Details

– Gulf economies require to pursue plans aimed at achieving great strides in productivity, competitiveness

 

-Regional development plans need more flexibility in dealing with fluctuations in US currency

 

-Plans to pump SAR 270 billion within five years to raise spending efficiency, achieve financial balance & promote PPPs in Saudi Arabia

Economies of the Gulf region are impacted by the development plans and projects already implemented and those in the process of being executed. At the same time, there are many external challenges that require advance preparation to avoid or mitigate any shocks affecting economic sectors in the region.

It is now clear that many economies in the region can deal with internal and external pressures and challenges efficiently through forecasting and anticipating what will happen.

At the forefront of these challenges are the fluctuations in the US dollar values and the changes in US interest rates, with the ability to cope with these changes varying from one region to another.

In its weekly real estate report, Al Mazaya says the focus should not be laid on whether local currencies are fully, or partially pegged to the dollar, but rather on exploring the options available to optimise economic performance and develop efficient development plans.

The economies of the region target growth rates of more than 2.5% by the end of 2018, which requires partial improvement in oil prices as well as improved performance of non-oil sectors. All of this is entirely linked to the performance of foreign currencies in general and the US currency in particular.

The regional economies are recovering significantly during the previous financial terms, especially with the recently approved stimulus plans. However, such growth rates will be affected by the existing fiscal deficits, estimated at 6.3% at the end of 2017. They are expected to fall to an average of 5% by the end of this year. At the same time, it is expected that withdrawals from central reserves and borrowing will continue, which is likely to increase the public debt ratio by an average of 27% by the end of this year.

The report indicates that the appreciation of the US currency, according to previous experience, does not reflect positively on the economies of the region as the regional currencies are fully pegged to the US dollar.

The appreciation of dollar-pegged local currencies will result in lower export capacity to those markets where currencies are not pegged to the dollar, which makes exports costlier, and the productive and tourism sectors will accordingly lose a large part of their share of the major markets around the world. This means that the region’s markets will get more costly than other regional and global markets, as far as tourism is concerned.

On the other hand, the strength of local currencies will mean lower import costs, which positively affects all products imported from the EU and Japan, for example, considering that there are other additional effects and challenges imposed by the strength of local currencies pegged to the dollar on the industrial sector and exports to foreign markets.

The report highlighted the difficulty in identifying the overall impact of the fluctuations in the US currency on the regional economies and the importance of monitoring and tracking economic changes in various sectors, particularly during the planning and adoption of medium- and long-term transformational and developmental plans to avoid any negative effect or failures resulting from these changes.

The real estate projects will be the biggest winners once import costs get down, as the costs of mega projects depend on their construction and operation of imported material. Reduced import costs ensure the timely completion of construction and reflect favourably on the performance and financial position of property companies.

The logistics sector is among the most affected by the movement and flow of goods and services. More stable prices will positively affect all material used in industrial and production activities. It will also support the diversification of economies and the returns of the tourism and shopping sector, significantly contributing to the expansion of manufacturing activities. This is due to the fact that the region’s economies count more on retail, trade, tourism and FDIs.

On the other hand, Al Mazaya stressed the impact of the ongoing changes in interest rates on the US dollar, specifically on the growth and economic transformational plans being implemented by the countries of the region.

The report drives home the fact that the real estate, tourism and services sectors, in general, will be at the heart of the negative effects to be generated by higher interest rates and stronger US dollar which will be significantly in favour of investors from China and Russia.

Al Mazaya report says that development and transformation plans have started and will not stop because they include a lot of goals to be achieved during specific time periods.  In addition, these plans seem to be adjustable according to the requirements of each stage of implementation. Therefore, they must consider the overall effects of a strong and weak dollar over the entire period of implementation, as well as the overall effect of the US Federal Reserve’s interest rate adjustments. Many key sectors have been beneficiaries while others have been negatively affected by these continuous changes in US economy which are introduced by the US administration regardless of their impact on other countries.

The report added in this respect that the Saudi economy is preparing to pump 270 billion riyals over a period of five years to raise spending efficiency, achieve fiscal balance and activate partnership with the private sector. The UAE’s centennial development plans aim to achieve a global competitive edge in education, economy, government performance and ensuring social welfare and economic well-being.

Such across-the-board plans and strategies require synergies and collaboration of all relevant sectors and entities, not only at the government level, but the private sector as well must be engaged.

With plans to privatise the economic, primary and parts of strategic sectors becoming at the heart of the region’s economic agendas in order to offset fiscal deficits by the end of the year, it has become incumbent on the economies of the region to pursue plans aimed at achieving great strides in terms of productivity. In addition, they need to give economic sectors greater freedom and flexibility. In the meantime, the noticeable reliance on the energy, banking, real estate and industrial sectors means that without efficient stimulus plans across these sectors, it would be impossible to achieve economic sustainability.