Diversification is working … but more needs to be done

Steen Jakobsen, Saxo Bank’s Chief Investment Officer, says higher oil prices are improving the short-term growth outlook for Bahrain/GCC but external factors will pressure the region’s fiscal outlook in 2019.

The governments of Bahrain and the wider GCC region are making good progress in the creation of revenue separate from the oil-based economy, especially with the introduction of VAT, but ignoring the early signs of a global slowdown could be costly to the region, said Steen Jakobsen, Chief Investment Officer of Saxo Bank, the leading fintech specialist focused on multi-asset trading and investing. Speaking at the Al Dana Ferguson Forum 2018 in Bahrain, Jakobsen said: “The recent high oil prices have been positive for the region as it has allowed GCC governments extra time to put in place strong structures for creating more revenue away from the petroleum economy. This urgency is well-placed, but more needs to be done to diversify GCC economies as I expect that the region will face significant economic headwinds in the next 12 months amongst an increasingly fractious global geopolitical outlook.”

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Jakobsen outlined his macroeconomic forecast for the GCC region at the Forum and cautioned that external factors could have a negative impact economically on the region in the next year. He said the Middle East remains very dependent on global external factors, especially US policy. The potential for rising US interest rates will drive the US dollar higher, as well as lead to a higher cost of capital which will also impact the GCC. Meanwhile increased political uncertainty surrounding the trade dispute between the US and China, as well as the growing anti-globalisation sentiment is likely to slow the US and global economy as we enter 2019.

“While the geopolitical climate is a significant headwind for regional growth, there are some good economic signals coming out of the GCC region. The introduction of VAT and increasing potential tax revenue from almost zero should be a net positive for the country rating, but it subsequently creates some issues in increasing price levels at a time of a global slowdown, as well as maintaining and attracting expat professionals to the region,” said Jakobsen.

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He said: “What I have been pleased to see most though is a newfound realism that the region needs to create credible revenue outside the petroleum economy. It’s clear to me that the last oil price crisis did more for structural changes in the region than anything I have seen in my 20-plus years of travelling to the region. Jakobsen was also positive about the growth of SMEs in the region: “The strong support for growing SMEs and reducing the dependency on state-owned enterprises is important structural change that should lead to more competition and stronger growth. Jakobsen concluded the presentation at the Forum by forecasting growth in the GCC region of slightly above the 1.9/2.0 percent seen in 2018, but with a significant downside risk of around 2.25 percent.