## _100513b - Executive Summary

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### Executive Summary — Key findings and outlook
- Global and regional economic environment remains challenging; global growth remains tepid, and risks are tilted to the downside.
- Recent financial market volatility is significantly affecting some large emerging markets and highlights challenges in unwinding the Federal Reserve’s quantitative easing policy.
- Geopolitical uncertainties in the Middle East are high and affect oil markets.
- Oil prices are close to where they started the year; 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.
- GCC growth outlook is positive but will be affected by global and regional developments; confidence is high and large infrastructure projects coming on stream should support growth.
- Main uncertainties for the GCC: the path of oil prices, increased volatility in global financial markets, and broader unrest in the Middle East.
- Macroeconomic policy scope: substantial buffers permit fiscal policy to manage demand; monetary and macro‑prudential policies can be used proactively.
- Over the medium term, fiscal consolidation is needed to strengthen buffers and increase savings for future generations.
- Key structural challenge: generate private‑sector jobs for the rapidly growing young population; reforms needed to limit incentives for public‑sector employment, raise educational quality, and make nationals more competitive in the private labor market.
- Other reform priorities:
  - Strengthen fiscal frameworks to underpin more efficient spending and medium‑term fiscal consolidation.
  - Reduce growth of domestic energy consumption.
  - Develop domestic capital markets to support corporate and infrastructure financing.
  - Further develop macro‑prudential tools to manage financial sector risks.
  - Improve availability and timeliness of economic statistics.

*Prepared by Zsofia Arvai, Tim Callen, Fuad Hasanov, Renas Sidahmed, and Martin Sommer.*

### I. The Global Context — Developments, risks, and implications
- Global growth and near-term outlook:
  - Global growth in 2013 is expected to be around 3 percent, before accelerating in 2014.
  - Acceleration in 2014 expected to be largely driven by stronger growth in the United States and the euro area as the pace of fiscal consolidation slows, with a more modest pick‑up in emerging market economies.
- Advanced economies:
  - United States: rapid reduction of the fiscal deficit has dampened growth; growth expected to strengthen next year as fiscal consolidation eases.
  - Japan: growth has been surprisingly vigorous after new policy actions; economy expected to lose steam in 2014 as fiscal policy tightens.
  - Euro area: deeper recession in the periphery than expected; modest pickup expected as fiscal consolidation slows and the external environment improves.
- Emerging markets:
  - Emerging and developing country growth rates are some 2½ percentage points down from 2010 levels; Brazil, China, and India account for about two‑thirds of this decline.
- Financial market volatility and inflation:
  - Since May, increased volatility; long‑term interest rates rose in advanced economies; emerging markets suffered capital outflows, equity price declines, rising local yields, and currency depreciation.
  - Inflation expected to remain subdued in advanced economies; in emerging and developing economies, inflation expected to fall slightly next year.
- Oil market developments:
  - Brent remained in the $100–120 a barrel range.
  - Futures markets point to a gradual decline in oil prices to about $90 a barrel for Brent over the next three years.
  - The 95 percent confidence band for oil prices is between $70–145 a barrel one year ahead.
  - Rapid development of United States unconventional energy resources presents new challenges for Middle Eastern oil producers.

### Special Feature — Unconventional Oil and Gas in North America: implications
- United States production trends:
  - Production of crude oil and other petroleum liquids has increased by 30 percent over the past five years.
  - Natural gas output has increased by about 25 percent over the same period.
  - EIA expects unconventional oil and natural gas production to increase by another 15 percent over the next five years.
- Global oil market impacts:
  - Rising U.S. unconventional oil production is expected to reduce future demand for OPEC oil; IEA (2013) baseline: reduction of demand for OPEC crude by about 1 mbd between 2012–15.
  - OPEC’s spare capacity may rise to some 7 mbd over the medium term given existing project pipelines.
- Price and distributional implications:
  - High breakeven cost of unconventional producers estimated "in the ballpark of $60–70 a barrel for the United States shale oil fields".
  - U.S. tight oil is light and sweet; exports from Algeria and Nigeria to the United States have fallen by some 60–80 percent over the past five years.
  - Saudi Arabia’s exports to the U.S. have remained broadly stable since 2010.
- Implications for GCC:
  - Risk of an oversupplied oil market over the next several years; falling call on OPEC could necessitate production cuts or, absent cuts, price declines.
  - Near‑term challenges to Middle East gas exporters from U.S. shale gas are limited because of geographic segmentation of gas markets.

### II. Developments in MENA — Snapshot
- 2013 developments:
  - Growth in MENA continued to slow in 2013, reflecting a marked slowdown in the region’s oil‑exporting countries and a lackluster recovery in the oil importers.
  - Uncertainties from prolonged political transitions, growing unrest, and a weak external environment are weighing on confidence in a number of countries.
- Outlook:
  - Growth is projected to pick up modestly in 2014 if domestic stability and global conditions improve, though uncertainties and risks remain high.

### MENA region: growth outlook and country group developments
- MENA region growth:
  - Real GDP growth is projected at around 2½ percent in 2013, some 2 percentage points lower than in 2012, and 3¾ percent in 2014.
- MENA oil exporters:
  - Hydrocarbon output is expected to fall in 2013; growth decelerated substantially in the first half of 2013 driven by falling oil production.
  - Non-oil economy is holding up well in most countries, supported by high levels of government spending.
  - Growth is expected to strengthen in 2014 as oil production recovers.
- MENA oil importers:
  - Nascent signs of improvement in tourism, exports, and FDI since the troughs in 2011.
  - External and fiscal buffers are running low for many countries.
  - Policy challenges: achieve macroeconomic stabilization; reduce fiscal and external vulnerabilities; reshape economic structures and institutions to boost confidence and long-term growth and job creation.
  - External official financing can help smooth adjustment where needed.

