The GCC countries look set to enjoy an uptick in economic activity in 2018, largely driven by further gains in oil prices, Fitch Solutions has said in a report.
Fitch Solutions team forecasts Brent to average $75 a barrel this year and $80/b in 2019, up from $54.8/b in 2017, which will support confidence in the economy, and enable governments to move away from austerity.
The uptick in economic activity in 2018, Fitch Solutions believes, will be a boon for the banking sector of these countries.
“We forecast average weighted real GDP growth of 2.3% in 2018 and 2.7% in 2019 across the block, after bottoming at an estimated 0.4% in 2017,” points out Fitch Solutions, part of Fitch Group, and known as BMI Research earlier. At the centre of the need for GCC economies to diversify away from their focus on oil and into new sectors is inextricably linked to the price of oil itself.
“In the similar vein, so is the speed at which they are able to do so. Furthermore, growth in local banking assets is closely correlated to economic growth, and both will also rise or fall in tandem with oil prices,” Fitch Solutions said.
The banking sector and the regional economy has suffered since volatility first hit the oil price environment back in mid-2014, and a sustained period of low prices has continued since.
“Looking ahead, we highlight that in the near term, we see heightened price volatility in Brent as further uncertainty around the impact from the sanctions on Iran by the US (which will place up to 2.5mn bpd of oil exports at risk), as well as further trade risk between the US and China, clouds the outlook.
“On the back of such events, we have revised our medium-term price forecast upwards with new price targets from 2019-2022. We foresee a growing market deficit from 2019, with the loss of Iranian barrels, a reduction in global spare production capacity and a thinning project pipeline adding upside pressure to prices.”
From 2019, Fitch Solutions expect prices to increase robustly, with a healthy global demand growth outlook outpacing supply growth, which will continue to experience constraints due to Iranian sanctions, limited new project start-ups and declining rates in Asia-Pacific, Sub-Saharan Africa (SSA) and Europe.
In sum, Fitch Solutions said while the ongoing oil price recovery is set to remain a long way off former highs, the more supportive and stable oil price outlook beyond 2019 should serve to support the GCC banking sector’s growth and its subsequent ability to compete on the global stage.
“As such, we expect to see an ongoing flow of deals across the region as lenders and operators in the financial services sector shuffle for position ahead of the expected return of tailwinds to the industry and the improvement in the macroeconomic backdrop,” Fitch Solutions noted.
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