Combined GDP of GCC states to touch $1.15trn

The economies of Gulf oil producers are expected to explode by at least $300 billion (Dh1.1 trillion) above their 2007 record level as public and private spending climbs to its peak and their coffers swell in massive petrodollar surpluses.

But the current boom is marred by deteriorating inflation rates and the region's inability to deal with such a problem given its limited current fiscal tools and its long-standing currency attachment to the fragile US dollar.

From around $810bn in 2007, the combined nominal gross domestic product of the six Gulf Co-operation Council (GCC) states is projected to leap to nearly $1.15trn this year, an increase of $340bn or a staggering 42 per cent.

The projections were issued this week by the Gulf Finance House (GFH), the Egyptian Al Ahli Bank and the Saudi American Bank (Samba). There was a small gap in their forecasts but all of them confirmed the GCC economy would rocket above $1trn.

Their figures and official data showed all member states would record high growth this year as a result of strong oil prices, massive public and private spending, an upsurge in construction projects and high growth in most non-oil sectors.

HIGH SPENDING

Public expenditure has already overshot budgeted spending by nearly 26 per cent in the first quarter of this year and overall spending is projected to be far above budget assumptions in 2008 as was the case in previous years when oil prices were high, according to the Federation of GCC Chambers of Commerce and Industry.

Its figures showed the GCC's nominal GDP leaped by nearly 27.9 per cent in the first half of 2008 compared to 14.8 per cent in the same period of 2007. It estimated the overall growth in the GCC economies to be around 20-30 per cent through 2007.

The increase in the nominal economy this year is expected to be the highest annual GDP rise since the GCC states of the UAE, Saudi Arabia, Bahrain, Qatar, Kuwait and Oman created their economic, political and defence council 27 years ago.

Standing at over $1.1trn in 2008, the GDP will be more than triple its 2000-level of around $340bn and five times the $239bn GDP recorded in 1995.

UAE GROWTH

In the UAE, official figures showed the GDP would gained over Dh100bn to climb to an all-time high of Dh800.2bn this year compared to Dh697bn in 2007 and around Dh599bn in 2006. The GDP was below Dh150bn in 1995.

The figures by the Abu Dhabi Chamber of Commerce and Industry, which cited the Ministries of Economy and Finance, showed the oil sector would jump to a record Dh290bn in 2008 from Dh253bn in 2007, an increase of 14.6 per cent.

High growth was also forecast for non-oil sectors, mainly construction, which is expected to leap by nearly 17 per cent. Growth was put at 14.9 per cent in industry, 13.3 per cent in government services, 12.9 per cent in the financial sector, 12 per cent in trade, 32 per cent in transport and communication and 10.2 per cent in electricity and water.

OTHER GCC STATES

In Qatar, estimates by the government Planning Council showed the GDP would surge to around QR268bn (Dh270.38bn) this year from QR232bn in 2007, an increase of nearly 15.5 per cent. The oil and gas sector was forecast to grow by nearly 10.8 per cent to around QR143.5bn from QR129.4bn while all other sectors are expected to record similar growth rates. The figures showed the 2008 GDP would be more than double its 2004-level of QR116bn.

Saudi Arabia, by far the largest Arab economy, has not yet released forecasts for its 2008 GDP but in 2007 it was put at around SR1.43trn (Dh1.4trn), nearly double its 2007 GDP of around SR706bn.

According to figures by the Central Department of Statistics and Information, growth in 2007 was around 7.1 per cent over the 2006 GDP of SR1.33trn.

Forecasts by the Riyadh-based Jadwa Investment company showed the Kingdom's economy would race by at least 23 per cent this year to reach a record SR1.76trn as a result of a sharp rise in oil revenues and growth in other sectors.

Kuwait's GDP was officially estimated at KD31.8bn (Dh439bn) in 2007 and forecasts by GFH and other sources expect it to exceed Dh500bn this year.

Oman's GDP stood at RO15.5bn (Dh147bn) in 2007 and is expected to jump by at least 12 per cent to Dh175bn this year. In Bahrain, which has the smallest GCC economy, its GDP was estimated at $17.5bn (Dh170.4bn) in 2007 and is predicted to surge by over 10 per cent this year.

Experts said most of the official economic forecasts in individual GCC countries for 2008 were produced in early 2008, adding the actual GDP level is expected to be bigger by the end of the year because of higher than expected increase in oil prices and spending.

