Regional economies to regain vigour next year

The economies of Gulf oil producers are expected to echo the burgeoning global recovery and regain steam in 2010 after suffering from their worst year since the start of the second oil boom in 2000, according to analysts.

Although their non-oil economy is projected to record modest growth this year, heavy cuts in oil production by the Gulf Co-operation Council (GCC) nations is expected to sharply depress growth in their overall GDP in 2009.

But the decline will not be that severe, thanks to record budgetary spending approved by regional governments as part of overall stimulus packages aimed at mitigating the adverse impact of the global financial distress.

As oil prices are projected to be relatively strong in the next months, the situation will be reversed and GCC economies will likely rebound by at least three per cent although this growth will be far lower than the rate achieved during the oil boom.

The fiscal situation is also expected to largely improve in 2010 after both budget and current account surpluses are believed to have plunged to one of their lowest levels in 2009. Analysts said the decline would not affect the assets of the region's sovereign wealth funds (SWFs), which are expected to have gained additional cash because of the improvement in global markets.

"Stronger oil prices and an easing of the global financial crisis have improved economic prospects in the GCC for the second half of this year. However, 2009 will still be a year of retrenchment and contraction. Real GDP growth will be stagnant, as credit growth slows sharply, private investment slumps and oil production declines. State spending will continue to support the non-oil sector, but economic activity will be held back by the weakness in the world economy and trade," the Saudi American Bank (Samba) said.

"The economic slowdown is likely to bottom out this year and GCC growth is expected to recover to 3.3 per cent in 2010. This will be driven by a small increase in oil output, together with stronger non-oil growth as expansionary fiscal and monetary policies are maintained, supported by a modest global recovery in a benign inflationary environment."

Peak growth in 2008

GCC economies recorded one of their highest growth rates in 2008 after oil prices peaked at an average $95 a barrel and most regional nations produced at near capacity. Real GDP growth in the GCC was estimated at as high as 7.1 per cent last year despite the downward pressure of the global crisis.

The GCC's combined current account surplus also hit a record high of around 25 per cent of the GDP, while their budget surplus soared to 28.5 per cent. The surge was a result of a sharp increase in the oil export revenue of the six nations to more than $500 billion (Dh1.83 trillon) in 2008.

Forecasts by the Washington-based Institute of International Finance (IIF) showed the GCC economies will fully recover in 2010 as a result of an expected rise in crude prices and output due to improved global demand.

IIF projected oil prices to average nearly $72 a barrel in 2010 compared with nearly $62 in 2009, adding that such an improvement would boost the GCC's fiscal and current account surpluses.

"Our baseline projection for 2010 for the GCC assumes modest global recovery – growth of 2.6 per cent – average oil prices of $72 per barrel, and that the impact of the troubled family-affiliated conglomerates on banks is contained," it said.

But the report noted that the recovery of the global economy in 2010 is expected to be sluggish, particularly in advanced economies, as financial systems remain impaired, and households will rebuild savings.

Despite recent signs of the onset of recovery in many parts of the world, the global economy is still expected to contract by 2.5 per cent in 2009. "As advanced economies move out of recession and global demand for oil recovers, a rebound in oil production of around three per cent in Kuwait, Saudi Arabia and the UAE will be reflected in an overall real GDP growth rate of 3.5 per cent in these countries," IIF said.

In another study, the government-controlled Emirates Industrial Bank (EIB) agreed the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman are heading for a better year in 2010, adding they have managed to minimise the impact of the crisis by hiking public expenditure.

EIB said the six nations, sitting atop nearly 45 per cent of the world's extractable oil deposits, have retained a policy of projecting a conservative oil price for their budgets, with most of them assuming a $50-$55 price in their 2009 budgets. "Oil prices have averaged nearly $59 a barrel so far this year and this explains the continuation of economic activity in the GCC at good rates despite the shrinking of many economies worldwide," the study said.

"Indicators point to an upward trend in oil prices in the coming months following signs of global economic recovery… this means GCC economies are heading for a new phase of economic growth next year. Most economic sectors, including the financial and banking sectors, are expected to rebound and begin to record high growth rates in 2010."

EIB said the sharp fall in oil prices after eruption of the global crisis has not largely affected GCC countries on the grounds most of them used the massive wealth they had accumulated during the oil boom to keep spending high and mitigate the downward pressure of lower oil output and recession.

"GCC nations were able to deal flexibly with the global crisis and the ensuing

collapse in oil prices… they managed to maintain high spending, which helped them to achieve positive growth in their non-oil economies this year albeit lower than the rates realised in the previous five years," it said.

EIB expected the GCC's combined oil export income to plunge by about 25 per cent to $402bn in 2009 from a record $537bn in 2008 as a result of a sharp decline in crude prices and production.

