GCC economies to soar 7.1% in 2011

The economies of Gulf hydrocarbon exporters is expected to surge by more than seven per cent in 2011, its second highest growth rate in many years since the sharp increase in 2008, a key Saudi bank has said.

The Saudi American Bank Group (SAMBA) said it had revised up its previous estimates for growth in the six-nation Gulf Cooperation Council (GCC) on the ground the global economy will not be unduly affected, with growth holding at four percent by the surging crude prices and unrest in the Middle East.

“As such, our revisions stem mainly from the impact of higher oil prices and GCC production; recently announced government spending plans; and some country-specific disruptions to economic activity in Bahrain and Oman,” it said.

“Overall GCC real GDP growth is now projected to surge to just over seven percent this year, led by a 5.7 percent increase in the dominant Saudi economy. Such a strong performance was last achieved in 2008 when the region was booming prior to the global recession and growth stood at 7.3 per cent.”

It said much of this acceleration in growth stems from projected increases in oil output as GCC countries, especially Saudi Arabia, raise production to cover the loss of Libyan crude because of the current unrest.

Total GCC crude production is now expected to rise around six percent in 2011 which, given the large share of oil sectors in GCC economies, will have a substantial impact on overall growth rates, it said.

Along with Saudi Arabia, larger crude GCC producers such as the UAE and Kuwait will see the most impact and growth in these two countries is expected to rise to between four and 4.5 per cent.

Qatar will also feel some benefit, but its oil exports are now relatively small compared to LNG and NGL sales, and it will be sustained growth in the latter two that drives growth of over 20 per cent in 2011, the study said.

It said Qatar also stands to gain from higher LNG exports to Japan to compensate for the loss of nuclear power capacity.

“In the meantime, disruptions to Omani and Bahraini oil output have been limited to-date and production is expected to hold at previously projected levels.”

Samba said that in addition to increased oil production, GCC states, which control over 40 per cent of the world’s crude wealth, would benefit from surging government revenues, used to boost both recurrent and capital spending.

Recently announced salary bonuses and pay increases along with new job creation in Saudi Arabia will help boost consumption, while public infrastructure spending will boost non-oil economic activity and provide opportunities for the private sector, according to the report.

“However, offsetting this somewhat will be an initially cautious stance from private sector companies and individuals, which will be reflected in modest increases in domestic lending in most GCC states,” it said.

“Current events in the Middle East and North Africa region are unprecedented and will take time to be digested. Thus, despite the evident and robust economic support being provided by GCC governments, the response by the private sector will probably be slower than might be expected.”

Samba projected non-oil growth in the GCC would rise to nearly five per cent this year, but the level remains significantly below the 8.2 per cent average during 2003-2008 when the region last benefited from the combination of high oil revenues and large public spending.

Non-oil growth should be robust in Saudi Arabia and the UAE, with the latter potentially benefitting from a “safe haven” quality as tourists and, potentially some financial activities, divert from North Africa and Bahrain.

Turning to the financial sector, the study said GCC public finances are being affected by two factors, including rising oil revenues as both prices and production increase, and an offsetting surge in public spending packages aimed at relieving or pre-empting social and political tensions.

“Estimating the impact of both necessitates a number of assumptions: on the timing, pace and final costing of announced measures; implementation capacity for planned infrastructure projects; and the speed and duration of increases in crude oil production,” Samba said.

“Our preliminary view is that announced GCC spending in addition to the already planned expansionary budgets for 2011 will be offset by the expected surge in oil revenues….some countries may see a slight deterioration in fiscal positions compared with our earlier projections, but both fiscal and current account balances will remain healthy.”

In terms of external balances, the expected increase in oil exports will lead to a strengthening of regional current account surpluses despite an increase in imports, the report said, adding that this would help support a further build up of foreign assets, providing a welcome buffer should oil prices start to slip again, and also a source of funds to support increases in public spending.

“If necessary, external savings could also be called on to support government-owned enterprises, some of which may face potentially challenging conditions in global capital markets in the wake of greater risk aversion.”

Follow Emirates 24|7 on Google News.