GCC growth to jump 5.2pct in 2011 as tensions ease

Fiscal growth in the Gulf Cooperation Council (GCC) will likely soar to 5.2 per cent this year as the political tension across the Middle East and North Africa (Mena) subside and as new governments in protest-hit countries begin a process of transition, says Bank of America-Merrill Lynch (BofA ML).

The bank’s latest quarterly outlook for the Mena economy offers a sliver of optimism – raising its GCC projection from 4.7 per cent – owing to a gradual easing of unrest in the region, high oil prices and increased government spending, particularly from petroleum giant Saudi Arabia.

“The geopolitical risks and contagion have decreased for now as the situation in Bahrain has relatively improved. While the absence of a dialogue and political concessions represent a medium-term risk, the situation is highly unlikely to generate further negative headlines in the short-term,” writes BofA ML.

Oil-exporting countries in the Gulf have been comfortably buffered from economic imbalances of the first quarter as Brent crude prices skyrocketed above $120 per barrel as of April 12, soaring by a hefty 40.5 per cent from the same period last year, according to LiveCharts.co.uk.

BofA ML also estimates that fiscal support packages announced so far accounts for about 7.6 per cent of the region’s forecasted GDP for 2011, a huge chunk of these packages will be coming from Saudi Arabia.

It may be recalled that the world’s largest oil producer released a total of $93 billion (Dh341bn) last month into the local economy to boost government spending on social and physical infrastructure, domestic jobs, as well as national housing.

The move, some analysts believe, was geared towards quelling any public agitation that resulted in a widespread revolution across several Arab states. But BofA ML believes that increased public spending will be the usual concession that governments across the region would have to take as a result of the political upheavals.

“In Saudi Arabia, in particular, the massive fiscal spending spree announced year to date has reached almost $120bn, [about] 25 per cent of the 2011 GDP,” the bank said, adding that the injection is considered a positive push for the kingdom’s economy.

Oman outlook still rosy, Bahrain lacklustre

While Gulf states Oman and Bahrain may not have been immune from the recent Mena outcry, their differing macroeconomic fundamentals would likely influence how they will come out of their respective domestic trauma.

Bank of America-Merrill Lynch believes that Oman’s hydrocarbon industry will help fuel its GDP to grow 3.7 per cent this year and 4.6 per cent in 2012. Meanwhile Bahrain, which has a more diversified economy, would likely suffer a backlash as its non-oil sector bear the brunt of weeks of violent protests.

“Bahrain’s economy is likely to deflate this year by 2.2 per cent in real terms, driven by contraction in the finance, tourism and manufacturing sectors. Assets of the banking sector are over 10 times Bahrain’s GDP and BIS [Bank for International Settlements] foreign claims on the private sector amount to 87 per cent of GDP,” the bank said.

On the other hand, Oman is seen benefiting from its increased hydrocarbon production, which has been driven by a $10bn investment plan that will help the country realise its development goal for 2020.

“Oil production [in Oman] has been increasing on average six per cent, year on year, since 2008 and the country is not bounded by an Opec [Organization of Petroleum Exporting Countries] quota,” the report noted.

Oil prices could soar to $140/barrel in Q2

Concerns over further disruptions in the oil supply chain and an anticipated increase in global consumption could likely push crude prices to $140 per barrel in the next three months, according to BofA ML’s estimates.

“More recently, the political situation in Libya has reduced domestic oil production by about one million barrels per day, according to the IEA [International Energy Agency],” the bank said.

In consideration of possible short-term risks to oil output from the Mena region, the bank also raised its average Brent crude oil forecast to $122 per barrel from $86 per barrel in the second quarter of 2011.

However, the bank also projects that average oil prices could settle at $94 per barrel in the fourth quarter of this year as higher crude prices drag down demand and as lost supplies from Libya come back on line.