The latest International Monetary Fund (IMF) report suggested that the short to medium term economic outlook of the GCC countries is positive thanks to rising oil prices and strong external balances.
However, the world financial body warned the Gulf economies of potential fiscal imbalances rising as a result of excessive public spending and budget break even oil prices.
The report forecasted that Gross Doemestic Product (GDP) growth for 2012 would average almost 5% and be evenly spread among the GCC and other regional oil exporters in the region, whereas oil prices are expected to average about $115 per barrel. It also noted that Kuwait, Saudi Arabia and Qatar will grow at a rate of more than 6%, whereas the UAE and Bahrain are projected to grow at 2.3% and 2% respectively.
“Last year GCC countries benefited from high oil prices, and generally shrugged off the impact of the global slowdown induced by the euro area crisis. In the GCC, the average real GDP growth reached 8 per cent. In 2012 too, the outlook appears positive on high oil prices,” Masoud Ahmad, Director of the IMF’s Middle East and Central Asia Department, said.
The IMF report expected non-oil GDP growth to rise in all GCC countries with GDP growth to reach 4.5% this year, thanks to increased government spending. As a result, the report said, non-oil GDP would comprise around three-quarters of overall GDP growth by 2013.
The IMF’s report noted that fears of social unrest and higher oil prices prompted massive increase in government spending in the Gulf region. In non-GCC countries, governments accelerated public spending by one-third in dollar terms that is leading to the rise in fiscal deficit of 1% of GDP despite average oil prices of more than $100 in 2011.
The IMF said that the GCC fiscal expenditure rose by about one-fifth in dollar terms, however, fiscal balances improved due to the twin effects of higher oil prices and export volumes. The Gulf oil exporters raised their current account surplus to $400 billion in 2011, almost doubling the 2010 figures, with official reserves hitting the $1 trillion mark.
Although the IMF estimates suggest oil prices will hover around $115 a barrel, the world financial institution warned oil prices may start waning soon. The resumption of Libyan oil supplies and Iraq’s increasing production capacity is set to offset the decline in world oil production, IMF said while hinting that Saudi Arabia will have to cut back its this year to sustain current rates.
“Although the short term economic outlook of the GCC is very positive, we can’t ignore the long term fiscal vulnerabilities arising from potentially lower oil prices and the steadily rising budget break-even oil prices which in some countries are very close to the already high oil prices,” Nasser Saidi, Chief Economist of the Dubai International Financial Centre, said.