By Dhuha Fadhel, Senior Economist, Thematic Research, Regional Research- Standard Chartered UAE
For years the Gulf Cooperation Council (GCC) successfully turned their natural resources – oil and gas – into material economic dividends, but how sustainable is this in the face of lower-for-longer oil prices?
GCC countries are now among the world’s 30 richest countries in terms of GDP per capita and fared well compared with emerging markets, developed markets and the world economy throughout 2008-14.
However, the latest episode of falling oil prices that started in mid-2014 saw average growth rates plummet throughout 2015-16, reaching only 0.3 per cent in 2017, based on our estimates.
The lower-for-longer oil prices [USD67 by the end of 2017 compared with an average of USD100 during 2008-14] and subsequent lower growth are creating three big challenges for the GCC.
First, global oil prices have always played a major role in determining growth rates, and consequently income levels, of these economies. For instance, lower oil prices turned current account surpluses into significant deficits in most cases, putting pressure on foreign exchange reserves. Furthermore, fiscal balances turned into deficits, prompting GCC countries to tap international capital markets, leading to increases in government debt.
Second, the dominance of oil and gas has resulted in a phenomenon familiar to commodity-exporting countries. Non-tradable sectors, such as property, tend to flourish (these attract a large share of oil and gas revenue), while tradable sectors, especially manufactured exports, do less well.
There are two key issues with this. First, higher oil prices can fuel asset price bubbles that could pose risk to the overall macroeconomic stability of GCC economies. For example, the high oil prices that prevailed before mid-2014 led to rapidly rising house prices in Abu Dhabi and Dubai, followed by a significant correction as oil prices started to fall from the second half of 2014.
Second, GCC economies are often characterised by stubbornly low productivity, with labour-intensive sectors such as construction and light manufacturing (less dependent on technology and high-skilled labour) taking the lead over more high-value-added sectors, such as finance and high-tech manufacturing. Given the importance of productivity for long-term growth, the GCC’s current low productivity levels may translate into lower growth rates in the medium to longer term.
Outside the distortions caused by overreliance on oil and gas, policy makers face a third pressing issue in the near future: demographics.  An increasing number of young people will enter the labour market in the coming years. Traditionally, GCC nationals seeking employment have favoured the public sector, given it offers higher wages, better job security, shorter working hours and longer holidays than the private sector. However, the public sector has reached saturation point, which means the GCC must find new ways to attract people to other sectors, or develop new sectors to absorb excess labour.
How can GCC countries tackle these challenges? In short, via reform. The question is, what type of reform?
To address their short-term imbalances, the GCC will need to continue with fiscal consolidation while structural reforms are needed to address longer-term issues.
The UAE and Saudi Arabia have led regional fiscal consolidation efforts to increase government revenue with the introduction of consumption taxes (value added tax – VAT) at 5 per cent at the turn of the year.
Other GCC countries appear to be lagging in this area. We believe that the potential revenue from 5 per cent VAT in GCC countries would be below the level needed to close the large fiscal deficits in many cases. Hence, introducing VAT will need to be accompanied by drastic cuts in current expenditure (especially subsidies and social benefits). Energy subsidy reforms introduced in 2015-16 were viewed as a positive step in this direction. However, further reform is likely in the future given that subsidies and social benefits are estimated to be equivalent to 8 per cent of total GCC GDP.
Also, GCC countries will need to implement measures to address deeper structural issues currently preventing them from reaching their long-term growth potential. Such reforms should aim to: improve the efficiency and conduct of fiscal policy; improve the business environment and reduce red tape; upgrade the regulatory system; address labour-market issues; introduce more ambitious industrial policies that aim to integrate GCC economies into the global supply chain; and continue to deepen the financial sector.
On the latter, a key development is the local debt market. This would provide these economies with new sources of financing, reduce pressure on local banks and the need to borrow from abroad at the same time as providing monetary authorities with effective tools to manage liquidity while preserving their currency pegs.
GCC countries, to some extent, provide a good example of how successful a country endowed with natural resources can be. However, the continued reliance on oil and gas both on the fiscal and external fronts has exposed these countries to macroeconomic instability related to the fluctuations in oil markets and, going forward, will continue to bring challenges especially in a lower-for-longer oil price environment.
GCC countries should prioritise reforms to help bring their fiscal and external balances back to more sustainable levels. Efforts targeting fiscal consolidation in the short term should continue alongside long-term structural reforms, to help sustain high growth in the future.

