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Economic outlook for GCC seen positive in 2013-14; oil supports Saudi and UAE expected to lead growth

The overall economic outlook for the GCC in 2013-14 remains positive supported by resilient oil sector, large infrastructure projects, stimulus measures and accommodative monetary policy. We expect the GCC economy to expand by 4.5% in 2013-2014. The non-oil economic growth is forecast to reach 6.0% in 2013 and 2014, nearly a percentage point higher than previously estimated as a result of a boost in public spending levels and improving private sector conditions. On the other hand, GCC oil production has already been cut quicker than we had expected, driven by a decrease in US demand due to shale gas and slow growth in China.

Hence, we expect the real oil-sector to decline 1.2% this year and improved slightly to 0.4% in 2014. This will still leave oil output at historically elevated levels, and combined with $100 oil prices should — in the near term at least — it would be enough to finance rising government spending without draining financial reserves in most countries.
Saudi and the United Arab Emirates (UAE) are expected to lead the way for GCC growth, with real GDP to expand by 5.3% in 2014, followed by Bahrain and Kuwait. Our in house projection is higher than the IMF’s forecasts of 3.7% for 2013 and 4.1% for 2014 for the GCC.

Significant diversification efforts among the GCC countries have made their economies to reduce dependence on petroleum products. For instance, the UAE’s share related to oil in total GDP decreased from 47% in 2000 to 33% in 2012. Dubai has become the region’s leading service centre and Abu Dhabi is focusing on manufacturing, petrochemicals, and renewable energy. Diversification has also led the GCC countries widening their reach in the export market by increasing the focus on the Asian market. Furthermore, new opportunities in North Africa and Turkey may emerge in light of a weak Asian market forecast. Southern Europe should also represent solid opportunities for non-oil exports.

According to the World Bank’s newly released 2014 Doing Business report, the GCC is still viewed as the easiest place to do business in the Middle East and North Africa (MENA). However, the continued oil windfall and the overwhelming priority given by the region’s leaders to stability — ahead of potentially destabilising economic reform — continues to hold back the GCC countries’ rankings. Hence, we expect FDI in the GCC will increase further, up from $26.4bln in 2012. Foreign investment in the GCC has benefited from a combination of relatively high hydrocarbon prices, buoyant economic growth and an ambitious programme of government-sponsored investment projects. The region also regularly accounts for over 50% of all FDI to the Arab Middle East and North Africa.

The index ranks 189 countries around the world across ten categories in order to determine the ease of operating. Although these indicators do not fully cover the actual competitiveness of a country’s business environment, which will also depend on workforce skills, security, actual enforcement capacity and other factors, they do capture key aspects of the country’s regulatory and institutional environment.
Unsurprisingly, the GCC countries score, especially well in terms of taxes (many of the GCC states levy low, or no, corporate and income taxes), although all six continue to be held back by an underdeveloped legal climate under which businesses can operate, as demonstrated by their continued weak scores in investor protection (albeit Saudi Arabia is a partial exception), and low rankings for enforcing contracts and, to a lesser extent, resolving insolvencies.

The monetary policy in the GCC also remains accommodative, with key policy lending rates in most countries at 2.5% or lower (with exception of Qatar Repo Rate). The slow return to higher interest rates in the US means that any tightening of policy in the GCC is likely to be gradual, and not occur in the near term.
Risks to the outlook remain on the downside. The main channel through which the GCC would be affected if these risks materialise is the oil market, although some countries (notably the UAE) would also be affected by their links to global financial markets. Nevertheless, with the substantial fiscal and financial buffers that have been built up, the GCC countries are in a strong position to withstand any turbulence. Risks from domestic sources could also emerge, for instance, if ongoing reform programmes are not successful at generating jobs.

Banking: For 2014, we expect GCC banking sector loan growth to average slightly higher at 10.6%, led by Saudi Arabia 15.3%, Qatar 14.7%, the UAE 9.0%, Bahrain 6.0%-7.0% and Kuwait 6.0%-7.0%. We expect Qatar banks to maintain loan growth momentum in 2014 on continued public sector spending as the country prepares to host the FIFA World Cup in 2022. High oil prices, positive economic expansion and huge capital investments will buoy loan growth in Saudi Arabia. Infrastructure spending in the UAE is expected to grow significantly in the next few years, propelling loan growth as the UAE prepares to host Dubai Expo 2020.

Meanwhile, loan growth in Bahrain and Kuwait will be supported by continued public spending and infrastructure investments. Furthermore, accommodative monetary policies will also support loan growth across GCC countries. GCC currencies are pegged to the $, therefore GCC countries are expected to maintain interest rates at current levels to maintain parity. The US Fed is expected to keep the Fed Fund Target Rate unchanged in 2014.

By KFH Research Limited

By: KFH Research Limited

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