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28 March 2024

GCC economy will shrink to 1.5% this year, says StanChart

Saudi Arabia makes up 47 per cent of the total GCC economy. (AFP)

Published
By Nissar Hoath

The GCC economy will slow significantly to 1.5 per cent this year before taking off to likely become the first to come out of the global crisis, says a new study by the Standard Chartered Bank.

The GCC has an impressive track record and a combined economy worth $1.1 trillion that also has the world's highest per capita GDP. Qatar, with nominal per capita GDP of $106,459, is the wealthiest country in the world on a per capita basis, according to the study.

"The region is dominated by Saudi Arabia, which makes up approximately 47 per cent of the GCC economy, followed by the UAE at 23 per cent, Kuwait at 14 per cent and Qatar at 10 per cent," said Marios Maratheftis, Regional Head of Research at the bank.

The report suggests though the first and to recover fast, the region like other global economies will continue to see downturns this year. "In 2009, we estimate that growth will slow significantly to 1.5 per cent for the GCC region as a whole. We expect 0.5 per cent growth in the UAE, 1 per cent in Saudi Arabia, 2 per cent in Oman and Bahrain, and 0 per cent in Kuwait. The main exception will be Qatar, which we expect to grow by 8.5 per cent, thanks to an increase of about 50 per cent in its liquefied natural gas (LNG) exports," the report says.

"While growth is set to slow, living standards are generally higher in the GCC region... Diversification and openness are positive developments and despite the cyclical slowdown, medium-term prospects are positive," the report says in bold.

Referring to the region's earlier good performance, Maratheftis said GDP growth rates in the GCC have been impressive for more than eight years. "In the period from 2000-04, the UAE's annual growth rate averaged 7.7 per cent, while Qatar's averaged 8.9 per cent, Saudi Arabia's 3.7 per cent, Oman's 4.6 per cent, Kuwait's 13.4 per cent, and Bahrain's 5.6 per cent."

The report also attributes lower hydrocarbon prices to the region's downturn this year, which Maratheftis said will impact the GCC despite efforts to diversify the region's economies.

He explains: "One of the most oil-dependent economies in the GCC is Saudi Arabia (oil accounts for 48 per cent of GDP), which has 266bn barrels of proven oil reserves and 253trn cubic feet (tcf) of natural gas. On the other hand, the direct dependence of the UAE economy on oil is only 25 per cent (98bn barrels of proven oil reserves and 214tcf of gas reserves). Qatar's dependence on hydrocarbons is 60 per cent, but this is mainly on gas (910tcf of proven gas reserves).

"Gas prices tend to be much less volatile than oil prices, as they are determined by long-term (usually decades-long) contracts. The impact of oil prices is significant, as oil is the main funding source for GCC budgets."

About regional 2009 budgets, the report states countries like Saudi Arabia and the UAE assume oil prices near $45/barrel (bbl), while Qatar is more conservative at $35/bbl. "However, given the extent of the global downturn, we expect government expenditure to overshoot, which would imply higher breakeven oil prices, or alternatively fiscal deficits."

The report also says the region, particularly the UAE, has been far ahead in taking all possible measures to come out from the current global financial crisis. The report says policymakers throughout the region have been and are responding impressively to this crisis with the UAE making it clear that it will take a one-country approach to the economy instead of emiratewise, which significantly reduced uncertainty.

"In order to solve a problem, you first have to identify it. Sultan bin Nasser Al Suwaidi, the UAE Central Bank governor, acknowledged that even though interbank liquidity is adequate, there are concerns regarding high corporate-to-bank deposit rates. He said that the Central Bank is working with the Finance Ministry on a scheme to reduce the interest rate on corporate-to-bank deposits to break 'the vicious circle and rigidity that developed as a result of the liquidity crisis.' This is consistent with our earlier view that liquidity was trapped in the interbank market," the report maintains.

According to the report, the credit crunch has affected the region, particularly the UAE, and during 2007 and most of 2008, a boom was fuelled by ample liquidity and a massive rally in the housing market. "These factors can no longer drive the UAE economy."

The report says regional authorities have now demonstrated their willingness to act decisively, which is helping to improve sentiment, "and we expect further policy actions in the coming weeks to help address tight liquidity conditions".

"Our view is that the UAE (and the GCC in general) will manage to avoid an outright contraction in 2009, despite a difficult first half. Our positive forecast about UAE is based on the view that the accumulation of vast surpluses over the past few years will allow policy makers to take the necessary measures to insulate the UAE economy to some extent.

"The recent measures, especially if they are accompanied by direct injections of liquidity into banks, will reduce uncertainty, lead to lower interest rates, and help the economy achieve a low but nevertheless respectable rate of growth in 2009."