### GCC: overall outlook and projections
- Regional growth and projections:
  - Real GDP grew by 5.2 percent in 2012, down from 7.7 percent in 2011.
  - Real GDP is projected to expand by 3.7 percent in 2013.
  - Overall GDP growth in 2014 is projected at just over 4 percent.
  - Growth in 2013 expected to be weaker than in 2012 in five of the six GCC countries; noticeable slowdowns projected in Kuwait and Saudi Arabia.
  - Non-oil sector remains robust as large infrastructure projects continue and private sector confidence remains high.

### GCC: fiscal developments and policy stance
- Fiscal consolidation:
  - Fiscal consolidation that started in 2012 expected to continue in 2013, with policy differences across countries.
  - Non-oil general government fiscal deficit as a percent of non-oil GDP:
    - Narrowed in Qatar, Saudi Arabia, and the United Arab Emirates in 2012.
    - Widened in Bahrain, Kuwait, and Oman in 2012.
  - In 2013:
    - Consolidation expected to continue in Qatar, Saudi Arabia, and UAE and begin in Oman.
    - Bahrain and Kuwait are pursuing an expansionary fiscal policy.
  - All GCC countries continue to run relatively large overall fiscal surpluses as oil revenues remain high, except Bahrain which is in deficit.
- Break-even oil metric:
  - Average Brent price in 2013: $108 (reported in figure notes).

### Inflation, credit, and financial sector conditions in the GCC
- Inflation and prices:
  - Inflation in Bahrain, Qatar, and Saudi Arabia picked up in 2013 to 3-3½ percent.
  - Inflation for the region as a whole is expected at 3.2 percent this year (annual average), up from 2.4 percent in 2012.
- Private sector credit:
  - Robust at around 15–16 percent in Saudi Arabia.
  - Relatively weak in other countries.
- Financial soundness and regulation:
  - Banking systems generally well capitalized and NPLs well provisioned.
  - Pockets of weakness: United Arab Emirates (NPLs still high); Bahrain (Islamic banks with concentrated real estate exposures); Kuwait (investment companies making losses).
  - Implementation of Basel III is progressing; phased implementation planned until 2019 in some countries.

### Global risks considered and simulated impacts (IMF scenarios)
- Four global risks examined and simulated impacts:
  1. Prolonged slowdown in large emerging market countries:
     - If investment in the BRICS were to fall 10 percent below baseline next year and be accompanied by capital outflows:
       - Global growth reduced by around 1¾ percentage points.
       - Oil prices fall by 20 percent.
  2. Re-intensification of pressures in the euro area:
     - Global growth reduced by about 1 percentage point.
     - Oil prices fall by about 7 percent.
  3. Unwinding of unconventional monetary stimulus with sharp increase in global interest rates:
     - Global growth could be 1 percent lower than baseline.
     - Oil prices falling by a little more than 10 percent.
     - If withdrawal happens while U.S. growth is stronger, impact on global growth likely small and impact on oil prices negligible.
  4. Increase in global oil prices from geopolitical uncertainties or disruptions:
     - Size of increase difficult to gauge; could range from negligible to substantial.
     - Higher oil prices could call on spare production capacity in the GCC and, if coincident with a decline in confidence elsewhere, could significantly negatively affect global growth.

### Oil market as the primary transmission channel to the GCC
- IMF staff simulations: fall in oil prices in the three downside scenarios could range from around 7 percent (euro area re‑intensification) to 20 percent (prolonged emerging market slowdown).
- Public external assets and government debt:
  - Total public external assets in the GCC estimated at about $1.8 trillion or more than 115 percent of GDP in 2012.
  - Government debt generally low; Bahrain and Qatar have the highest gross debt-to-GDP ratios at 34 and 36 percent respectively.
- Fiscal and external vulnerability simulations:
  - If oil prices were to fall $25 below the baseline from 2014, fiscal balances in all countries except Kuwait would be in deficit in 2018 (assuming no policy reaction).
  - Current account balances would also fall; only Oman and Qatar would move into deficit under that scenario.
  - Accumulation of public external assets would slow under the $25 lower oil price scenario.
  - If oil prices increased by $25 above the baseline, all countries would remain in fiscal surplus in 2018, and accumulation of foreign assets would be substantial.

### GCC exposure to financial channels and external financing
- External financing and linkages:
  - Qatar and the United Arab Emirates are significant recipients of foreign bank lending (about 25–30 percent of GDP).
  - Bahrain has high exposure to foreign banks as an international financial center.
  - Kuwait and Saudi Arabia are considerably less dependent on foreign bank financing.
  - Investment Corporations in Kuwait hold foreign assets constituting almost half of total claims and have foreign liabilities comprising almost a quarter of total obligations.
- Potential effects:
  - Capital outflows would increase financial sector vulnerabilities, put pressure on bank credit, and could spill over to the real economy, particularly real estate markets.
  - Financial sectors in the region generally remain well capitalized and liquid.

