Economic outlook to improve gradually as oil prices pick up, but rising political risks pose substantial downside risks


GCC: Moderate recovery in 2018

In 2017, growth in the Gulf Cooperation Council (GCC) region decelerated to an estimated +0.4% (from +2.4% in 2016). This was mainly due to a reduction in oil production following the November 2016 agreement by OPEC members and other major oil producers (such as Russia) to cut output in order to stabilize then falling oil prices. For example, oil extraction in Saudi Arabia which accounts for almost half of GCC GDP dropped by -3.5% in 2017, dragging the whole economy into recession (-0.7%) even though the non-oil sector grew by +1%.

Meanwhile, the oil production cuts have been extended until the end of 2018 but not deepened. Hence oil output in the GCC should stabilize this year, allowing for a gradual recovery of the oil sector as prices will be higher than last year—Euler Hermes forecasts an average USD62/bbl of benchmark Brent in 2018, up from USD55/bbl in 2017. The non-oil sector is expected to continue to expand moderately as ongoing fiscal austerity measures will retard a significant strengthening. Overall, we forecast a modest recovery of growth to +2.2% in the GCC region in 2018. 

The long announced introduction of a 5% VAT across the GCC at the start of 2018 was implemented only in Saudi Arabia and the UAE, for now. This should speed up inflation to an average 4% or so in 2018.

The rest of the GCC states are understood to have deferred VAT implementation, perhaps until 2019.Huge SWFs in the larger GCC economies still provide for solid country risk profiles. However, Bahrain ran out of reserves in late 2017 and reportedly asked GCC allies for financial support. Meanwhile, Qatar appears to weather the political tensions with other Arab states as GDP growth rebounded to +1.9% y/y in Q3 2017. We forecast growth of +2.5% in 2018.


Iran: Political risks cloud economic outlook 

The economy is recovering from years of tough economic sanctions. We forecast +4% real GDP growth in 2018.  However, rising political tensions in the country (as strong growth since the lifting of sanctions in 2016 has not yet translated into better living standards), mounting regional geopolitical risks and potential new U.S. sanctions pose considerable downside risks. Inflation remains elevated and is forecast to average 10% in 2018.


Israel: Robust outlook

Real GDP growth is projected to pick up to +3.6% in 2018 (from +3% in 2017), supported by accommodative monetary and fiscal policies that will boost private consumption and investment. And the improving global economy should sustain sound export expansion. Inflation is expected to pick up to an average 1% in 2018.  

GDP growth forecasts and short-term country risk as of Q4 2017