GCC economies set for a sharp rebound in 2010
After suffering from one of the most turbulent periods, the economies of Gulf oil producers are set to sharply rebound in 2010 while their public finances will largely improve and stock markets head for sustained recovery, said a latest economic report.
Inflation in the six-nation Gulf Co-operation Council (GCC) countries, which control nearly 45 per cent of the world's proven oil wealth, will pick up again this year, but it will be a slight increase as a sign of strong domestic demand and it will likely be far below the 2008 record rates.
The improvement in oil prices this year means higher current account surpluses for the six members and this will result in additional income for their sovereign wealth funds (SWFs) that were severely hit by the 2008 global fiscal distress.
In a 15-page study on the GCC, the Saudi American Bank Group (Samba), one of the largest banks in Saudi Arabia, presented a positive outlook on the region's economies, finances and capital markets in 2010 and said member states are expected to stick to the dollar and keep interest rates low.
Samba noted that the GCC as a whole managed to weather the global slowdown reasonably well in 2009, posting an estimated real GDP growth rate of just under one per cent despite a surge in the GDP of some members. Key to this resilience was the robust policy response by GCC governments who pumped liquidity and support into regional banking systems to offset the sharp decline in capital flows and asset values, the bank said in it report.
They also adopted strong counter cyclical fiscal policies, boosting public spending to counter the slump in private sector activity.
In this, it said, they were aided by recovering oil prices during the year which also allowed most to continue running fiscal and current account surpluses. As a result, non-oil growth of gross domestic product was sustained, helping moderate the negative impact of the steep drop in oil production and revenues as Opec quotas were cut and annual average oil prices declined.
According to Samba, star performers in 2009 were Qatar and Oman which posted estimated growth rates of 9.4 and 3.7 per cent, respectively.
In contrast to the rest of the GCC, both countries benefited from positive growth in their hydrocarbons sectors as a sharp rise in LNG output in Qatar offset a decline in oil production while, not being constrained by Opec quotas, Oman was able to continue to raise its oil output.
Outlook for 2010
"Prospects for 2010 are largely positive. With crude oil prices projected to average $75 a barrel, GCC economies will be flush with revenues which can be used to finance the economic transformations currently underway. The announced budgets in the region confirm the intentions of GCC governments to actively pursue their development and diversification agendas, with large spending planned on infrastructure projects," the study said.
"Although the scope to raise oil output will be limited for Opec members given the still weak market fundamentals, some moderate production gains combined with increasing investment activity will ensure a return to oil sector growth. Meanwhile, growth in the non-oil sector is likely to pick up in response to the improving global environment and the sustained fiscal stimulus."
But the study believed it would take some time for private sector activity to fully recover as lingering problems remain in some real estate and corporate sectors. "In many cases consumer balance sheets are still stretched, and credit availability is likely to continue to be somewhat strained, curtailing prospects for private investment. Nonetheless, in most cases the situation will be measurably better than last year, and overall we expect a strong rebound in GCC real GDP growth to five per cent in 2010. This figure is significantly boosted by our 18.1 per cent projection for Qatar, which is driven by further scheduled large increases in LNG output. We also expect Oman to grow by six per cent as additional oil output gains combine with sustained growth in its non-oil sector."
While Saudi Arabia's economy, the largest in the Middle East, should rebound to grow by close to four per cent, growth in the UAE will be partly affected by weak property prices and constrained credit, the report said.
It projected growth in the UAE, the second largest Arab economy, at around two per cent this year and that of Kuwait and Bahrain at three and 1.8 per cent respectively. The report expected the UAE's oil output to edge up to around 2.33 million bpd this year from about 2.25 million bpd in 2009.
Analysts said the UAE could record higher growth in case it increased oil supplies in line with any new decision by the 12-nation Opec to raise output in response to improved global demand in the second half of 2010.
"Any increase in oil production by the UAE and other Gulf countries this year means there will be growth in the oil sector. This will combine with an expected growth in the non-oil sector to contribute to better performance in their GDP," said Malik Younus, senior economist at the Saudi National Commercial Bank.
Turning to project finance, Samba said it saw better prospects in 2010 after a sharp slowdown in 2009 because of the squeeze in funding by global banks.
It noted that many GCC governments began to shift priority infrastructure developments more fully into the public sector domain, particularly in Saudi Arabia, following the global credit tightness last year.
"This should ensure financing, either directly or through capital markets. The Qatar and Abu Dhabi governments issued bonds worth $10 billion (Dh3.67bn) and $3bn respectively in the latter part of 2009 to help fund planned projects," it said. "In addition, we believe there will be a slow but steady return of international bank financing, although this will initially focus on extremely strong project sponsors with government backing, such as the recent international bank financing component for Saudi Aramco's Jubail refinery project.
"Greater attention will be paid to the viability of projects, particularly those in real estate, and the nature of any assumed government support for project sponsors."
Citing MEED data, the report said the GCC project pipeline remains ambitious, with an estimated $2.8 trillion of ventures scheduled.
Samba expected an improvement in credit growth through 2010 after a sharp decline in 2009 despite strong government intervention and support to banks.
It said tighter bank lending conditions, combined with corporate and individual deleveraging, caused annual domestic credit growth to plunge to low single digits for all but Qatar, where credit grew by 14.3 per cent.
