Financial experts have projected a rosy near-term outlook for the Gulf region with overall economic growth expected to jump 4.4 per cent in 2010 and 4.7 per cent in 2011, a massive improvement from the 0.3 per cent real GDP registered last year.
Out of the six nations comprising the Gulf Cooperation Council (GCC), Qatar is seen as the sole economy to post double-digit growth of 13.9 per cent this year and 10.2 per cent next year, according to a report released on Monday by the Institute of International Finance (IFF).
The rest of the GCC countries have also been predicted to record relatively healthy fiscal growth this year with Oman likely to post 5.1 per cent, followed by Bahrain (3.7 per cent), Saudi Arabia (3.4 per cent), Kuwait (3.2 per cent), and the UAE (2 per cent).
Inflation rate in the region has likewise been expected to remain contained as rents drop sharply. Next to Asia, the GCC is seen recording the highest growth of any emerging markets region with its net foreign assets ballooning to $1.2 trillion (Dh4.4trn) by end-2010 and steadily rising to $1.3trn by the end of 2011.
The forecast, however, follows an assumption that the global economy is on its way to recovery, albeit slow, says Dr George Abed, senior counselor and director of the IIF’s Middle East-Africa Department at its headquarters in Washington, DC, USA.
“Global sources of risks lie in the possibility that the world economy may not recover as fast as we thought, in part because Europe is unable to generate much growth and US is still burdened by an overhanging of real estate assets that have not been sold, in addition to high unemployment,” Abed said.
He further explained that if the European Union’s economic crisis continues to weigh heavily on global markets, it could result to reduced investor confidence and eventually affect global economic recovery.
Such scenario could indirectly impact the prices of oil and volume of international trade – sectors that are primarily significant to a region such as the GCC, which relies greatly on petrodollar revenues.
“If the global recovery weakens, we see some outside risks to our forecast for the GCC,” Abed warned.
Economic diversification leads to sustainability
For a region that holds about 40 per cent of the world’s proven oil reserves and 25 per cent of proven gas reserves, it is not an easy feat for the Gulf to modify its economic focus outside of the hydrocarbon industry, says Abed.
“Diversification in a heavily oil-dependent economy is always a challenge, but it is absolutely necessary [especially] for larger economies such as Saudi Arabia because of the size of its labour force, which the oil sector alone cannot accommodate,” he said.
With the recent volatility of oil and gas prices, absolute dependence on the hydrocarbon industry could seriously hurt the Gulf region – an issue that is already being addressed by the six Gulf states.
“Indicators connected to the oil and gas [sector] showed volatility and decline. But the non-oil sector has done reasonably well although at a lower rate,” the IIF economist said.
According to the IIF estimates, the consolidated external current account surplus of the region’s hydrocarbon sector plunged by over 79 per cent to $53bn in 2009 from $255bn in 2008. Likewise, the oil sector’s real GDP growth dwindled by 5.3 per cent in 2009 after it posted a 6.4 per cent growth the previous year.
The decline had been attributed to the nearly 38-per-cent drop in oil prices from $98 per barrel in 2008 to just about $61 per barrel in 2009, as well as the 10-per-cent reduction in global oil output. The agency said gross revenue from hydrocarbon export had been expected to sharply decrease to $331bn in 2009 from $570bn a year earlier.
The non-hydrocarbon sector, meanwhile, still managed to post a slight increase of 2.7 per cent in real GDP growth. While it might not be as impressive as the 7.8 per cent growth registered in 2008, the figure remains significant considering the economic impact of the financial crisis on various industries worldwide.
Debt crisis and economic policy reforms
The Dubai World debt restructuring and the Saad-Algosaibi debacle in Saudi Arabia have undoubtedly shaken the region’s financial sector, but Abed downplayed them as major threats to the medium-term growth of GCC economy.
But while these issues may have “punctured” market confidence in the region, it also paved way for policymakers to take a closer look at existing financial regulations in a bid to prevent similar vulnerability from recurring in the future.
“The Dubai World debt issue and the Saad-Algosaibi standstill became a wake-up call to the region that going too far into leverage and debt may not be a wise move sometimes. Revelation about the two conglomerates in Saudi Arabia [also] showed that there are still unrevealed, difficult issues here and there that, if we have any more big surprises, could become a problem,” Abed said.
He added that transparency and public disclosure, particularly in the financial sector, should be encouraged to provide more information to the market. The Dubai World’s restructuring of around $26bn of debt also shed light on the need for clarification on the role of the sovereign in providing guarantee for public entities.
“We hope the Dubai World debt issue will be settled soon in a market-friendly way. We believe Dubai can avoid economic decline this year if Dubai World can settle the restructuring quickly and amicably,” he said.
Consider also reading:
Saudi, other Arab states optimistic on economy
Gulf 2010 inflation may rise on higher food prices
UAE economy to grow by up to 3pct in 2010:economy minister
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