GCC projected to become major global trade hub

Gulf oil producers are expected to boost their share of the global economy from 1.5 to two per cent in 2020 and become a major global trading hub, with Dubai maintaining its dominance, according to a key Saudi investment firm.

The combined nominal economy of the six-nation Gulf Co-operation Council (GCC) is projected to climb to nearly $1 trillion (Dh3.67trn) in 2010 before soaring to around $1.5trn in 2015 and $2trn in 2020, said NCB Capital, an affiliate of National Commercial Bank, the largest bank in Saudi Arabia.

The UAE, Saudi Arabia and Kuwait, the largest economies in the GCC, are expected to post a real growth of around four to five per cent and a nominal growth of about nine to 10 per cent until 2020, NCB Capital said in its monthly bulletin, sent to Emirates Business yesterday.

The report noted that the GCC countries have emerged from the global fiscal distress stronger and expected a shift in their economic and investment relationship from the West towards Asia.

The report also forecast a stronger role by the non-oil sector in the six members in the long run but underlined the need for more reforms. "In contrast to its Western counterparts, the GCC has emerged from the global economic turmoil with its standing enhanced," it said.

Boost to infrastructure

"Further, the GCC is likely to emerge as a leading international trading hub as the regional governments invest heavily in ports and cargo transport infrastructure… Dubai has already consolidated its position as a leading re-export destination with massive investments in transport infrastructure and free trade zones such as Jebel Ali," said the report.

Citing data by the Organisation for Economic Co-operation and Development (OECD), the report said there are 32 free zones in the UAE, of which 26 are in Dubai, with activities relating to services and trade.

"Incentives in the form of zero customs duty, tax holidays and no foreign exchange controls have helped ensure the success of these zones… similar moves are being taken elsewhere in the region with Abu Dhabi and Saudi Arabia in particular revamping their port infrastructure."

NCB Capital's projections showed the GCC, which controls 45 per cent of the world's proven oil wealth and over half the Arab economies, is on track to emerge as a $1.5trn economy by 2015.

It said proactive policy steps taken by the regional governments and regulators have not only limited damage to the economy during the global downturn, but also laid a solid foundation for a quick rebound to pre-crisis growth levels. From around $342.6 billion in 2000, the aggregate nominal GDP of the GCC is projected to climb to $1trn this year, it said.

"This could further double to $2trn by 2020. We expect the region's largest economies – Saudi Arabia, the UAE and Kuwait – to post annual nominal growth of nine-10 per cent and real growth of four-five per cent over this period. This would likely increase the region's contribution to the global GDP from some 1.5 per cent currently to around two per cent by 2015."

NCB Capital's forecasts were in line with shorter-term projections by the International Monetary Fund (IMF), which put real growth in the UAE at around 4.8 per cent in 2015. Growth in Saudi Arabia, the world's top oil exporter, is projected at 4.6 per cent while that in Kuwait, Oman and Bahrain is estimated at 4.9, 4.5 and 5.3 per cent.

Qatar, one of the fastest growing economies because of its soaring liquefied natural gas exports, is projected to see its real GDP growth largely stabilising at around 4.6 per cent in 2015 after leaping by 18.5 per cent in 2009 and an expected 14.3 per cent in 2011.

Lower oil share

"In addition to boosting the region's global importance, the projected growth in the GCC is likely to coincide with a steady transformation of the regional economy. From the current level of around 48 per cent, we expect the oil sector's contribution to the regional GDP to gradually come down to 45 per cent by 2015. However, oil is set to continue to play a critical role in this economic paradigm shift," NCB Capital said.

The report projected oil prices to range between $90 and $100 per barrel in the medium term which, it said, would further boost the region's fiscal and current account surpluses, thereby generating the means for the necessary structural modernisation in areas such as infrastructure. After declining from around 27.2 per cent in 2008 to 6.6 per cent in 2009, the GCC's current account surplus is expected to rebound to nearly 15 per cent in 2015 because of strong oil prices, according to NCB Capital.

"This will be of critical importance for amassing the necessary foreign assets to drive the transition to the post-hydrocarbons future," it said.

Shift to Asia

NCB Capital saw a shift in the GCC's trading partnership towards Asia as China and other major markets in the continent are expected to largely increase in their imports of Gulf oil in the future. It noted that China has already become one of the GCC's top commercial partners although the two sides have not yet finalised a free trade agreement (FTA).

"The rise of the emerging economies is fundamentally challenging the traditional reliance of the GCC on the US, the EU and Japan as trade partners. Since 2006, Asia has been the GCC's largest trading partner and accounted for 55 per cent of the region's total foreign trade of around $758bn in 2009… In spite of the slow progress towards the China-GCC FTA, which was originally proposed in 2004, two-way trade between the two sides in 2008 totalled nearly $70bn, comprising around $42bn worth of exports by the GCC and $28bn in Chinese exports to the region."

Although China only became an oil importer in 1993, the country's oil imports could reach a record 210 million tonnes in 2010, up 5.5 per cent over 2009 when its oil imports averaged five million bpd, the report said. Further, China displaced the US as the largest crude importer from Saudi Arabia as it imported an average 1.2 million bpd while the US imports declined to less than one million bpd for the first time since 1988.

"Global energy needs are expected to rise significantly over the coming two decades with majority of the growth in demand coming from China, India and the Middle East itself. China's demand for crude oil doubled between 1995 and 2005 and by 2020, the country is expected to import 7.3 million bpd."

The report said the level accounts for nearly 60 per cent of Saudi Arabia's current production capacity of around 12.5 million bpd.

India, which is set to become the world's fourth-largest energy consumer after the US, China and Japan, is dependent on oil for roughly 33 per cent of its energy needs and 65 per cent of which it imports.

