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Gulf Cooperation Council

Annual Meeting of Ministers of Finance and Central Bank Governors

October 5, 2013

Riyadh, Saudi Arabia

Economic Prospects and Policy Challenges for the GCC Countries

Prepared by Staff of the International Monetary Fund

* 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.

Contents

• Executive Summary

• I. The Global Context

• II. Developments in the Middle East and North Africa (MENA) Region

• III. Developments and Outlook in the GCC Countries

• IV. Risks and Spillovers in an Uncertain Global Environment

  • A. Key Global Risks

  • B. Implications for the GCC

• V. Policy Responses and Challenges

  • A. Macroeconomic Policy Settings

  • B. Longer-Term Policy Challenges

• Tables

  • 1. GCC Financial Soundness Indicators

  • 2. GCC Countries Publication of IMF Reports

  • 3. GCC Countries Selected Economic Indicators, 2007–13

• Figures

  • 1. Recent Developments in Advanced Economies

  • 2. GDP Growth Rates in Emerging Markets, 2010H1–2013H2

  • 3. Recent Financial Market Developments, 2011–latest

  • 4. Oil Market Indicators

  • 5. GCC Recent Economic Developments

  • 6. GCC Fiscal Indicators

  • 7. GCC Credit Growth and Inflation.

  • 8. Bond Flows, 2005–latest

  • 9. Oil Price Risk Scenarios

  • 10. GCC Links with Foreign Banks

  • 11. GCC Governance and Education

• References

Executive Summary

The global and regional economic environment remains challenging. Global growth remains tepid, and although some pick-up is expected, risks are tilted to the downside. Recent volatility in financial markets is having a significant impact on some large emerging markets, highlighting the challenges that will be faced in unwinding the Federal Reserve’s quantitative easing policy. Geopolitical uncertainties in the Middle East are also high.

Global oil markets are being affected by competing factors. The increase in non- conventional oil production in the United States and weak global oil demand are putting downward pressure on prices, while supply disruptions in some countries and uncertainties arising from the unrest in the Middle East are applying upward pressure. Prices are close to where they started the year, while futures markets are pricing in a gradual decline going forward. GCC producers, particularly Saudi Arabia, are playing a key role in helping ensure the global oil market remains well supplied in the face of supply disruptions elsewhere.

The growth outlook for the GCC is positive, but will be affected by global and regional developments. While growth has slowed from the exceptionally strong rates in 2010–11, it remains robust, and with confidence high and large infrastructure projects coming on stream, it should remain well-supported going forward. The path of oil prices remains the main uncertainty for the region, although countries would also be affected by increased volatility in global financial markets or broader unrest in the Middle East region.

Macroeconomic policies have scope to respond to economic developments as they unfold. Given the substantial buffers that have been built up, fiscal policy is well positioned to manage demand as needed, while monetary and macro-prudential policies can also be proactively used. Over the medium term, fiscal consolidation will be needed to strengthen buffers and increase savings for future generations.

A key challenge for the region is to generate jobs in the private sector for the rapidly growing young population. Policies are already being implemented to achieve this objective, but more is needed to limit incentives for public-sector employment, raise educational quality, and make nationals more competitive in the private labor market. Other reform priorities include: strengthening fiscal frameworks to underpin more efficient spending and medium-term fiscal consolidation; reducing the growth of domestic energy consumption; developing domestic capital markets to support corporate and infrastructure financing; further developing macro-prudential tools to continue to manage financial sector risks; and improving the availability and timeliness of economic statistics.