In contrast, credit growth essentially stagnated in Saudi Arabia, with central bank data showing a contraction of 0.3 per cent in 2009. "The outlook for 2010 is more promising as the GCC governments spend increasing oil revenues and capital inflows improve – although the banks' access to international wholesale funding markets may remain tight until the second half of the year," Samba said.
"GCC banks start 2010 well capitalised and well provisioned providing a sound basis for growth. Interbank rates remain relatively low, although the UAE has seen a recent uptick due to concerns over debt restructuring, while rates in Qatar remain comparatively elevated given the authorities' decision to maintain higher policy rates in the face of previously soaring credit growth."
As for inflation, which dived from around 11.1 per cent in 2008 to 2.5 per cent in 2009, Samba expected the rate to pick up slightly this year. While the GCC economies are projected to recover, aggregate demand growth will be modest, and credit growth comparatively restrained despite the accommodative monetary policy stance, it said.
In addition, after the sharp downturn in activity last year, capacity constraints have eased considerably in the region, particularly in the real estate sector.
"Rents account for a large share of GCC consumer price indices (CPI) and thus developments in real estate have a major bearing on inflationary developments. This was evident in Qatar and the UAE during 2009 when inflation dropped sharply (turning to deflation in Qatar) in line with the real estate downturn."
Turning to public finances, Samba said it expected stronger oil prices in 2010 to prompt GCC nations to maintain their counter-crisis fiscal measures and at the same time widen their current account surplus. "The strength of GCC public finances will return as a major theme in 2010 as oil prices hold on to recent gains, raising fiscal and current account surpluses, and adding to the region's large external savings," it said.
"In 2010, GCC governments are expected to maintain the expansionary fiscal policy of recent years, which has provided the main driver of growth in the region. We expect government spending will rise by around 14 per cent this year to a record $354bn, bolstered by stronger oil prices."
In tandem with fiscal balances, the external balance of the GCC should improve as stronger oil and gas revenues, accompanied by a revival in petrochemical and non-hydrocarbon exports, boost the current account position, it said.
"Healthy current account surpluses will allow the GCC states to continue growing their substantial external assets which have provided a vital buffer during the global slowdown. With the exception of Saudi Arabia, the bulk of GCC states foreign assets are managed through SWFs," Samba said.
"Unfortunately, little information is publicly available on the assets under management by these SWFs. However, we believe that recovering global equity prices and replenishment from sustained current account surpluses resulted in an increase in value during 2009 which we expect will be repeated this year."
Quoting estimates by the Washington-based Institute of International Finance, Samba said the GCC's net foreign asset position improved by around $111bn in 2009 and will grow by $146bn this year to total $1.35trn. "Available data on GCC central bank reserves confirm this trend, with most members managing to build reserve levels in 2009 despite lower oil prices."
Samba's forecasts about the GCC stock markets showed they would be supported by the recovery and head for a steady improvement this year. It pointed to an economic upswing, stronger oil prices, sustained fiscal stimulus in the region and a recovery in global trade.
"From a macroeconomic perspective, the foundation is in place for a sustained improvement in GCC equity markets during 2010. Liquidity conditions are expected to improve, real estate sector is stabilising and possibly returning to growth in some cases.
"After relatively weak performances in 2009, corporate earnings should revive (consensus earnings growth for 2010 is around 23 per cent).Having been held back by higher provisioning in 2009, bank earnings should also recover," the report said.
According to the study, the prospect of bubbles forming in some emerging market equities does not apply to the GCC where the potential for catch up remains strong. The trailing PE ratio for the GCC stands at 13.2 per cent compared with around 18 per cent for emerging market equities, it said.
"GCC markets will remain sensitive to developments in global equities, which are likely to be volatile within a positive upward trend. However, while we anticipate gains for the year as a whole, a number of factors may limit the upside potential for some of the region's stock markets," it said.
Dollar peg is here to stay
The GCC's exchange rate pegs to the US dollar and is expected to remain unchanged over the next couple of years (with Kuwait retaining its peg to a dollar heavy basket of currencies).
Despite continued progress towards the stated goal of monetary union involving Saudi Arabia, Kuwait, Qatar and Bahrain, announcements from GCC officials concede that this is still a long-term project. "In the meantime, efforts will continue to develop and build the necessary institutions and capacity to launch a viable single currency, starting with the central bank to be based in Riyadh," Samba said. "Given the retention of the dollar peg, GCC monetary policy will continue to be driven by the actions of the US Federal Reserve," it said.
"We thus anticipate a continuation of low policy rates in 2010. As in the US, we expect inflation to be muted in the GCC, and thus do not expect a return of the exchange rate pressures that emerged in 2007-2008. Current forward markets continue to reflect confidence in the dollar peg and are not pricing in any significant revaluation pressure within the next 12 months."
But Samba said it expected the peg to continue to be an area of debate as inflationary pressures mount at a time when governments will be reluctant to use fiscal policy to influence domestic activity.
"While we recognise the benefits of currency flexibility and an independent monetary policy, we hold the view that the dollar peg currently remains the best option. The dollar peg helps minimise exchange rate volatility and provides a credible and easily understood anchor for monetary policy," it said.
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