy of a growth shock in emerging Asia. The analysis employs an augmented three-region version of the IMF’s Global Integrated Monetary and Fiscal model. The results indicate that Saudi Arabia’s fiscal multipliers are low, in part due to the large leakage via imports, but that the composition of fiscal spending matters greatly. The global spillovers are largest in Asia via the trade channel. A potential growth slowdown in emerging Asia would have a significant adverse impact on Saudi Arabia in the short term—largely through a decline in demand for oil—but less so over the medium to long term.
Chapter 7, on corporate sector vulnerabilities, analyzes the evolution of the balance sheets of listed non-financial companies during and after the global financial crisis. As anticipated, corporate vulnerabilities rose during the crisis in all countries and all sectors. However, the recovery has been rapid, with corporates returning to strong profitability in 2010 and in many cases reducing vulnerabilities to close to pre-crisis levels. The corporate sector has, on aggregate, also built a large cash cushion that helps to mitigate risks from potential shocks, particularly to interest rates.
The GCC (Gulf Cooperation Council) is comprised of Bahrain (BHR), Kuwait (KWT), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), and the United Arab Emirates (UAE.)