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Gabon accused French environmental services group Veolia on Tuesday of widespread pollution at SEEG, the power and water utility it operates there, amid a growing dispute over the company’s concession.
<img loading="lazy" decoding="async" class="aligncenter wp-image-40293 size-full" src="http://cnbc.africa/wp-content/uploads/2017/02/gabon_-_public_domain.jpg" alt="African Union plans to mediate in Gabon election crisis" width="725" height="490" />
Veolia, which has already threatened legal action after the government seized SEEG earlier this month and said it would cancel its concession, rejected the accusations.
Speaking to reporters in the capital Libreville, government spokesman Alain-Claude Bilie By Nze said an environmental inspection of power and water pumping stations discovered “nearly all” SEEG sites were contaminated by petroleum waste.
“This is a very serious situation since, at this stage, aside from the obvious environmental damage, no one knows the consequences this pollution could have had or could have on public health,” he said.
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He said that on top of legal penalties of up to 500 million CFA francs ($946,110) for each polluted site, Gabon would force SEEG to shoulder the clean-up costs.
Responding to the accusations, Veolia stated that the water it distributed continued to conform to World Health Organization standards and Gabonese regulations.
“It is surprising that none of the inspections of the public authorities &#8230; ever highlighted environmental damage,” it said. “The SEEG is subject to regular audits by the Gabonese authorities, more than 10 in the last 10 years.”
Negotiations between the government and Veolia over the concession broke down in October, and authorities seized SEEG earlier this month, citing years of poor service quality.
Veolia in turn blamed the government for failing to live up to its investment obligations, and on Tuesday said the state owed SEEG over 29 billion CFA francs in consumption charges and unpaid value-added tax reimbursements.
Gabon spokesman Bilie by Nze said the government had called for an audit of its 13 billion CFA consumption bill.
He rejected accusations it had neglected SEEG and said the state had invested around 1 trillion CFA francs in the company, around three times more than Veolia.
($1 = 528.4800 CFA francs)
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Reporting by Gerauds Wilfried Obangome; Additional reporting by Laurence Frost in Paris; Writing by Joe Bavier; editing by David Evans
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Gabon accuses France’s Veolia of polluting amid concession dispute

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Francois Conradie | NKC African Economics
French utilities giant Veolia is leaving Gabon after it was unable to get its way in negotiations over the renewal of its contract with the State.
<img loading="lazy" decoding="async" class="aligncenter wp-image-40293 size-full" src="http://cnbc.africa/wp-content/uploads/2017/02/gabon_-_public_domain.jpg" alt="African Union plans to mediate in Gabon election crisis" width="725" height="490" />
The break-up follows years of poor service delivery by the French company, which has been present in Gabon since 1997. More recently, in the context of negotiations about renewing the first 20-year contract, consumers have been more visible: groups of consumer rights advocates have held sit ins in front of Veolia’s local subsidiary, the Water and Electricity Company of Gabon (SEEG), complaining about poor delivery and inflated bills.
On Friday, February 16, negotiations to renew the contract finally failed. The State decided the contract would not be renewed and requisitioned the local subsidiary.
“In the interest of preserving continuity and quality in the public provision of drinking water and electric energy, the Gabonese state has proceeded exceptionally to the temporary requisition of the company,” Water and Energy Minister Patrick Eyogo Edzang wrote in a statement. Police accompanied the court official who delivered the State’s decision to the company.
On Monday, February 19, the staff of SEEG held a meeting at which executives under the leadership of Marcellin Massila Akendengue, the new interim chief executive, reassured staff about their future with the company.
According to Mr Eyogo Edzang, Veolia had threatened the government with water cuts; he told the trade union leaders at SEEG: “They told us: ‘If it’s like that, if you don’t do it our way, we’ll cut the power in Gabon. You can see what you’re going to do.’ It was intolerable.”
The Gabonese State’s move is a bold one.
It is certain that Veolia was derelict in running its business; it is much less certain that civil servants will be able to do better.
If the State continues to manage SEEG, then issues with service delivery may well persist or in fact grow worse, affecting perceptions of government legitimacy. It may also be that the requisition was a negotiating tactic to cut the French company down to size.
Veolia’s public relations executives seem to be hard at work to persuade public opinion that the requisition was some sort of arbitrary violation of its property rights; it was not.
If Veolia (a hugely influential cog in the French export machine) does finally lose the contract, we would expect media attacks on Gabon and President Ali Bongo personally to increase again after a lull as memories of the stolen election in 2016 have faded.