### Policy responses and medium- to long-term challenges
- Short-term macro policy options if downside risks materialize:
  - Maintain existing expenditure plans and allow the overall fiscal surplus to decline.
  - Slow or temporarily reverse fiscal consolidation if domestic growth is severely affected.
  - Ensure new fiscal measures are consistent with short- and medium-term objectives (avoid boosting public-sector employment/wages that conflict with labor market reforms).
  - Use monetary and macro-prudential policies proactively to ensure liquidity and protect private-sector credit.
- Policy guidance if oil prices increase:
  - Avoid procyclical policies; maintain fiscal consolidation plans.
  - Save additional revenues to build fiscal buffers and for intergenerational purposes.
  - Adjust macro-prudential settings if inflation or sector credit risks emerge.
  - In UAE and Qatar consider macro-prudential measures targeted at the real estate sector.
  - In Saudi Arabia focus on delivering new supply of affordable housing.
- Macroprudential and financial stability actions:
  - Conduct regular systemic assessments and publish financial stability reports.
  - Make macro stress testing integral to systemic surveillance and support the macro‑prudential framework with an effective early warning system (EWS).
  - Refine macro‑prudential toolkit: consider time‑varying loan‑to‑deposit ratios, time‑varying loan‑to‑value ratios, and sector exposure limits.
  - Continue development of domestic debt markets to support liquidity management and long‑term financing needs.
- Fiscal framework and longer‑term reforms:
  - Introduce medium-term budget frameworks, set revenues on realistic oil price forecasts, consider structural fiscal balance concepts, move to multi‑year budgeting, establish macro-fiscal units, and publish fiscal data in GFSM 2001 format.
  - Gradually raise domestic energy prices with compensatory measures for poor and vulnerable groups.
  - Strengthen labor market reforms to increase nationals’ employment in the private sector, control public sector employment growth, and raise educational quality.
  - Develop domestic capital markets and continue financial deepening to support SMEs and mega-infrastructure projects.
- Data and transparency:
  - Enhance quality and availability of economic statistics, addressing gaps in national accounts, balance of payments, labor markets, and real estate.
  - Regional initiatives (GCCStat, ArabStat) to harmonize statistical measures and improve data quality.
  - Further steps to enhance economic transparency include publication of IMF reports (not all GCC countries currently publish IMF country reports).

### Selected economic indicators (highlights extracted from Table 3; values preserved as in source)
- Real GDP (selected entries):
  - GCC countries: 6.5 7.8 0.9 6.4 7.7 5.2 3.7
- CPI inflation (average; selected entries):
  - GCC countries: 7.0 8.4 2.8 2.6 3.1 2.4 3.2
- Government sector — Fiscal balance (Percent of GDP; selected entries):
  - GCC countries: 17.2 24.0 -0.7 3.6 11.2 13.9 10.8
- External sector — Current account balance (Percent of GDP; selected entries):
  - GCC countries: 18.3 21.1 6.6 12.4 23.7 24.4 21.3
- Memorandum items (US$ billions, unless otherwise indicated):
  - Nominal GDP, GCC countries: 928.6 1,180.8 955.2 1,139.6 1,446.1 1,577.2 1,604.7
  - Current account balance, GCC countries: 195.5 291.8 107.7 172.6 350.5 395.6 360.5
  - Oil price (US$ per barrel): 71.1 97.0 61.8 79.0 104.0 105.0 104.5
  - Oil production (million of barrels per day): 15.7 16.2 14.5 14.6 16.3 17.2 17.2

*Italic source attribution: IMF — Executive Summary (content unit: _100513b - Executive Summary).*

### Executive Summary ......................................................................................................

### _100513b - Executive Summary ......................................................................................................

### Executive Summary — Key findings and outlook
- Global and regional economic environment remains challenging; global growth remains tepid, and risks are tilted to the downside.
- Recent financial market volatility is significantly affecting some large emerging markets and highlights challenges in unwinding the Federal Reserve’s quantitative easing policy.
- Geopolitical uncertainties in the Middle East are high and affect oil markets.
- Oil prices are close to where they started the year; 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.
- GCC growth outlook is positive but will be affected by global and regional developments; confidence is high and large infrastructure projects coming on stream should support growth.
- Main uncertainties for the GCC: the path of oil prices, increased volatility in global financial markets, and broader unrest in the Middle East.
- Macroeconomic policy scope: substantial buffers permit fiscal policy to manage demand; monetary and macro‑prudential policies can be used proactively.
- Over the medium term, fiscal consolidation is needed to strengthen buffers and increase savings for future generations.
- Key structural challenge: generate private‑sector jobs for the rapidly growing young population; reforms needed to limit incentives for public‑sector employment, raise educational quality, and make nationals more competitive in the private labor market.
- Other reform priorities:
  - Strengthen fiscal frameworks to underpin more efficient spending and medium‑term fiscal consolidation.
  - Reduce growth of domestic energy consumption.
  - Develop domestic capital markets to support corporate and infrastructure financing.
  - Further develop macro‑prudential tools to manage financial sector risks.
  - Improve availability and timeliness of economic statistics.

_Prepared by Zsofia Arvai, Tim Callen, Fuad Hasanov, Renas Sidahmed, and Martin Sommer._