Optimistic forecasts

In a research note about the GCC economies, the National Bank of Kuwait appeared to be more optimistic about their prospects in 2010, projecting a growth rate of 4.8 per cent due to higher oil prices and GCC expansionary fiscal policy.

According to the report, the recent months have witnessed an overwhelming consensus that the global economy is on the road to recovery, suggesting that the bottom of the financial crisis is behind.

It cited IMF projections showing the world economy is expected to contract by 1.1 per cent in 2009 and to recover by 3.1 per cent next year. "The road to this recovery has been cemented to a large extent by governments around the globe expanding fiscal and monetary policies, bailing out firms, and injecting capital and liquidity in the banking system," NBK said.

"The Gulf economies are definitely among the top beneficiaries of any global rebound. As oil continues to be the major driver of GCC macro performance, the higher oil prices that started to stabilise since June this year began to gradually restore regional confidence and to leverage its favourable prospects."

"The global recovery, if robust, is expected to provide further support to oil prices in the near term. For 2009, however, we still project the real GDP of the region to contract by 2.5 per cent, affected mainly by cuts in oil production."

But the report projected growth in the region's non-oil GDP to continue in 2009, though at a slower pace of around two per cent, compared to an average growth of seven per cent in the previous five years.

"Meanwhile, we project that Gulf economies will post 4.8 per cent real growth in 2010, outperforming most regions around the world. There are, however, some downside risks to this projection," NBK said.

"If prices witness a substantial drop in 2010 and governments, out of budgetary concerns, decided to reduce spending, then the bullish outlook of the region would be jeopardised. Instead, Gulf governments would be advised to exploit the positive atmosphere and to build on it with more spending and more public-private projects. They also ought to pursue economic reforms and introduce further improvement to the business environment."

Taken individually, only three GCC members – the UAE, Saudi Arabia and Kuwait – are expected to record slowdown or contraction in their real GDP this year mainly because of deep cuts in their oil output.

Qatar's economy would still make big leaps given the steep rise in its LNG exports, while that of Bahrain would also grow because of the negligible contribution of the oil sector to its GDP. Oman's real GDP is also expected to maintain its upward trend in 2009 as the non-Opec country increased its oil output by at least 50,000 barrels per day in 2009.

Contrary to projections by the IMF, which had expected a contraction, Saudi Arabia said this week its real GDP edged up by around 0.15 per cent. The UAE also expected slight growth of 1.3 per cent this year in contrast with IMF forecasts about a contraction of nearly one per cent. Yesterday, UAE Ministry of Economy Sultan bin Saeed Al Mansouri also projected the GDP growth to rebound to 3.2 per cent in 2010.

Higher assets

IIF estimates showed the improvement in global markets through 2009 more than offset the decline in oil prices from their historic high level of $147 last year, with the combined assets of four SWFs in the GCC rebounding by around $134bn towards the end of 2009 after tumbling by $90bn in 2008. The decline in 2008 despite massive current account surpluses was a direct result of a sharp drop in asset prices following the collapse of world markets.

A breakdown showed the Abu Dhabi Investment Authority, one of the world's largest SWFs, regained around $81bn in 2009 after losing nearly $41bn in 2008. The Kuwait Investment Authority rebounded by about $35bn after losing nearly $45bn, while the Qatari Investment Authority surged by nearly $18bn compared with a loss of about $5bn in 2008. Oman's Reserve Fund, a small SWF-style institution, maintained assets at nearly $8bn this year after gaining around $1bn last year.

The GCC's combined assets, including SWFs, official reserves and those of other financial institutions, were expected to swell by about $138bn to $1.49trn by the end of this year from $1.35trn at the end of 2008. The assets had shrunk by around $35bn from $1.38trn at the end of 1987.

Official figures showed 2008 was one of the best years for the GCC in terms of real and nominal growth due to high oil prices and output, which encouraged governments to largely overshoot budgeted spending.

In current prices, the GCC's combined GDP shot up by around 25 per cent from around $826.1bn in 2007 to a record $1.03trn in 2008.

Qatar had the highest growth rate of 44.4 per cent, followed by Kuwait with 32.1 per cent, Oman 27.7 per cent, Saudi Arabia 22.1 per cent, the UAE 20.7 per cent and Bahrain with about 5.7 per cent, according to government data.

Saudi Arabia had by far the largest economy in the region, standing at $468.8bn in current prices in 2008. The UAE controlled the second largest economy of $239.5bn, while the GDP was estimated at $148.8bn in Kuwait, $104.6bn in Qatar, $53.1bn in Oman and around $18.5bn in Bahrain.

Figures by the Saudi Arabian Monetary Agency (Sama) showed the GCC's combined current account surplus climbed to a record $246.6bn in 2008, with Saudi Arabia accounting for nearly 55 per cent at around $134bn. The surplus was put at $59.5bn in Kuwait, about $28.7bn in the UAE, $18.3bn in Qatar, $4.8bn in Oman and nearly $1.3bn in Bahrain.

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