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Global Economic Outlook
Gulf Cooperation Council Outlook Update: Stability Focus Brings Economic Boom
By Ayah El Said and Rachel Ziemba
- Higher oil revenues support massive government expansion, with richer countries supporting more cash-strapped neighbors.
- Property overhang dampens inflation in UAE and Qatar, while supply bottlenecks boost inflation in Kuwait and Saudi Arabia.
- Credit growth is becoming more of a support as social transfers boost deposits, but public-sector borrowing needs raise the risk of crowding out the private sector.
Macroeconomic Dynamics: Government Leads the Way
Ample government spending and stronger hydrocarbon output sets the GCC countries on a path to far outperform the rest of the MENA region, expanding by 6% in 2011, up from 4.8% in 2010. We expect growth to moderate in 2012 to about 5%, as the pace of fiscal stimulus moderates. Qatar continues to lead, growing at around 15% this year, before slowing to near single digits next year as gas output growth eases, alongside the slowing of new commercial and residential property.
Growth in Kuwait and the UAE will increase towards potential as increased liquidity helps repair financial balance sheets, and government spending supports consumption first and investment second. Implementation of Kuwait’s investment plan will pick up over the course of the year (from the 50% in 2010).
Bahrain and, to a lesser extent, Oman suffer more extensive output losses from protests earlier in the year and have fewer resources to step up fiscal stimulus. Bahrain, where a national unity effort is set to be launched, has suffered capital outflows in the face of security crackdown and job losses, particularly of Shi’a and expats, which will weigh on consumption. Oman, more stable, has suffered modestly from strikes that dampened output, but growth has revived. As a non-OPEC member, Oman has continued to increase oil output, which will near 1mbd this year and government spending will push forward its diversification efforts. Tourism will remain restrained, despite the implementation of discounts. Regional funds will support both countries.
Government-led consumption will be the primary driver across the region, offsetting still-weak capital inflows (except in Qatar) and investment. Governments will push forward with more efforts to employ nationals to temper high youth unemployment. Implementation could dampen near-term growth but, if coupled with other reforms, could support longer-term growth.
Oil output will rise across the region, led by Saudi Arabia, as GCC members seek to meet global oil demand and avoid a price spike that would hamper global growth. Nonoil exports have picked up from Oman, Saudi Arabia and UAE. Stronger imports will temper current account surpluses. Credit growth is becoming more of a support, particularly in Saudi Arabia and Qatar. Government transfers have boosted deposits and should support credit growth. The creation of Kuwait’s new capital markets authority should improve financial reporting and sentiment.
Policy Implications: Very supportive
Higher oil prices mean that all countries but Bahrain should run a wider fiscal surplus in 2011, though Oman’s will be miniscule. The increase in spending leaves the region more reliant on ever-higher oil prices. Qatar aside, social spending has outpaced capital investment, meaning infrastructure buildout may be slower. With private capital scarce, governments may need to support key projects, and we expect regional sovereign funds to face more pressure to invest at home.
Price pressures are picking up across the region, led by food prices and fiscal expansion. Falling rents, which make up 40% of the CPI basket, will continue to depress inflation in the UAE and Qatar, as amplified by new supply. Stronger liquidity will meet supply bottlenecks in Kuwait and Saudi Arabia, particularly as public-sector wage hikes boost unit labor costs. We expect that GCC central banks will live with any increase in inflation, relying instead on price controls and will hike interest rates only when the Fed does (not before the end of 2012). Kuwaiti officials could cease dinar depreciation.
- Government spending creates a positive feedback loop, mediated through the banking system.
- Low global interest rates enable refinancing of key government linked corporations.
- Stabilization in Bahrain attracts capital and prompts consolidation.
- Easing of oil demand dampens revenues, reducing liquidity, and government and private inflows.
- Public-sector borrowing crowds out the private sector, which also faces higher labor costs due to wage hikes, and pressure to nationalize the workforce.
- Real estate weakness pressures banks.
Figure 1: Latest Data and RGE Forecasts
Figure 2: Growth Divergence (Real GDP growth)
Figure 3: Inflation Still Moderate (y/y % change)
Source: National central banks, RGE estimates