### I. The Global Context — Developments, risks, and implications
- Global growth and near-term outlook:
  - Global growth in 2013 is expected to be around 3 percent, before accelerating in 2014.
  - Acceleration in 2014 expected to be largely driven by stronger growth in the United States and the euro area as the pace of fiscal consolidation slows, with a more modest pick‑up in emerging market economies.
- Advanced economies:
  - United States: rapid reduction of the fiscal deficit has dampened growth, but underlying activity resilient owing to higher house and equity prices and easy financial conditions; growth expected to strengthen next year as fiscal consolidation eases.
  - Japan: growth has been surprisingly vigorous after new policy actions; economy expected to lose steam in 2014 as fiscal policy tightens.
  - Euro area: deeper recession in the periphery than expected; modest pickup expected as fiscal consolidation slows and the external environment improves.
- Emerging markets:
  - Growth disappointed in many emerging market economies; emerging and developing country growth rates are some 2½ percentage points down from 2010 levels.
  - Brazil, China, and India account for about two‑thirds of this decline.
  - Contributing factors: diminished confidence about medium‑term prospects, infrastructure bottlenecks (e.g., in India), and previous overinvestment (China).
- Financial market volatility:
  - Since May, increased volatility; long‑term interest rates rose in advanced economies; emerging markets suffered capital outflows, equity price declines, rising local yields, and currency depreciation.
  - Countries with current account deficits (Brazil, India, Indonesia, South Africa, Turkey) hit particularly hard.
  - Policymaker responses included foreign exchange intervention, monetary tightening, and measures to discourage capital outflows and imports.
- Risks to global growth:
  - Tilted to the downside: persistent financial volatility, exit challenges from accommodative monetary policies, potential longer‑term euro area stagnation, failure to raise the U.S. debt ceiling, and rising geopolitical risks in the Middle East.
- Inflation prospects:
  - Inflation expected to remain subdued given large economic slack in advanced economies and projected decline in commodity prices.
  - In emerging and developing economies, inflation expected to fall slightly next year.
- Oil market developments:
  - Crude oil prices moved higher in recent months due to output declines in Libya and Iraq and OECD inventories falling below usual levels; Brent remained in the $100–120 a barrel range.
  - Futures markets point to a gradual decline in oil prices to about $90 a barrel for Brent over the next three years.
  - Oil price outlook is highly uncertain: the 95 percent confidence band for oil prices is between $70–145 a barrel one year ahead; price spikes cannot be ruled out if geopolitical risks escalate.
  - Rapid development of United States unconventional energy resources presents new challenges for Middle Eastern oil producers.

### Special Feature — Unconventional Oil and Gas in North America: implications
- United States production trends:
  - Production of crude oil and other petroleum liquids has increased by 30 percent over the past five years.
  - Natural gas output has increased by about 25 percent over the same period.
  - EIA expects unconventional oil and natural gas production to increase by another 15 percent over the next five years.
- Macroeconomic effects in the United States likely modest due to small share of mining and energy‑intensive industries.
- Global oil market impacts:
  - Rising U.S. unconventional oil production has materially affected global oil balances and is expected to reduce future demand for OPEC oil.
  - IEA (2013) baseline: rapid growth in non‑OPEC oil production combined with sluggish oil demand could lead to a modest reduction of demand for OPEC crude by about 1 mbd between 2012–15.
  - Given existing project pipelines, OPEC’s spare capacity may rise to some 7 mbd over the medium term to balance the market.
  - Many forecasters (EIA, OPEC, BP) suggest demand for OPEC oil will stagnate or fall for some time, though outcomes depend on U.S. production sustainability and supply disruptions elsewhere.
- Price downside constraints:
  - High breakeven cost of unconventional producers—"in the ballpark of $60–70 a barrel for the United States shale oil fields"—and higher reservation prices of OPEC producers limit downside.
- Distributional effects and grade mix:
  - U.S. tight oil is light and sweet; its growth has especially hurt exporters of light grades (e.g., Algeria and Nigeria), whose exports to the United States have fallen by some 60–80 percent over the past five years.
  - Producers of heavier sour grades have done much better; Saudi Arabia’s exports to the U.S. have remained broadly stable since 2010.
  - The shift in crude grade mix is pressuring the global refining industry; Middle Eastern refiners are better positioned to manage this trend than some peers.
- Long‑run expectations:
  - Most forecasters expect demand for OPEC oil to pick up again in the long run as U.S. tight oil production plateaus early next decade, but shale developments could slow oil demand growth via fuel switching toward gas.
- Implications for GCC:
  - GCC producers face the risk of an oversupplied oil market over the next several years; falling call on OPEC could create need for production cuts or, absent cuts, price declines that would hurt oil exporters.
  - Near‑term challenges to Middle East gas exporters from U.S. shale gas are limited due to geographic segmentation of gas markets, though producers exporting gas indexed to spot oil prices could face challenges.
  - Competition from other LNG exporters such as Australia likely to grow over the longer term.

### II. Developments in the Middle East and North Africa (MENA) region — Snapshot
- 2013 developments:
  - Growth in MENA continued to slow in 2013, reflecting a marked slowdown in the region’s oil‑exporting countries and a lackluster recovery in the oil importers.
  - Uncertainties from prolonged political transitions, growing unrest, and a weak external environment are weighing on confidence in a number of countries.
- Outlook:
  - Growth is projected to pick up modestly in 2014 if domestic stability and global conditions improve, though uncertainties and risks remain high.

_Italic source attribution: IMF — Executive Summary (content unit: _100513b - Executive Summary)._

### 9.      In the MENA region, growth is expected to slow quite sharply in 2013, before

### _100513b - 9.      In the MENA region, growth is expected to slow quite sharply in 2013, before

### MENA region: growth outlook
- Real GDP growth is projected at around 2½ percent in 2013, some 2 percentage points lower than in 2012, and 3¾ percent in 2014.
- Slowdown in 2013 mainly driven by slower output growth in oil exporting countries, more than offsetting a tepid recovery in oil importing countries.
- Growth in 2013 and 2014 for many oil-importing countries is expected to be broadly unchanged from 2012.

