Businesses in the GCC and five other countries in the Middle East (GCC+5) remain worried about the potential impact on costs as a consequence of pressure on exchange rate pegs caused by the decline in the price of oil.
The implications for insurers include the cost of imported automobiles, vehicle spare parts, medicine, and reinsurance, etc, as well as, in certain countries, hard currency liquidity.
According to the Institute of Chartered Accountants in England and Wales (ICAEW) in its 4Q2016 Economic Insight: Middle East report, all GCC economies operate a pegged exchange rate regime, and they have seen current accounts deteriorate sharply through 2015-2016, requiring central banks to draw upon foreign exchange reserves to meet demand for foreign currency. The immediate pressure has eased a little recently, as sovereign bond issues have increased capital inflows. Nevertheless the longer-term pressure on reserves and pegs remains.
The report said: “Across the GCC, weaker exchange rates looks to be a necessary part of any longer term plan for diversification. However, as countries in the region rely on imports, any depreciation will have a short to medium-term impact on business costs, output prices, and ultimately household spending power. As such, even in economies where there is little short-term pressure on pegs, concerns over the eventual impact of currency movement will remain.”
The report, produced with Oxford Economics, examines future prospects for the Middle East as a whole and for the region’s individual countries. The focus is on the GCC states plus Egypt, Iran, Iraq, Jordan and Lebanon, abbreviated to GCC+5.
Other key findings in the reports are:
• Risks to an already-weak oil price
Even in a more positive scenario, oil prices will not return close to the $100 per barrel (pb) averaged in 2010–2014. The report’s baseline forecast remains below $60pb until 2019.
• Rising tax burden
Businesses are concerned about potential tax increases and spending cuts to shore up government finances. This could prompt lower demand, administrative burdens for businesses (a particular blow to SMEs), or loss of retained earnings for future investment. Moves to boost employment of nationals could also place a strain on business.
• Fiscal deficits
These worries are keenest where set government budgets mean large deficits. Oman, Bahrain and Saudi Arabia are most exposed with fiscal “breakeven” oil prices $30–$50pb above current levels.
• 2017 economic growth
Due to the impact of lower oil prices on business demand and financial liquidity, the report expects only a modest pickup in economic growth in GCC+5, from 2.3% in 2016 to 2.6% in 2017. Average annual growth from 2005-2015 was 3.7%. However, Iran should perform better in the coming years following the easing of sanctions.