Gabon – Veolia quits after contract dispute

African nations need to diversify energy supply, particularly countries reliant on hydropower, industry experts said at an energy conference in Johannesburg on Wednesday.
<div id="attachment_299739" style="width: 860px" class="wp-caption aligncenter"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-299739" class="wp-image-299739 size-full" src="http://cnbc.africa/wp-content/uploads/2018/02/Liberia-HydroPower_GettyImages.png" alt="" width="850" height="560" />A picture shows a general view of the newly renovated Mount Coffee Hydropower Project, a hydro-electric plant on Liberia&#8217;s Saint Paul River, in Harrisburg, some 40km from Monrovia, on December 15, 2016. Liberia&#8217;s hydro-electric plant was switched on on December 15 for the first time in 26 years. Image: Getty Images</div>
The region has been affected by severe droughts in recent years, affecting not only food security but also energy supply in countries that make heavy use of hydropower.
Hydropower stations in such countries are are at risk, said Langiwe Lungu, executive director of the Energy Regulation Board (ERB) in Zambia, pointing to climate change studies.
Zambia’s electricity deficit rose to 1,000 megawatts (MW) in 2016 as severe drought reduced water levels at the Kariba Dam, which generates much of its electricity.
Mines also came under pressure, with Glencore’s Zambian Mopani Copper Mines business suspending operations in certain areas after power supply restrictions.
Zambia, Africa’s second-largest copper producer, has since introduced solar, coal power and heavy fuel oil to its energy mix.
“At one point our energy supply was 99 percent from hydropower but now we are at about 85 percent,” Lungu said.
Low rainfall in Kenya, where electricity generation capacity is mostly from hydroelectric and geothermal sources, pushed the country to generate more electricity using costly diesel last year.
“You need a mix that allows you to mitigate those types of issues,” said George Njenga, GE Power’s regional executive for sub-Saharan Africa.
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Reporting by Tanisha Heiberg; Editing by Ed Stoddard and David Goodman
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African nations urged to avoid hydropower reliance

Glencore and four bank lenders have reached a deal with Chad on the restructuring of an oil-backed loan of more than $1 billion after months of often-fraught negotiations, the two parties said on Wednesday.
<img loading="lazy" decoding="async" class="aligncenter wp-image-17712 size-full" src="http://cnbc.africa/wp-content/uploads/2017/01/glencore_-_telegraph.jpg" alt="Glencore Q1 copper output dips" width="620" height="388" />
Glencore, backed by banks, lent the west African country’s state oil firm SHT (Societe des Hydrocarbures du Tchad) about $1.45 billion in 2014 to be repaid with crude oil cargoes.
The loan was restructured once in 2015 after the crash in global oil prices but the central African country still struggled to meet its own budget needs as the debt ate up nearly all of its oil profits &#8211; Chad’s main source of revenue.
Chad secured credit from the International Monetary Fund in June last year but the release of most of these funds depended on a second restructuring of this debt, which the IMF considered unsustainable. Chad then hired Rothschild &amp; Co as its adviser.
“We are pleased to have reached an agreement with the Government of Chad. Chad is an important partner of Glencore‘s, and we look forward to working closely together across all aspects of our oil business,” said Alex Beard, Glencore’s head of oil.
A spokesman for Chad’s state oil firm said that the new terms included an extension of the maturity to 2030 from 2022, a two-year grace period on principal payments and a lower interest rate of Libor plus 2 percent, down from 7.5 percent.
In addition, the agreement includes a supply guarantee for the country’s refinery near the capital N‘Djamena.
During the negotiations, Glencore and the banks had offered an extension to 2025, a grace period with a lower interest rate of 4 percent for that period.
The IMF criticized the loan last year saying that the process of allocating payments to service the debt were opaque.
Negotiations became tense after the Chadian government threatened to divert oil from the Swiss trading house to U.S. energy company ExxonMobil.
Adding to the complications, Chad’s finance minister and deputy were sacked in November the week after a round of talks.
A finance ministry statement on Wednesday gave President Idriss Deby credit for pushing the deal through.
“The successful conclusion of these difficult negotiations is undeniably down to the diplomatic efforts of the president, who employed all his influence with institutions and friendly nations to have these terms accepted,” it said.
One of the world’s poorest nations, Chad is key in efforts to counter Islamist insurgencies in Africa’s Sahel region and is part of the G5 Sahel joint military force backed by France and the United States.
It has been weighed down by drought, a refugee crisis and a costly military campaign to combat militant group Boko Haram, which took over large swathes of neighboring Nigeria in 2014.
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Additional reporting by Dmitry Zhdannikov in London and Madjiasra Nako in N&#8217;Djamena; editing by David Evans
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