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Arab Gulf Economies To Benefit From Oil Price Driven Spending In 2H

Monday, Jul 04, 2011

By Leila Hatoum

Of ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--Arab Gulf economies will benefit from large government spending programs paced by high oil prices in the second half of the year, while bank lending is expected to pick up after sluggish growth in the first six months, despite concerns over the ongoing political turmoil in the wider Middle East and Europe's sovereign debt crisis.

Simon Williams, HSBC's chief economist for the Middle East and North Africa, said his expectations for economic growth in the Mena region had remained largely unchanged over the past three to four months, with growth seen at around 4.5% to 5% in 2011.

"I think that public spending is going to continue to be the key driver of growth over the second half of this year, and provided that the political environment begins to stabilize, we should get some pick up in private spending too," Williams said.

Awash with petrodollars, Gulf Cooperation Council, or GCC, states including Saudi Arabia and the United Arab Emirates have ramped up spending in recent months in response to the turmoil sweeping across much of the Arab World that has seen the Egyptian and Tunisian governments toppled, and others such as Libya's left fighting for their survival.

Despite the wider regional unrest, Gulf states are still seeing "a lot of investor interest because investors are now differentiating between the GCC and some parts of the region that are facing challenges," said Shady Shaher, Standard Chartered's senior economist for the Mena region and global markets.

"The GCC has stronger economic dynamics than the rest of the region," he added.

Investor interest has been reflected in largely positive international responses to bond issues out of the Gulf. In the U.A.E., the Dubai government and Dubai state-owned Emirates Airline both launched bonds successfully in June, with other potential issues including from Abu Dhabi's Dolphin Energy and Tourism Development and Investment Co. in the pipeline.

SPENDING PROGRAM

Regional public spending initiatives will continue to be driven by oil revenues during the second half of the year, supplying the funding needed to support the enormous fiscal packages declared by some governments led by Saudi Arabia.

In March, Saudi King Abdullah announced that the world's largest oil exporter would embark on a massive spending program on social benefits, with as much as $67 billion to be spent on house-building alone to meet a domestic shortage.

Governments in the Gulf are ramping up public spending having filled their war chests with petrodollars in recent years. Oil prices have remained buoyant, with New York Mercantile Exchange crude futures averaging around $99 a barrel during the first half and hitting their highest level since 2008 at $114 a barrel in April. Prices fell to levels around the mid-$90s in late June after the International Energy Agency said it would release some of its emergency stocks to make up for lost production in Libya.

According to five economists polled by Zawya Dow Jones in June, oil prices are estimated to range between $100 and $113 barrels a day in 2011.

Saudi Arabia, the region's biggest economy, is expected to see real gross domestic product growth of as much as 6.6% in 2011, according to Standard Chartered, the highest rate for the kingdom in nearly a decade.

"We expect Saudi Arabia's real GDP growth to be around 6.6% for the full year on the back of strong oil prices," said Standard Chartered's Shaher. The U.A.E., the region's second-biggest economy and also a major oil exporter, is expected to see real GDP growth of around 4% this year, he added.

BANK LENDING

Despite a relatively weak bank lending environment during the first six months, analysts do expect a pickup in the second half due to improved liquidity.

"We are expecting bank lending to gradually recover in 2H of 2011, notably in Saudi Arabia and the U.A.E. on the back of higher spending and improved liquidity," said Alia Mobayed, Barclays Capital's chief economist. HSBC's Williams said he expects "bank cautiousness to dissolve bit by bit in the second half."

The key challenge for improved bank lending remains confidence, which remains shaky in particular in markets such as the U.A.E., whose real-estate sector continues to suffer from the fallout from the global financial crisis and where high debt obligations are still looming over several corporate entities owned by the Dubai and Abu Dhabi governments.

The International Monetary Fund warned in a report in late June that high debt levels among Dubai and Abu Dhabi government related entities present a significant risk to the sovereign balance sheets of both emirates, which may face funding cost "shocks" as they attempt to roll over $60 billion worth of debt maturing this year and next.

The region's stock markets led by the U.A.E., Qatar and Saudi Arabia may still be in for a better performance in the second half as confidence and stability are returning after the initial shock of the unrest around the Arab Spring.

"High oil prices continue to help economic recovery post the crisis of the last few years, and valuations are cheap, especially in the U.A.E.," said HSBC fund manager Andrea Nannini. "We expect the markets in the region to do well in the remainder of the year."

The trend may be supported by earnings growth among GCC companies in the latter half of the year, according to Sachin Mohindra, fund manager at Abu Dhabi-based Invest AD, as fundamentals of most companies are improving mainly due to aggressive cost control and gradual demand improvement.

-By Leila Hatoum, Dow Jones Newswires; +971-4-446-1686; leila.hatoum@dowjones.com

(Nikhil Lohade in Dubai contributed to this report.)

Copyright (c) 2011 Dow Jones & Co.

(END) Dow Jones Newswires

04-07-11 1053GMT