According to the Institute of International Finance (IIF), the average growth projected to be registered by the GCC (Gulf Cooperation Council) countries, is expected to moderate to 3.8% in 2013, compared to the 2012 5.8% growth rate.
The dip in the projected growth can be attributed to stagnating crude oil production. The growth of the non-hydrocarbon sector in 2013, which is more representative of economic activity, is forecast to stay robust at around 5 percent.
The IIF report highlights the risk of a decline in growth for the year 2013, as a result of decreased oil prices over a sustained period of time. The reduced oil prices have also led to an irreversible increase in some state expenditures.
Dr. George T. Abed; “The GCC countries have pressed ahead with economic diversification as the share of the hydrocarbon ratio has continued to decline, from 41 percent in 2000 to 27% most recently. Growth has been driven by rising public sector spending, especially on physical and social infrastructure, and buoyant private sector activity. However, to sustain this momentum as the share of the hydrocarbon sector continues to decline, structural reforms need to be deepened and sustained. Among the priorities is a continued review of public spending with the aim of tempering its growth while reducing inefficiencies (e.g. energy subsidies), and diversifying sources of revenues. Furthermore, especially for the more populated countries, ongoing efforts to reorient work incentives and promote private sector employment of nationals must be reinforced and expanded.” — Dr. George T. Abed, IIF Senior Counselor and IIF Director for Africa and the Middle East
Dr. Garbis Iradian; “We expect average oil prices to be $108 per barrel this year. The GCC‘s crude oil production is projected to decrease slightly. As a result, the consolidated external current account surplus for the GCC is likely to decline from a peak of $389bn in 2012 to $334bn in 2013, but still leading to size-able accumulation of foreign assets, which could rise to around $2.5 trillion by year-end. In the UAE, we expect growth to moderate to 3.6% in 2013 from 4.8% in 2012, due to much smaller increase in crude oil production. Non-hydrocarbon growth, however, is forecast to accelerate slightly to 4.5% in 2013, driven by higher government capital spending in Abu Dhabi and continued robust growth in trade, tourism, and transportation in Dubai.” — Dr. Garbis Iradian, IIF Deputy Director, Africa and Middle East Department
He noted that the adverse impact of a drop in oil price on the UAE will be limited, given its diversified economy and lower break-even oil prices. However, Dr. Iradian cautioned that the Dubai debt episode has left markets with some concerns that the lessons of the past may not have been fully absorbed, and that efforts should continue to focus on strengthening the balance sheets of government related entities.
Dr. George T. Abed; “Since the onset of the global financial crisis and, subsequently, the Dubai debt difficulties, financial institutions that were affected by the crisis have steadily strengthened their balance sheets, thanks to public sector support, supervisory vigilance, and timely recovery in asset prices, core economic activity and earnings. Banks in the GCC, especially the large, well established institutions, which account for the bulk of bank assets in the region, have generally maintained strong capital and liquidity positions. The rise in provisions is tapering off and NPLs have begun to trend downwards. All six jurisdictions are in various stages of implementing Basel III.”
The report presents forecasts key macroeconomic indicators, based on two oil scenarios:
(i) a baseline scenario with oil prices stable at USD 108/barrel through 2020
(ii) an alternative scenario which assumes a drop in oil prices to USD 85/barrel starting in 2014 and lasting through 2020.
Under the alternative scenario the consolidated fiscal surplus (projected at 10 percent of GDP in 2013) will shift to a deficit of 1 percent of GDP by 2016 and 5 percent by 2020. Foreign assets could be drawn down by USD 1 trillion by 2020. While the risk of a drop in the oil price to USD 85/barrel appears unlikely at present, robust global oil supply growth and weak demand could conceivably push prices down close to that level in the coming years.