Corporate sector

Outside the hydrocarbon industry, the GCC corporate sector growth will increasingly determine the nature and pace of broader economic growth in the long term, although oil prices are projected to remain firm, the report said.

"Traditionally, the GCC corporate sector has largely been dominated by government or family-owned private businesses. This structure has evolved surprisingly little to date in spite of transformative change in other areas of the regional economy. This state of affairs is unlikely to persist, however," it said. "The GCC corporate sector has in recent years benefited from a range of liberalising reforms, the most recent wave directly in response to challenges thrown up by the global economic crisis. The region is already home to a number of important, internationally recognised brands, and their numbers are likely to grow at accelerating pace."

According to the study, the Saudi Arabian Basic Industries Company (Sabic) already appears on the list of global Fortune 500 companies. Nonetheless, this still compares unfavourably to a total of 37 Chinese, seven Indian and six Brazilian companies, it added.

Furthermore, as at the end of 2009, the combined revenues of the companies listed on the GCC stock markets stood at $175bn compared to $590bn for India and $1.2trn for China.

Private sector

"In spite of the considerable room for catch-up, the GCC private sector appears well positioned to leverage on the region's structural growth drivers, including a positive demographic profile and rising consumer wealth. Around 30 per cent of the region's population is below 15 years of age while the majority [65 per cent] falls in the working age group of 16-65 years," it said.

"This is likely to drive the demand for consumption-driven businesses, including financial services, housing and retail trade in the coming years."

Citing forecasts by the London-based Business Monitor Intelligence (BMI), NCB Capital said retail sales in the UAE would surge by around 59 per cent over the period 2008-2013, while the Kuwaiti, Saudi and Bahraini markets are set to grow by 31, 25 and 11 per cent, respectively.

"Furthermore, huge underexploited opportunities exist in the areas of corporate consolidation and SME [small and medium enterprises] development as the corporate space remains highly fragmented," the study said.

Its figures showed that in 2008, a total of 785,000 business establishments were registered in Saudi Arabia, of which 764,000 were sole proprietorships. In the UAE, SMEs constitute around 90 per cent of all businesses.

There were some 40,000 SMEs in Bahrain in 2007 while their number in Kuwait was estimated at 33,000, again representing around 90 per cent of the total registered companies, according to the study. Most of these companies inevitably fail to take advantage of economies of scale and are limited in their growth by a lack of access to capital.

"The GCC has a pressing need for policies to foster capital-raising, knowledge acquisition and growth by SMEs. The projected corporate sector growth is expected to go hand in hand with the further development of the GCC financial sector. At present, the regional stock exchanges lag their counterparts in the emerging world by a wide margin," NCB Capital said.

It said that while the Saudi stock market, Tadawul, is by far the largest in the Middle East with a market capitalisation of around $319bn last week, it ranks 25th among the top 54 stock markets globally.

China's Shanghai Stock Exchange and India's Bombay Stock Exchange with market capitalisation of $2.7trn and $1.3trn are ranked sixth and 11th, respectively, according to the report.

"To service the growing needs of a rapidly expanding population, the corporate sector will need significantly improved access to capital, some of it through channels such as debt markets which remain woefully underdeveloped by global standards in spite of a positive momentum of late."

UAE construction sector regains muscle

The construction sector in the UAE is showing strength. According to Proleads, a leading market research firm, the UAE construction market remains strong with around 1,600 projects worth $560 billion under construction.

This is encouraging, especially given the fact the UAE construction market was hit by the global financial crisis. Real estate continues to dominate the UAE construction landscape with 682 projects worth $306bn currently active, while the retail and hospitality sectors are close behind with more than 740 projects totalling $310bn.

In Dubai, inflation has started to slow down. According to the Dubai Statistics Centre, inflation in the emirate slowed to 0.83 per cent on an annual basis in March, the lowest level in the past two years, due to the fall in housing and food prices. This was also the fifth consecutive monthly decline as the housing and energy prices, which constitute around 44 per cent of the CPI (consumer price index) basket, declined by 0.22 per cent month-on-month while food prices, which account for 11 per cent of the CPI basket, fell by 0.67 per cent.

Saudi Arabia continues high spending

Buoyed by rising oil prices, which averaged nearly $75 per barrel during the quarter, the Saudi Government continued its aggressive spending, with some SR20.9bn (Dh20.47bn) going to construction contracts.

This reflects the government's commitment to devote more than SR260bn to capital spending under this year's budget. Government spending during the previous quarter had totalled SR32bn, with SR15.7bn worth of investments going to projects involving the construction of roads, hospitals and schools.

In the energy sector, making adequate provisions to meet the rising demand for electricity in the kingdom has become one of the principal long-term challenges facing policymakers. The country needs to boost capacity by 3,000 megawatts a year to meet annual demand growth. According to Saleh Al Awaji, Deputy Minister for Electricity and Chairman of the state-owned Saudi Electricity Company (SEC), the country plans to spend $80bn on expanding its power generation capacity and transmission network in the next 10 years. Of the proposed spending, two-thirds will come from the SEC, while the remaining one-third will be contribution from private investors.

As for inflation, the annual rate of increase in the Saudi Consumer Price Index accelerated to a nine-month high of 4.7 per cent in March, led by a surge in housing, food and fuel prices during the month.

The annual increase in food and beverage index, which account for 26 per cent of the CPI basket, was 5.0 per cent in March compared to the 4.0 per cent increase in February. By contrast, the annual increase in the renovation, home rents, water and fuel index slowed down to 10.1 per cent in March from 10.6 per cent a month earlier.

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