Liquidity in other parts of the GCC, according to the report, has now normalised - in fact, in Qatar, the focus of the monetary authorities remain on tackling inflation rather than boosting liquidity.

"We have referred to the defining factors of GCC economies as the three D's – demographics, diversification, and the dollar. The GCC has a very young population, with the percentage of the total population under the age of 24 ranging from 37.5 per cent in Qatar to 60 per cent in Oman. In addition to its young population, the region experiences significant migration. While a young population offers a promising future for a country, it can also weigh heavily on a nation's economic fundamentals. Essentially, governments must provide jobs to sustain this population and prevent unemployment from straining the government in the future."

The report also refers to the region's dependence on expatriate manpower due to the small and young population – in Kuwait, the UAE and Qatar, over 60 per cent of the population are expatriates. Bahrain, Saudi Arabia, and Oman have much smaller yet still significant expatriate populations of 40 per cent, 33 per cent, and 26 per cent, respectively.

The report explains: "There are plans to grow Abu Dhabi, the UAE capital, to 3.1 million people by 2030 from one million now. Only 20 per cent of the population is UAE nationals. Thus, the reliance on foreign workers is rising. Demographics and diversification are interlinked.

"One of the main reasons for the inflow of people to the GCC, and in particular to the UAE and Qatar, has been the rapid diversification of their economies. However, given these countries' expanding populations, and their high proportion of young people, diversification needs to continue and spread to the entire region. Job creation is essential. There is a need to invest in more labour-intensive industries, and in this respect, the importance of the service sector cannot be underestimated."

Referring to the regional currency-peg, the report says dollar pegs may have served the region well in the past, when there was a need to import policy credibility from the US. "However, with the GCC economies becoming larger and more complex as they diversify, and with the business cycles of the GCC and the US not always coinciding, there is a need for reform. In 2008, markets were expecting a GCC currency revaluation. As a result, the region experienced significant hot money inflows, particularly into the UAE. These inflows have now reversed, according to the Dubai Chamber of Commerce, $136bn of hot money has left the UAE over a period of nine months."

The problem, according to Maratheftis, in the UAE was that the hot money was allowed to enter the domestic credit market, with banks lending the short-term speculative inflows longer-term. When the inflows reversed, the banking sector faced a significant gap, with loans exceeding deposits.

The report says on the monetary policy front, liquidity in the GCC was affected by the global credit crunch but is now normalising. Liquidity, however, remains tight in the UAE, mainly due to excessive credit growth in 2008 (49 per cent year on year in June same year) and the reversal of hot money inflows. The authorities have already responded through a Dh50bn liquidity support facility, a Dh70bn liquidity injection and a swap facility.

"However, more needs to be done, as loans are Dh116bn higher than bank deposits, preventing banks from lending. The authorities have signalled that they are aware of the situation, with the Central Bank governor stating that he is working on a plan with the Ministry of Economy to resolve the issue. We, therefore, expect more measures to be announced by the authorities."


UAE next to Saudi as largest economy

The United Arab Emirates is second largest economy of the GCC after Saudi Arabia with a stake of 23 per cent, according to a report by Standard Chartered Bank.

The bank puts the UAE next to Saudi Arabia as the largest stakeholder in the combined economy of the region that it says stands at $1.1 trillion (more than Dh4trn).

According to the report, Saudi stake in the economy is 45 per cent, followed by the UAE with 23 per cent, Kuwait 14 per cent and Qatar 10 per cent.

However, the report does not state where Oman and Bahrain currently stand as stakeholders in the total and combined regional economy.

The report concludes the UAE coming next to Saudi Arabia, the Arab world's largest country in mass-land and hydrocarbon resources, because of its aggressive diversification and stringent measures to keep the country's economy stable and transparent at a time when the entire world is witnessing the history's second-worst downturn.

The Standard Chartered report also suggests that the aggressive diversification could be one of the reasons that brought the slowdown to the country but that could be restricted to 2009 with growth showing positive signs beyond with the policy-makers pushing with their restoring measures that continue.

The report praises the Central Bank measures to rescue the country's financial institutions as well as the Federal Government initiatives of going ahead taking all the emirates in confidence as a single economy.

"The Central Bank has already set up a taskforce to deal with the banking sector and tightening liquidity conditions. The bank governor's latest comments suggest that more measures to improve liquidity should be forthcoming. These comments are consistent with our views that liquidity and credit growth in the UAE are inadequate given the business cycle has turned. We believe ensuring that bank deposits are higher than loans is the way to ensure that credit growth resumes," the bank maintains in its report.

 

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