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Moving toward more broad-based growth in the GCC

By Dr. Jarmo Kotilaine
2011 proved a bumper year for the GCC region as a whole in terms of growth, led by a particularly strong performance in Qatar, Oman, and Saudi Arabia. However, the pattern of growth remained generally uneven. Even though increasingly positive momentum was observed in the private sector, it was above all a substantial boost to government spending that accounted for the sharp acceleration in overall GCC growth from an estimated 5.4% in 2010 to 7.2% in 2011.

The robust government spending was in turn supported by an increase in the oil price, accompanied by a gradual upward movement in GCC oil production. The OPEC reference basket price for oil rose from USD 76.5/barrel in 2010 to USD 107.5/barrel last year. Even though the average oil price assumption used in the GCC budgets rose fairly sharply from just over USD 50/barrel in 2010 to USD 61.5 in 2011, most regional governments were able to post substantial surpluses during the year.

This year is likely to be characterized by two significant departures from this pattern. GCC growth is likely to revert to its longer-term norm while becoming more broad-based. Relative stability in the hydrocarbons and public sectors is likely to go hand in hand with a continued rebound in the private sector as bank lending recovers more or less across the region. The end result will be lower headline growth as compared to last but this should not distract from the consolidation of last year's progress and the addition of new dimensions to growth. Overall, even if the global economic environment remains highly uncertain, the GCC economies are on track for a strong year in 2012. GDP growth for the GCC region as a whole is likely to be around 4%.

Read NCB's GCC Economic Review

The regional budgets announced so far point to a great deal of continuity with high government spending and an increased emphasis on the inclusive growth paradigm that emerged last year. In addition to the traditional priorities on education, health care, and infrastructure, far more resources are now being devoted to housing, job creation, and social spending. Both Saudi Arabia and Oman are committed to maintaining public sector expenditure at historically high levels, whereas the UAE is once again embarking on some fiscal retrenchment. Especially Dubai has signaled its determination to cuts its deficit at a time when the broader public sector is still rationalizing the high levels of leverage amassed during the boom years. By contrast, Abu Dhabi has indicated that a number of landmark infrastructure projects that were delayed are once again on track.

At the same time, the monetary environment looks likely to remain fairly benign, partly supported by the likelihood of an extended period of near-zero rates in the US. Money supply growth is robust and credit growth is accelerating in much of the region. It is now in or near the double digits YoY in most regional economies. Saudi growth has been particularly encouraging, relying entirely on lending to the private sector. Bank credit in Kuwait has been held back by politically induced delays to government spending while the UAE is affected by expatriate remittances and regulatory efforts to tighten credit standards. The inflation outlook is generally stable and likely to remain broadly unchanged, although some upward pressure has resulted from increased government spending.

The main risks to this benign picture are exogenous in nature, even though the beginning months of the year have seen impressive market rallies the world over in the face of diminished risk aversion. The European situation seems to have stabilized for now thanks to the latest Greek rescue deal but the structural weaknesses and vulnerabilities remain severe and renewed deterioration later in the year highly likely. The structural challenges of the US economy are likely to be eclipsed by the election campaigns but remain a potential source of discontinuities in spite of some positive signs regarding the performance of the economy. There is also growing anxiety about the performance of the emerging markets due to the recent announcement by the Chinese government that its growth target was lowered from 8.0 to 7.5%. In practice, however, this likely represents merely step in the ongoing efforts of the authorities to put growth on a more sustainable footing after inflationary pressures began to mount following aggressive stimulus spending earlier during the crisis.

In the regional context, the efforts to tighten the Iranian sanctions remain the main source of uncertainty as Iran has repeatedly threatened to retaliate against any attempt to interfere with its export trade at a time when the West is seeking to tighten the sanctions applied to the country. Any disruption to Iranian oil exports is likely to prove fairly manageable given the magnitude of excess capacity in Saudi Arabia. By contrast, concrete steps by Iran to disrupt the flow of hydrocarbons through the Straits of Hormuz would create a much more challenging situation. The available spare capacity in the regional pipeline network is relatively minimal and it is mainly focused in the cross-Saudi Petroline now that the Abu Dhabi-Fujairah pipeline looks likely to be delayed until 2013. As a result, even a short disruption to shipping - even though we still view this as fairly unlikely - would quickly put substantial upward pressure on oil prices with a 72-hour stoppage pushing them to the neighborhood of USD 200/barrel.

But even underneath the political risk-related price pressures, the oil market fundamentals looks fairly tight even allowing for the numerous powerful structural and cyclical forces pulling in opposite directions. Global oil demand has rebounded clearly above its pre-crisis levels and is continuing to grow, albeit more slowly than previously expected. At the same time, the transatlantic divide in the market is growing at an unexpectedly brisk pace. North America is moving towards growing hydrocarbons self-sufficiency thanks to new developments in tapping unconventional oil and gas reserves while South America is benefiting from substantial new discoveries.

These trends are likely to continue to intensify trade ties between the GCC and the emerging markets of Asia which remain the main drivers of incremental oil demand globally. Total crude oil demand this year is expected to end up in the range of 88-89 mbd by both OPEC and the International Energy Agency. This should be consistent with an oil price in the neighborhood of USD 105/barrel for the year as a whole. These price prospects augur well for the fiscal accounts of the GCC states in 2012, even if they may materialize with a degree of concomitant volatility.

Dr. Jarmo Kotilaine is the chief economist at Saudi Arabia-based National Commercial Bank.

Read NCB's GCC Economic Review

© Zawya 2012

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