GCC economy gains $130 bn in 2010

Strong crude prices boosted the nominal economy of Gulf oil producers by nearly $130 billion in 2010 while real GDP growth sharply rebounded, according to a key Saudi bank.

The rise in oil prices also turned the deficit in the combined fiscal balance in the six-nation Gulf Cooperation Council (GCC) into a surplus last year and largely widened their current account, the Saudi America Bank Group (Samba) said in a study.

From around $886bn in 2009, the GCC’s combined GDP surged to $1,016bn in current prices in 2010 and could swell further to an all time high of about $1,115bn in 2011.

The increase last year followed a sharp fall of nearly $141bn in 2009 from a record high of around $1,027bn in 2008, when oil prices climbed to their highest average of nearly $95 a barrel.

Real GDP also gained from higher oil prices which allowed the six members to expand spending to mitigate the repercussions of the 2008 global fiscal distress, with growth surging to nearly 4.8 per cent in 2010 from only 0.7 per cent in 2009, Samba said.

“Real GDP growth in the GCC is estimated to have rebounded to 4.8 per cent in 2010 from 0.7 per cent in 2009. Sustained expansionary fiscal policies, supported by higher oil prices, helped spur faster growth in non-oil sectors although the recovery in private sector activity remained tentative,” it said.

But it noted that stronger growth was prevented by continued corporate and consumer deleveraging and bank caution in the face of rising NPLs and uncertainty following regional debt defaults.

In addition, real estate sectors continued to struggle in the UAE and Qatar, GCC equity markets generally underperformed, and financing conditions, while improved, remained tighter than pre-crisis, it said.

“Growth was thus mainly driven by public spending accompanied by a rebound in the dominant oil sector following the decline in crude oil output in 2009 when Opec quotas were slashed,” the study said.

“Although the global economy enters 2011 in a state of some uncertainty, the outlook for the GCC economies remains positive. Strong oil prices will sustain robust public spending and buoy confidence, while an easing of bank balance sheet strains, particularly in Saudi Arabia and Qatar, is expected to lead to a faster recycling of the region’s large oil surpluses…overall the region’s real GDP growth is expected to accelerate to six per cent.

A breakdown showed GDP growth in Saudi Arabia would be around 3.8 per cent in 2011 and 4.3 per cent in 2012 while it is projected in the UAE at about 2.2 and 3.3 per cent respectively.

Growth was forecast at 2.5 and four per cent in Kuwait, 16 and 18.7 per cent in gas giant Qatar, 4.8 and five per cent in Oman and around four and five per cent in Bahrain.

Turning to finances, Samba expected a slowdown in growth in the GCC’s public spending in 2011 after two yeas of expansionary fiscal measures triggered by the downward pressure of the global crisis.

“The rate of increase in spending will likely moderate in 2011 as GCC governments seek to unwind exceptional fiscal stimulus and return spending growth to more sustainable levels,” Samba said, “That said, public spending will continue to be driven by long-term spending plans and will remain the key driver of growth in 2011.” 

It said such plans remain affordable in the context of projected oil prices around $85 a barrel and large external savings, and GCC public finances will remain reassuringly strong.

All except Bahrain are expected to post fiscal surpluses despite the large increase in budget break even oil prices that has occurred over the past few years as GCC spending commitments have risen.

“That said, GCC governments are conscious of their over reliance on oil revenues and the long discussed introduction of value-added tax (VAT) could take place by 2012,” the report said.

It noted that the GCC consolidated fiscal balance recorded a deficit of 3.2 per cent of GDP in 2009, principally reflecting revised data for the consolidated UAE fiscal accounts and the Saudi budget which show deficits of 12.2 and 6.1 per cent of GDP respectively. It said this reflects the large amount of public spending during the year to support banks and state owned enterprises as well as expansionary fiscal policies. In the case of the UAE there are also some presentational issues as the deficit is financed principally from Abu Dhabi’s oil company profits, as well as a drawdown in external assets.

“With oil prices up an estimated 28.2 per cent in 2010, GCC fiscal balances have since strengthened despite still high spending."

The report said higher crude prices and an increase in NGL and LNG sales also boosted the GCC’s external fiscal surplus and expected a further improvement in 2012.

“The current account surplus for the GCC as a whole is expected to rise to between $120bn-140bn (around 12 per cent of GDP) in 2010-2011. Although still considerably lower than the $200bn plus surpluses achieved in 2006-08, this will allow for a further build up in external assets boosting confidence and providing additional income revenues,” it said.
 

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