Sound policy and strong oil prices pull Gulf nations out of regional crisis
The UAE economy will grow by 3.7 per cent in 2010 while the combined GDP of the country and its Gulf partners will expand by six per cent thanks to strong oil prices and government fiscal moves, Saudi Arabia’s largest bank has said.
National Commercial Bank said top LNG exporter Qatar and Saudi Arabia, the world’s largest oil supplier, would lead growth in the six-nation Gulf Cooperation Council (GCC) this year. The UAE, the second largest Arab economy, is also back on track thanks to high oil prices and Dubai’s recovery.
“The uncertainty caused by the recent bout of regional political turmoil appears to have largely lifted in the GCC region. Even as regional stress points remain in Libya, Syria, and Yemen, the GCC economies have generally managed to overcome investor concerns through a combination policy initiatives and, until recently, positive momentum in the oil price,” NCB said in a 20-page study on the GCC economies, sent to Emirates 24/7 on Sunday.
“With crude prices at historically high levels and in turn supporting a plethora of new government spending commitments, the GCC has seen a clear improvement in its near-term growth prospects…..as a result, we expect a marked increase in the region’s headline growth figures this year, led by Saudi Arabia and Qatar. But even the UAE is set for a rebound thanks to its success in addressing pressure points linked to its sovereign and quasi-sovereign debts as well as signs of normalization in the battered real estate sector.”
The study said Bahrain, which has little oil, stands out as the only GCC economy whose growth outlook appears to have been significantly hit by the crisis.
“We expect the GCC region as a whole to grow by some six per cent this year and by some five per cent next year,” NCB said.
But the report noted that despite such a positive turnaround, the region would likely face challenges due to the backdrop of unusually global uncertainty.
It said the main concerns in this regard remain three-fold, adding that market stress in the United States is linked to the impact of the end of the Federal Reserve’s quantitative easing program (QE2) on the bond markets, given the critical role that the Fed played in buying government issues -as much as 85 per cent of the total during the program.
At the same time, pressures in the fiscal sphere are mounting due to a highly polarized debate regarding plans to extend the nation’s $14.3 trillion debt ceiling and indications on the part of the leading rating agencies that their confidence in US government debt is beginning to erode. This might result in an unprecedented downgrade from the current top rating, it said.
In Europe, the ongoing efforts to address the effective insolvency of Greece and some of the other peripheral economies are yet to translate into a convincing policy response that goes beyond merely “delaying the day of reckoning.”
In the meantime, the risks of contagion will persist, something that has already forced also Italy – the third-largest Euro-zone economy – to embark on significant fiscal consolidation, according to the study.
Even though the latest growth data from China has confounded some skeptics, emerging markets remain the third potential source of trouble due to persistent inflationary pressures which are necessitating monetary tightening and generating political pressures as large segments of the population remain highly vulnerable to increases in the prices of the basic necessities.
“The impact of these factors on the GCC is likely to be felt primarily through the financial markets and the oil price. While the GCC financial markets have rebounded from the lows seen earlier in the spring, the recovery in bank lending and broader capital market activity remains tentative and mixed,” NCB said.
“Many issuers have shown themselves to be sensitive to global market pressures which have in general translated into highly volatile issuance activity.”
Turning to oil prices, NCB said that even if short-term corrections in the crude price cannot be ruled out, the basic outlook remains one of historically high prices underpinned by continued demand growth, something that should translate into improving government and external balances for the GCC.
Its forecasts for prices showed they could average around $95 a barrel for Saudi Arab light crude in 2011, almost equivalent to the 2008 peak price.
The report showed Kuwait is on track to record the highest current account surplus in 2011 at as much as 37.3 per cent of GDP, followed by Qatar at 36.1 per cent. Kuwait is also expected to amass the largest fiscal surplus of 28.9 per cent of GDP, up from 20.8 per cent in 2010, in spite of the fact that its government budget foresees a large deficit for the year.
Even the UAE and Bahrain, both of which recorded fiscal deficits in 2010, are likely to post surpluses this year, it said.
“Growth in the GCC in 2011 will be led by Qatar which, at the final stages of its natural gas investment boom. This is likely to result in real GDP growth of approximately 20 per cent this year, up from 16.3 per cent in 2010. The growth is likely to be driven above all by the hydrocarbons sector where the pace of expansion is projected to accelerate to 29.5 from 22.2 per cent in 2010.”
The report showed Saudi Arabia, the largest Arab economy, is likely to be the second fastest growing GDP in the region.
It projected growth of 5.3 per cent for this year, far higher than the 3.7 per cent growth recorded in 2010.
Much of this expansion will be driven by strong growth in the oil economy thanks to the prospect of high prices and significant increases in production.
As for the UAE, NCB said it had faced greater turbulence during the global crisis than its regional peers given its open economy but added that the “contours of a sustainable recovery are now emerging.”
“We foresee real GDP growth of 3.7 per cent in the UAE this year, up from the official estimate of 1.4 per cent4 in 2010,” it said.
“Nonetheless, this will be an uneven. While Abu Dhabi will benefit from strong growth in the hydrocarbons sector, Dubai remains vulnerable to financial market uncertainty and is yet to see a convincing turnaround in the real estate sector. The contagion in housing markets is also felt…….but Dubai is reaping the benefits from an ongoing strong recovery in international trade. Moreover, the UAE the main beneficiary from redirection of tourist flows from the crisis-hit regional countries, most notably Egypt.”
A breakdown showed growth in the UAE would be led by the non-hydrocarbon sector, which will expand by 3.9 per cent.
It projected GDP growth to pick up to four per cent in 2012, including 3.2 per cent for oil and four per cent for the non-hydrocarbon sector.
Nominal GDP is expected to surge by 8.8 per cent in 2011 and 8.1 per cent in 2012 on the back of higher oil prices, which will also turn a fiscal deficit of 1.3 per cent of GDP in 2010 into a surplus of 6.4 per cent in 2012 and 7.1 per cent in 2012. The current account will also record a surplus of around 5.4 per cent in 2011-2012, according to the report.