GCC not affected by low oil price in short term

The sharp fall in oil prices will not hurt the economies of Gulf hydrocarbon producers in the short term given the massive foreign assets they accumulated during the oil boom but they could be negatively affected if crude prices remain low for a long time, according to a regional economic study.

While the price decline will sharply reduce their earnings, the six Gulf Cooperation Council (GCC) countries could benefit from an economic upswing in key consumer nations which will gain from lower crude prices, said the study by the Saudi-based Federation of GCC chambers of commerce and industry (FGCCI).

The study, sent to Emirates 24|7, said the GCC’s combined GDP picked up to 4.4 per cent in 2014 from 4.1 per cent and projected growth at 4.5 per cent in 2015 despite the decline in crude prices from as high as $120 a barrel last year to just $60 currently.

Non-oil GDP in the GCC, which controls over a third of the world’s recoverable crude deposits, grew by 6.1 per cent last year compared with 5.7 per cent in 2013 while the oil GDP edged up by only 0.6 per cent in 2014 compared with 0.7 per cent in 2013, it said.

“The GCC economies are guarded by their huge assets in the short term…but the main challenge that is facing these economies is the possibility that the global economy will not grow at a desirable level while crude prices could remain as low as $50-60 for a long period of time…this could force the GCC governments to cut investment spending, which in turn would stifle growth,” the study said.

“Another key challenge is a possible strong growth in consumption due to the quick execution of projects in the GCC…this will increase inflationary pressure and increase challenges to the monetary policy and current rates in the GCC.”

The study urged the GCC states—the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman—to tap their massive overseas assets, estimated at over $two trillion.

But it warned member states against rushing towards risky real estate projects in the West and other oil consuming countries.

“GCC countries should not rush to invest in projects which are announced now and then by countries whose economies have been hurt by the oil price developments…GCC countries should specifically avoid investing in real estate projects in Europe and use their financial resources to pump investment in countries which have benefited from the decline in oil prices, mainly in the productive sectors.”

The reported noted that GCC countries, mainly Saudi Arabia, have largely benefited from strong oil prices over the past decade, adding that they have built up what it described as an enormous overseas investment empire.

“Saudi Arabia and the UAE now possess enormous financial assets, which will largely support their economies and the banking sector…as a result, spending on infrastructure projects in the two countries will remain unchanged according to the plan.”

The report expected weak oil prices to motivate GCC countries into intensifying their economic diversification programmes with a special emphasis on manufacturing on the grounds it has a much bigger potential than other sectors.

It noted that the GCC had set a target to boost their industrial sector’s contribution to GDP from around 10 per cent at present to 25 per cent by 2020.

“Total GCC industrial investment is expected to reach $one trillion by 2020 after member states complete major manufacturing projects and industrial zones.”

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