The six Gulf Cooperation Council (GCC) countries will experience robust growth in 2012 on the back of high oil revenues which are expected to hit $572 billion this year, an Institution of International Finance (IIF) forecast said.

Sharp increases in oil production to offset losses in Libya, coupled with a surge in public spending, helped lift the region’s growth rate to 6.9 per cent last year. This will moderate to 4.9 per cent in 2012, and a likely 4.2 per cent in 2013.

Expansionary fiscal and monetary policies are expected to remain in place in light of the continued rise in hydrocarbon revenues, the peg to the dollar, and the modest rebound in private credit. Inflation will remain subdued.

The GCC countries possess 40 per cent of the world’s proven oil reserves and 25 per cent of gas reserves. Spare oil production capacity in the region is between 2.5-3.0 million barrels per day, enabling key countries, especially Saudi Arabia, to meet any shortfall in exports from Iran stemming from the sanctions or other supply disruptions, said the IFC report.

The GCC will continue to play a pivotal and stabilizing role in the volatile global energy markets, it said.

Assuming Brent oil prices average $114 per barrel for 2012 and oil production remains at the level registered during Q1 2012, budget revenues from oil are projected to grow from $538 billion in 2011 to a record $572 billion in 2012. As a result, the consolidated
fiscal surplus will widen to 12 per cent of GDP.

The aggregated nominal GDP in dollar terms rose by about 31 per cent to $1.4 trillion in 2011, mainly due to higher oil prices and crude oil production. Buoyant hydrocarbon revenue contributed to large fiscal and external surpluses despite strong import growth and fiscal expansion. The GCC’s consolidated external current account surplus is expected to increase to a new peak of $358 billion in 2012, compared with an estimated $327 billion in 2011.

After topping an estimated $685 billion in 2011, the region’s hydrocarbon export receipts look set to rise to near $730 billion in 2012. Similarly, on the fiscal side, government
 revenue from hydrocarbons is now estimated at $536 billion  for 2011, rising to $567 billion in 2012.

With the combined external current account surplus expected to be a record $358 billion, gross foreign assets could rise to about $2.3 trillion. With relatively little external debt, the region’s net foreign assets position of $1.9 trillion (127 per cent of GDP) will remain substantial, the report said.

Economic activity in the heavily oil-based economies of the six countries continues to be driven by buoyant government spending, financed by surging oil and gas revenues and setting the pace for private sector activity. As a measure of the public sector’s contribution to aggregate demand, the non-hydrocarbon government deficit averaged 27 per cent of GDP and 60 per cent of non-hydrocarbon GDP in 2011, the report said.

Government spending since 2002 has grown at an average annual nominal rate of 14.5 per cent, driving up the breakeven (Brent) price of oil that would balance these countries’ budgets.

For example, for Saudi Arabia and the UAE, breakeven prices have risen from about $30 per barrel in 2003 to $80 per barrel and $90 per barrel, respectively. While for the principal oil producers in the region breakeven prices remain comfortably below prevailing market levels, the unrelenting rise in and the near irreversibility of government spending could expose the fiscal position to undue risk because of the historically high volatility of oil and gas prices, it cautioned.

Since the onset of the global financial crisis and, subsequently, the Dubai debt difficulties, affected financial institutions have steadily strengthened their balance sheets thanks to public sector support, supervisory vigilance, and timely recovery in earnings. Banks in the GCC are now sounder. The rise in provisions is tapering off and NPLs in the affected banks should begin to trend downwards, it said.

'Countries in the region have made commendable efforts to diversify their economies through investment in manufacturing, downstream activities, and especially in services (finance, tourism, trade-related services, and health and education). Considerable public investments in infrastructure continue to be made to facilitate private sector activity. Much more remains to be done, especially on appropriate skill development and on restructuring incentives to help create private sector jobs for nationals,' it said.

The risks to the outlook for the GCC countries are large although difficult to quantify. In the first place, political turbulence in the Arab countries, if it is prolonged, could infect the region with negative consequences. 'However, we do not attach a high probability to this risk. Other risks arising from sanctions on Iran indicate ambiguous outcomes. On the one hand, a large drop in Iran’s oil exports, but in the absence of a military confrontation, suggests an upside risk, since it would necessitate significantly higher oil output from the GCC countries, raising the growth rate and lifting hydrocarbon receipts and government spending.

'However, an escalation of the crisis into a military conflict with Iran could bring about untold damage to the economies of the region, as such a conflict could easily spread to parts of the GCC region,' it warned.

The growth in the UAE will moderate to 3.1 per cent in  2012 from an estimated 4.7 per cent in 2011. While growth in Abu Dhabi will remain strong, driven by a sizable increase in public spending, Dubai’s economy will be more vulnerable to weaker global growth and to the adverse impact on trade from the recent sanctions on Iran, which is an important trading partner.

In Qatar, the moratorium on expanding liquefied natural gas (LNG) production capacity, in effect until 2015, will moderate growth. But continued strength in public spending on infrastructure will maintain non-hydrocarbon growth of around 8 per cent through 2015.

The relatively modest non-hydrocarbon growth of 3.2 per cent in Kuwait is due to the ongoing disputes between the ruling family and the parliament on policy implementation. A higher level of growth requires a political consensus on much-needed reforms, and a shift in public spending to support increases in non-hydrocarbon productive capacity in the private sector, the report said.

Oman’s growth accelerated, driven by robust expansion in the non-oil sector. Prospects for strong growth this year are encouraging. The unrest last year had little impact on economic activity, but did result in some political reforms and an increase in government spending, it said.

In Bahrain activity was hit last year by demonstrations and unrest, which adversely impacted tourism, retail trade and the banking sector. The increase in oil production has offset some of the decline in the non-oil sector. Prospects for 2012 and 2013 are brighter,
although simmering unrest and isolated outbreaks of violence suggest that growth is unlikely to return to levels in excess of 5 per cent per year, the report said.

Average inflation is expected to remain at around 3 per cent across the GCC this year, with the UAE and Qatar at the lower end of the range and Saudi Arabia and Kuwait at the higher end.  - TradeArabia News Service