Saudi, Gulf growth forecasts cut but region to avoid recession

Analysts have cut their forecasts for economic growth in Saudi Arabia and the Gulf's other rich oil states this year but still expect the region to avoid recession by a comfortable margin, a Reuters poll found.

The median forecast of 22 economists surveyed by Reuters is for gross domestic product growth in Saudi Arabia, the region's biggest economy, to slow to 1.9 percent in 2016. That is down from a forecast of 2.5 percent in the last Reuters poll, conducted three months ago.

But only one economist expects GDP to shrink this year, and the median forecast is for growth to pick up slightly in 2017, to 2.2 percent.

The region's second biggest economy, the United Arab Emirates, is expected to fare better because it has stronger government finances and a diversified business landscape which relies less on oil.

The UAE is expected to expand 3.0 percent this year, slowing only moderately from an estimated 3.3 percent last year and compared to a 2016 forecast of 3.3 percent in October's poll. The median forecast for next year's growth has been kept unchanged at 3.4 percent.

The plunge of the Brent crude oil price LCOc1 to a 12-year low below $30 a barrel, from around $110 just 18 months ago, has given the six Gulf Cooperation Council countries with their biggest economic challenge in more than a decade.

Although their oil sectors have continued growing as production has increased, the price drop has slashed governments' income, forcing them to cut spending and plan to raise taxes. In the last few months, this has started to hurt private sector growth in the region, and pressure is expected to increase in coming months.

London-based Capital Economics said spending cuts in Saudi Arabia would help to reduce its big budget and current account deficits this year, allowing Riyadh to adjust to low oil prices without devaluing its riyal currency, but added:

"All of this will come at the expense of weaker economic growth. We have pencilled in GDP growth of 1.5 percent this year, down from the 3.4 percent recorded in 2015."

The poll shows analysts reducing their 2016 GDP growth forecasts for Kuwait, Qatar, Oman and Bahrain only moderately, even though all of them have begun constraining state spending and most are considering tougher fiscal reforms.

Most GCC governments are expected to reduce their budget deficits this year through austerity measures, but in some cases the deficits will remain high enough to continue causing concern in financial markets, the poll indicated.

Saudi Arabia's fiscal deficit is forecast to edge down to 14.1 percent of GDP this year and 10.3 percent next year from an estimated 16.8 percent in 2015.

The UAE is projected to shrink its deficit to 3.8 percent in 2016 and just 0.6 percent in 2017 from 4.7 percent in 2015. But the two financially weakest governments in the GCC, Oman and Bahrain, are expected to continue to struggle, posting deficits of 14.6 percent and 11.9 percent this year - huge gaps in relation to the size of their economies.