### MENA oil exporters: recent developments and near-term outlook
- Growth in the MENA oil exporters decelerated substantially in the first half of 2013, driven by falling oil production.
- In a number of non-GCC countries (Iran, Iraq, and Libya), geopolitical tensions, economic sanctions, and deteriorating security interrupted oil supply.
- Region’s hydrocarbon output is expected to fall in 2013.
- The non-oil economy is holding up well in most countries, supported by high levels of government spending.
- Growth is expected to strengthen in 2014 as oil production recovers.

### MENA oil importers: recent developments, vulnerabilities, and policy challenges
- Nascent signs of improvement in tourism, exports, and FDI since the troughs in 2011, partly owing to increased demand from the GCC countries.
- Many countries face weak confidence and slow domestic activity due to prolonged political and policy uncertainty, social unrest, and security problems.
- Regional spillovers from the protracted conflict in Syria and potential spillovers from the ongoing complex political transition in Egypt complicate economic management.
- External and fiscal buffers are running low for many countries.
- Policy challenges:
  - Achieve macroeconomic stabilization.
  - Reduce fiscal and external vulnerabilities.
  - Reshape economic structures and institutions to boost confidence and long-term growth and job creation.
- Where needed, external official financing can help smooth adjustment during macroeconomic stabilization and structural transformation.

### Risks to the region (general)
- Risks remain tilted to the downside; extent and nature vary considerably among countries.
- For oil exporters:
  - Extended disruptions in domestic production or a fall in oil prices (due to global slowdown or faster-than-expected increase in non-OPEC supply) would leave many with fiscal deficits.
  - Many countries have not been accumulating wealth fast enough to provide sufficient reserves for future generations or buffers against declines in oil revenues.
  - Upside: higher oil prices from stronger-than-expected global recovery or supply disruptions elsewhere would be positive.
- For oil importers:
  - Risks stem mainly from domestic and regional factors: setbacks in political transitions, continued social and security tensions delaying reforms and return of confidence.
  - Weaker growth in the euro area would present risks for tourism, exports, investment, and remittances.
  - Limited external financial exposures reduce the risk of a sudden stop in capital inflows for most countries.
  - Upside: faster progress in political transitions and reform implementation across the region, and a resolution of regional conflicts, could boost investor confidence and growth.

### GCC: overall outlook and projections
- Economic outlook in the GCC remains favorable, although growth is likely to be slower over the next few years than in the recent past.
- Real GDP grew by 5.2 percent in 2012, down from 7.7 percent in 2011.
- Regional growth set to slow further in 2013, before strengthening in 2014.
  - Real GDP is projected to expand by 3.7 percent in 2013.
  - Overall GDP growth in 2014 is projected at just over 4 percent as oil production is projected to increase and non-oil growth remains steady.
- Growth in 2013 expected to be weaker than in 2012 in five of the six GCC countries; noticeable slowdowns projected in Kuwait and Saudi Arabia.
- Non-oil sector remains robust across the region as large infrastructure projects continue and private sector confidence remains high.

### GCC: fiscal developments and policy stance
- Fiscal consolidation that started in 2012 is expected to continue in 2013, with policy differences across countries.
- The non-oil general government fiscal deficit as a percent of non-oil GDP:
  - Narrowed in Qatar, Saudi Arabia, and the United Arab Emirates in 2012 as government spending growth eased.
  - Widened in Bahrain, Kuwait, and Oman in 2012.
- In 2013:
  - Fiscal consolidation expected to continue in Qatar, Saudi Arabia, and UAE and begin in Oman.
  - Bahrain and Kuwait are pursuing an expansionary fiscal policy.
- All GCC countries continue to run relatively large overall fiscal surpluses as oil revenues remain high, except Bahrain which is in deficit.
- Break-even oil metric: Average Brent price in 2013: $108 (reported in figure notes).

### Special feature: Tools for assessing fiscal policy in the GCC countries
- Key tools described:
  - Non-oil fiscal deficit (NOFD) as a percent of non-oil GDP — measures fiscal stance and impact on aggregate demand; useful to delink fiscal stance from oil revenue volatility.
  - Breakeven oil price — indicates oil price needed to balance the budget given government spending.
  - Structural budget balance — smooths oil price volatility by basing expenditure on an estimate of long-term oil price (example: a 5-year average) and a target structural balance.
  - Permanent income model — assesses longer-term fiscal sustainability and intergenerational equity; useful for countries with short reserve horizons but sensitive to assumptions.
  - Precautionary saving-investment model — assesses size of fiscal buffers needed to smooth spending against expected oil revenue volatility (see Cherif and Hasanov (2012)).
- IMF staff uses combinations of these approaches:
  - NOFD, breakeven oil price, and permanent income model used in all analyses.
  - Structural budget balance applied to Saudi Arabia.
  - Precautionary saving-investment model applied to Oman and Kuwait.
- Importance of considering composition and efficiency of fiscal spending to promote development and diversification.

### Inflation, credit, and financial sector conditions in the GCC
- Inflation:
  - Inflation in Bahrain, Qatar, and Saudi Arabia picked up in 2013 to 3-3½ percent due to rising food prices and higher housing costs; appears to have peaked.
  - In Oman, inflation is declining.
  - In the United Arab Emirates, inflation remains low.
  - For the region as a whole, inflation is expected at 3.2 percent this year (annual average), up from 2.4 percent in 2012.
  - Residential real estate prices rising strongly in Dubai and Qatar as housing demand from expatriates increases.
- Private sector credit growth:
  - Robust at around 15–16 percent in Saudi Arabia.
  - Relatively weak in other countries.
  - In the United Arab Emirates, some recent pick-up in credit growth but debt overhang from the Dubai crisis limits lending; banking sector remains cautious given high NPLs.
  - In Kuwait, weak non-oil growth and slow implementation of public capital projects limit lending.
  - External bond inflows have decelerated from the 2010 peak in Bahrain, Qatar, and the United Arab Emirates.
- Financial soundness:
  - Banking systems generally well capitalized and NPLs well provisioned.
  - Pockets of weakness:
    - United Arab Emirates: NPLs still high; potential additional restructuring of government related entity (GRE) debt could raise levels.
    - Bahrain: some Islamic banks with concentrated exposures to local and regional real estate markets.
    - Kuwait: some investment companies continue to make losses; sector vulnerable to swings in global and regional financial and real estate markets.
  - Implementation of Basel III is progressing; Saudi Arabia implemented Basel II early, others plan phased implementation until 2019.