At the present projection levels, the GCC's GDP is lower than $1trn but an expected revision of economic data later this year would put the level far above $1trn.

"The six GCC members are enjoying a spectacular economic boom – one that we expect to continue over the medium term. The GCC economy is set to surge past $1trn in nominal terms in 2008, marking a threefold increase in only five years," Samba said.

"This will push the GCC economy past that of South Korea and put it on a par with India," it said.

Real GDP growth, which is expected to reach 8.2 per cent in 2008, has tended to fluctuate in line with oil output… the contribution of the non-oil sector has been more vigorous and more stable, and has been the engine of the current boom.

"Assuming non-oil GDP growth this year of round 8.5 per cent, the five-year average for the 2004-2008 period will be a robust 7.7 per cent, a full percentage point higher than overall GDP growth in the Gulf countries."

It said the surge has further boosted the GDP per capita income despite a rapid growth in the group's population, which gained over five million people during 2000-2007. "The average per capita income for the GCC is likely to reach nearly $30,000 in 2008, more than double the level recorded in 2004," it said.

"However, there remains a sharp disparity in income distribution across the GCC, ranging from $15,000 in Saudi Arabia to a staggering $66,000 in Qatar."

Besides high growth, the surge in oil exports also allowed the six members to record their highest external fiscal surpluses, which in turn sharply boosted their foreign assets.

Figures by the International Monetary Fund showed the GCC's combined current account surplus hit a record $225bn in 2007 and the balance could swell to more than $250bn this year. It stood at nearly $200bn in 2006 and $160bn in 2005.

It was estimated at $80bn in 2004 and less than $20bn in 2000 while it suffered from a persistent deficit in most years during the 1990s.

The combined budget surplus is also expected to soar to 21 per cent of the GDP this year from 19 per cent in 2007 due to a 30 per cent increase in the oil earnings.

The record oil price average of $70 a barrel last year boosted the GCC's crude export revenues to nearly $400bn, more than double their 2003 level and seven times their 1998 earnings.

GFH projected the income to shoot above $600bn this year.

According to a UN group, real growth in the GCC is far lower than the nominal GDP increase because of the sharp rise in oil prices and soaring inflation rates.

The Economic and Social Commission for Western Asia (ESCWA), which comprises the GCC and other Middle Eastern countries, said accelerating inflation in all GCC members has largely dampened the current economic boom.

"In 2008, real GDP growth in the GCC is expected to average around 5.5 per cent, supported by continuing high oil revenues, increased public expenditure and a positive investment climate," the Beirut-based ESCWA said.

INFLATION THREAT

"However, the favourable macroeconomic picture has increasingly been clouded by rising inflation rates, which are expected to remain high in 2008. As a result, local purchasing power has been eroded and the pressure on monetary authorities to reconsider exchange rate regimes increased. After a decade of high price stability, inflation rates in the GCC countries started to rise in 2004, beginning primarily in the fast-growing economies of the UAE and Qatar."

Its figures showed the UAE and Qatar had the highest inflation rates in the GCC during 2006 and 2007, standing in the UAE at nearly 9.3 per cent in 2006 and more than 11 per cent in 2007. In Qatar, it stood at 11.8 per cent and 12.8 per cent.

But the report said the rate could be really far higher on the grounds several spending factors are not included in the computation of the consumer price index in the two countries. It gave no figures but the UAE has officially put its 2007 inflation rate at 11.1 per cent while Qatar estimated it at nearly 14 per cent.

ESCWA put inflation at over four per cent in Saudi Arabia in 2007, nearly 6.3 per cent in Oman, 5.6 per cent in Kuwait, and 4.8 per cent in Bahrain.

It attributed the surge in inflation in the GCC to abundant liquidity, strong consumption and investment demand, high government spending, soaring food prices and rents in member states, and a constant weakening of the US dollar.

But it noted that high oil prices have allied with a surge in public and private spending to give a strong push to the GCC economies after several years of slackening growth mainly because of low crude prices.

"The economic recovery that began in 2003 continued during 2007, albeit at a slower pace than in previous years… average real GDP growth in the GCC is slowing from around 5.9 per cent in 2006 to 5.2 per cent in 2007," it said.

"But average growth in 2008 is expected to accelerate to 5.5 per cent in the light of projected high oil prices and further increases in Government spending. Just as in 2007, the UAE and Qatar are expected to record the highest growth rates."

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