### Global risks considered and simulated impacts
- Four global risks examined:
  1. A prolonged slowdown in large emerging market countries:
     - If investment in the BRICS were to fall 10 percent below baseline next year and be accompanied by capital outflows, simulations suggest:
       - Global growth reduced by around 1¾ percentage points.
       - Oil prices fall by 20 percent.
  2. A re-intensification of pressures in the euro area:
     - IMF simulations suggest such a scenario would:
       - Reduce global growth by about 1 percentage point.
       - Be accompanied by a drop in oil prices of about 7 percent.
  3. An unwinding of unconventional monetary stimulus that leads to a sharp increase in global interest rates:
     - If interest rates and financial market volatility spike higher before stronger U.S. growth is evident, simulations suggest:
       - Global growth could be 1 percent lower than in the baseline.
       - Oil prices falling by a little more than 10 percent.
     - If withdrawal of monetary stimulus happens while U.S. growth is stronger, on balance the impact on global growth is likely small and the impact on oil prices negligible.
  4. An increase in global oil prices from geopolitical uncertainties or disruptions in oil production outside the GCC:
     - Size of potential oil price increase is difficult to gauge; could range from negligible to substantial if production in a large non-GCC exporter is significantly affected for an extended period.
     - Higher oil prices could call on spare production capacity in the GCC.
     - If higher oil prices coincide with a decline in confidence in advanced and emerging market economies, global growth could be significantly negatively affected.

### Implications for the GCC
- Main channel through which the region would be affected if global risks materialize is the oil market; some countries (notably the United Arab Emirates) would also be affected by links to global financial markets.
- With substantial fiscal and financial buffers, the GCC countries are in a strong position to withstand turbulence.
- Domestic risks could emerge if ongoing reform programs fail to generate jobs.

*Source: IMF country/regional analysis as presented in the supplied content unit.*

### 20.      The main channel through which the GCC countries would be affected by any of

### _100513b - 20.      The main channel through which the GCC countries would be affected by any of

### Oil market as the primary transmission channel
- IMF staff simulations: fall in oil prices in three downside scenarios could range from around 7 percent (re-intensification of pressures in the euro area) to 20 percent (prolonged emerging market slowdown).
- Effects could be magnified if oil production in the United States increases more rapidly than expected.
- Total public external assets in the GCC are estimated at about $1.8 trillion or more than 115 percent of GDP in 2012.
- Government debt is generally low; Bahrain and Qatar have the highest gross debt-to-GDP ratios at 34 and 36 percent respectively (the latter has issued debt for market development purposes rather than fiscal need).
- A more prolonged drop in oil revenues would begin to erode the fiscal buffers that have been established in recent years.

### Fiscal and external vulnerability simulations
- If oil prices were to fall $25 below the baseline from 2014, fiscal balances in all countries except Kuwait would be in deficit in 2018 (assuming no policy reaction).
- Current account balances would also fall; only in Oman and Qatar would they move into deficit under that scenario.
- The accumulation of public external assets would slow under the $25 lower oil price scenario.
- If oil prices increased by $25 above the baseline, all countries would remain in fiscal surplus in 2018, and the accumulation of foreign assets would be substantial.

### Growth, monetary transmission, and policy response options
- Impact on economic growth depends greatly on government policy response.
- Weaker global environment: oil production in the region expected to fall as global energy demand drops, reducing oil GDP; slowdown likely to reduce private-sector confidence and curtail FDI, negatively affecting the non-oil sector.
- Substantial fiscal buffers enable government spending to be maintained or temporarily increased, which would help limit impact on non-oil growth.
- Pegged exchange rate regimes imply that eventual interest rate increases in the United States will result in higher domestic interest rates; pass-through of policy rates to lending rates is generally weak in the GCC, so initial impact of rising interest rates is likely limited.
- Policy options if downside risks emerge:
  - Maintain existing expenditure plans and allow the overall fiscal surplus to decline.
  - Slow or temporarily reverse fiscal consolidation if domestic growth is severely affected.
  - Ensure new fiscal measures are consistent with short- and medium-term objectives (avoid boosting public-sector employment/wages that conflict with labor market reforms).
  - Use monetary and macro-prudential policies proactively to ensure liquidity and protect private-sector credit.

- Policy guidance if oil prices increase above current levels:
  - Avoid procyclical policies; maintain fiscal consolidation plans.
  - Save additional revenues to build fiscal buffers and for intergenerational purposes.
  - Adjust macro-prudential settings if inflation or sector credit risks emerge.
  - In UAE and Qatar consider macro-prudential measures targeted at the real estate sector.
  - In Saudi Arabia focus on delivering new supply of affordable housing.

### Financial channels and external financing exposures
- Countries with higher reliance on external financing and closer links to global financial markets will be affected through financial channels.
- Qatar and the United Arab Emirates are significant recipients of foreign bank lending (of about 25–30 percent of GDP).
- Bahrain, as an international financial center, has high exposure to foreign banks.
- Kuwait and Saudi Arabia are considerably less dependent on foreign bank financing, though Investment Corporations in Kuwait hold foreign assets constituting almost half of total claims and have foreign liabilities comprising almost a quarter of total obligations.
- Capital outflows would increase financial sector vulnerabilities, put pressure on bank credit, and could spill over to the real economy, particularly real estate markets.
- Financial sectors in the region generally remain well capitalized and liquid, which would help them weather these risks.

### Outward spillovers from the GCC
- Main outward spillover to the global economy is through the oil market; Saudi Arabia’s spare production capacity is a key source of stability for the global oil market.
- Saudi Arabian production has been raised during past episodes of large oil supply disruptions and has again increased in recent months as production from several other OPEC countries has fallen.
- Remittance outflows from expatriate workers are an important source of foreign income for a number of countries.
- GCC countries have provided financial support to a number of countries in transition in the Middle East.

### Policy responses and medium- to long-term challenges
- GCC countries are well positioned to respond owing to substantial buffers, but further actions needed to reduce vulnerabilities, diversify economies, and create well-paying, productive jobs.

A. Macroeconomic policy settings
- Short-term settings appear appropriate in most countries; fiscal consolidation generally needed over the medium term.
- Non-oil fiscal deficit is narrowing in 2013 in Oman, Qatar, Saudi Arabia, and the United Arab Emirates following the expansionary stance in 2011.
- In Bahrain and Kuwait, the non-oil fiscal deficit is expected to increase further in 2013; early action is needed—particularly in Bahrain where government debt is already quite high.
- Over time, fiscal consolidation should focus on containing growth of current spending (particularly public sector wages), prioritizing capital spending, and enhancing non-oil revenues.
- With the exception of Qatar, all countries are running non-oil fiscal deficits larger than is consistent with an equitable intergenerational allocation of oil revenues.
- Except in Qatar and Kuwait, the non-oil primary fiscal deficit is above the level needed to ensure sustainability when oil reserves are exhausted.

- Monetary policy:
  - Settings remain accommodative; vigilance needed for rising inflationary pressures in goods and asset markets.
  - Under pegged exchange rates, fiscal tightening must be the first line of defense against rising price pressures; monetary and macro-prudential tools (reserve requirements, loan-to-deposit ratios) could be used as well.
  - If real estate pressures emerge, early and targeted macro-prudential interventions are recommended, though effectiveness is constrained where financing largely comes from outside the financial sector.

B. Longer-term policy challenges
- Employing a rapidly growing working-age population:
  - Labor market structure: majority of nationals in public sector; private sector reliant on low-skilled expatriate workers — this model has costs: low productivity and low responsiveness of national employment to growth.
  - Reforms underway to increase nationals’ employment in private sector; need greater focus on controlling public sector employment, raising educational quality, and making nationals more competitive.
- Sustaining private non-oil sector growth to create jobs:
  - GCC countries generally rank relatively well in competitiveness and Doing Business indicators, though Oman and Kuwait could strengthen positions.
  - Continued financial deepening and development of domestic bond markets are important to support financing, including for SMEs and mega-infrastructure projects.

- Strengthening fiscal frameworks:
  - Introduce medium-term budget frameworks to integrate National Development Plans and identify fiscal risks.
  - Set estimated revenues on realistic oil price forecasts; consider using a structural fiscal balance concept.
  - Move to multi-year budgeting, establish macro-fiscal units, and publish fiscal data in GFSM 2001 format.

- Curtailing domestic energy consumption:
  - Without reform, domestic energy consumption likely to continue rising; GCC have some of highest per capita consumption and some of the lowest prices.
  - Gradual upward adjustment in domestic energy prices over time would curb consumption growth, redirect incentives away from energy-intensive industries, and strengthen fiscal position.
  - Energy price increases would adversely affect poor and vulnerable groups; compensatory measures and phased, well-communicated reforms are necessary.

- Developing domestic debt markets:
  - Domestic debt markets are at an early stage; developing them is a priority to support private-sector-led growth and diversification.
  - Benefits of deep, liquid domestic debt markets: diversify financing risks, support funded pension schemes, enhance corporate governance, provide long-term financing for infrastructure.
  - Government securities markets are usually the first step; practical requirements include public debt management, diverse investor base, corporate governance, market transparency, and technical market infrastructure.

- Strengthening macro-prudential policy frameworks:
  - Macro-prudential policies have been used historically but without formal frameworks or legal backing.
  - Desirable to develop more formal and transparent macro-prudential institutional and policy frameworks covering mandate for financial stability, coordination, objectives, analytical methods, and toolkits.
  - Development of formal frameworks may require time; some countries (including Qatar) are introducing institutional arrangements for macro-prudential policy.

*Italic: IMF staff summary of chapter content from the provided source.*

### 38.      GCC countries should conduct regular systemic assessments and publish

### 38.      GCC countries should conduct regular systemic assessments and publish financial stability reports

### Financial stability reporting and systemic surveillance
- Bahrain (since 2007), Qatar (since 2010), Oman (since 2013) and the United Arab Emirates (since 2012) publish financial stability reports.
- Benefits of publishing financial stability reports:
  - Improve transparency of risk recognition in the financial system.
  - Facilitate broad communication with the public.
- Recommended enhancements to systemic surveillance:
  - Make macro stress testing an integral part of systemic surveillance.
  - Support the macro-prudential framework with an effective early warning system (EWS) to identify and monitor systemic risks.

### Refining the macro‑prudential toolkit
- Scope for refinement:
  - Build appropriate buffers and limit excessive leveraging and credit booms in good times.
- Current emphasis and complementary measures:
  - GCC countries have relied strongly on high capitalization of banks.
  - Complementary measures could include:
    - An enhanced role for Pillar II.
    - A further move towards risk-based supervision.
    - Linking the supervisory review process to the cycle.
- Macro-prudential instruments to consider:
  - Time-varying loan-to-deposit ratios to alleviate procyclicality.
  - Time-varying loan-to-value ratios to contain excessive exposure to real estate.
  - Sector exposure limits to reduce credit concentration.
- Liquidity risk and market development:
  - Regulators are appropriately focusing on instruments to reduce liquidity risks and developing Basel III–compliant regulations.
  - Development of the domestic debt market is important to help with liquidity management.

### Improving economic statistics and increasing transparency
- Priority and progress:
  - Enhancing the quality and availability of economic statistics remains a key priority.
  - Good progress has been made in strengthening data provision in the GCC in recent years, but gaps remain in national accounts, balance of payments, labor markets, and the real estate sector.
- Regional initiatives:
  - Regional initiatives, including GCCStat and ArabStat, will help harmonize statistical measures and could help anchor statistical improvement plans.

### GCCStat: A Regional Statistical Center
- Establishment and mandate:
  - Heads of State of the GCC member countries approved the establishment of a new statistical center—GCCStat—at their 2012 annual summit.
  - GCCStat will be responsible for the collection, analysis, and dissemination of economic, social, and other data, working with national statistical agencies and compilers.
  - GCCStat will coordinate all statistical work programs at the level of member states, apply international standards and best practices, unify methodologies, and improve data quality.
  - GCCStat will be the official source of data for the GCC.
- Location and governance:
  - GCCStat is located in Oman, and will be overseen by a Board of Directors comprised of the heads of the statistical centers of the six GCC countries.

### Publication of IMF reports and economic transparency
- Further steps could be taken to enhance economic transparency, including the publication of IMF reports.
- Although there have been very positive steps in recent years, not all GCC countries publish IMF country reports.

### Selected economic indicators (extracted from Table 3)
- National accounts and prices — Real GDP
  - Bahrain8.46.33.24.72.14.84.4
  - Kuwait6.02.5-7.1-2.46.36.20.8
  - Oman6.713.23.35.64.55.05.1
  - Qatar18.017.712.016.713.06.25.1
  - Saudi Arabia6.08.41.87.48.65.13.6
  - United Arab Emirates3.23.2-4.81.73.94.44.0
  - GCC countries6.57.80.96.47.75.23.7
- National accounts and prices — Real Oil GDP
  - Bahrain1.10.4-0.81.83.4-8.513.5
  - Kuwait-4.76.5-12.90.514.211.7-2.0
  - Oman-3.57.88.54.52.13.44.2
  - Qatar13.813.24.528.915.71.70.4
  - Saudi Arabia-3.84.3-8.00.311.05.5-0.9
  - United Arab Emirates-4.2-2.4-8.93.86.66.33.6
  - GCC countries-2.44.2-6.34.310.55.40.4
- National accounts and prices — Real Nonoil GDP
  - Bahrain9.67.23.85.21.96.63.4
  - Kuwait14.00.0-3.2-4.11.32.23.0
  - Oman13.216.00.76.25.85.85.5
  - Qatar21.621.317.68.610.810.08.8
  - Saudi Arabia9.99.95.19.57.95.04.8
  - United Arab Emirates7.46.0-2.90.72.63.54.3
  - GCC countries11.09.43.86.36.55.25.0
- CPI inflation (average)
  - Bahrain3.33.52.82.0-0.42.82.7
  - Kuwait5.56.34.64.54.93.23.0
  - Oman5.912.63.53.34.02.92.8
  - Qatar13.815.0-4.9-2.41.91.93.7
  - Saudi Arabia5.06.14.13.83.72.93.8
  - United Arab Emirates11.112.31.60.90.90.71.5
  - GCC countries7.08.42.82.63.12.43.2
- Government sector — Fiscal balance (Percent of GDP)
  - Bahrain1.94.9-6.6-7.0-1.7-2.6-4.2
  - Kuwait39.019.826.824.533.233.428.9
  - Oman11.113.7-2.14.07.32.55.2
  - Qatar2 9.910.212.52.53.68.110.7
  - Saudi Arabia15.031.6-4.12.112.015.09.6
  - United Arab Emirates16.016.9-13.1-1.84.18.68.3
  - GCC countries17.224.0-0.73.611.213.910.8
- External sector — Current account balance (Percent of GDP)
  - Bahrain15.710.22.93.612.68.213.5
  - Kuwait36.840.926.730.841.843.238.7
  - Oman5.98.3-1.310.015.311.610.1
  - Qatar14.423.16.519.030.332.429.6
  - Saudi Arabia22.525.54.912.723.723.219.3
  - United Arab Emirates6.97.13.12.514.617.315.2
  - GCC countries18.321.16.612.423.724.421.3
- Memorandum items (US$ billions, unless otherwise indicated)
  - Nominal GDP, GCC countries928.61,180.8955.21,139.61,446.11,577.21,604.7
  - Current account balance, GCC countries195.5291.8107.7172.6350.5395.6360.5
  - Oil price (US$ per barrel)3 71.197.061.879.0104.0105.0104.5
  - Oil production (million of barrels per day)15.716.214.514.616.317.217.2

*Source: IMF staff text as provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_100513b.pdf_