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GCC Growth Starts to Revive, Oil Revenues Set to Increase Saudi Arabia Seen as Key to Continuing Moderate Oil Prices
Washington, DC, October 1, 2009 — After a significant slow-down as a result of the global economic crisis, the economies of the member states of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) - are now on a recovery path that could see significant advances in real growth, oil production, oil revenues and the accumulation of foreign assets in the year ahead, forecast the Institute of International Finance (IIF) today.
IIF Managing Director Charles Dallara stated, "GCC policy responses to the crisis have been timely and substantial. The authorities adopted extraordinary measures to ensure the normal functioning of financial markets and to set the base for the recovery that is now developing. On the whole, the financial sector performed well. The crisis, however, exposed excesses in some areas and we estimate that 23 percent of $2.0 trillion of investment projects, including real estate, (both public and private) that were in different stages of implementation as of end-2008, are being placed on hold or cancelled."
The IIF is the global association of financial institutions with over 375 member financial services firms across the world. The forecasts in today's IIF "GCC Regional Overview" involve a baseline 2010 projection of average oil prices at $72 per barrel. The report said that as advanced economies move out of recession and global demand for oil recovers, a rebound in oil production of around 3 percent in Kuwait, Saudi Arabia, and the UAE will be reflected in an overall real GDP growth of 3.5 percent in these countries. Qatar's growth rate could exceed 30 percent driven by 60 percent increase in gas production.
The IIF said the GCC current account and fiscal surpluses will remain sizable. The region's revenue from oil will decline from $575 billion in 2008 to $327 billion in 2009, before recovering to $421 billion in 2010. The current account surplus will shrink from $261 billion in 2008 to $44 billion in 2009, and then recover to $122 billion in 2010. Foreign assets of the GCC will increase to $1.6 trillion by end-2010. The fiscal position will also remain in large surplus of around $130 billion in 2010 (13 percent of GDP) as compared with $245 billion in 2008 and $68 billion in 2009, despite a continued rise in government spending.
Sovereign wealth funds (SWFs) were affected by the decline in international assets prices, with write downs estimated at 20 to 30 percent of SWFs. A large portion of these losses has been recovered in the recent upturns in the global equity markets.
Non-hydrocarbon export earnings (largely petrochemicals and re-exports) are expected to fall due to the global slowdown. Weak domestic demand and a sharp decrease in import prices are estimated to result in a 8 percent decline in import spending in 2009. The IIF now estimates that the consolidated GCC fiscal surplus will narrow to 7 percent of GDP in 2009 from 22 percent of GDP in 2008.
George T. Abed, the IIF's Special Advisor to the Managing Director and Director for Africa & the Middle East said, "We expect that growth in global demand for oil will recover modestly in 2010. The recent increase in Saudi Arabia's spare production capacity will be the main critical element in keeping oil prices at moderate levels in the next few years. We believe that Saudi Arabia will use this spare capacity with a view toward keeping prices at levels of between $65 and $80 per barrel for the remainder of this year and possibly through 2011, to maintain long-term demand for oil, temper the attractiveness of alternative sources of energy, and moderate the deflationary impact on the oil consuming economies. The GCC, in particular Saudi Arabia, will continue to play a key role in the stability of the international oil market."
The report pointed out that endowed with 40 percent of the world's proven oil reserves and 23 percent of proven gas reserves, GCC countries have often helped reduce volatility in the world energy market. The GCC countries as a group remain the world's largest producer of crude oil (accounting for 25 percent of global exports) and over the medium term, most of the increase in the production of crude oil is expected to come from these countries. Saudi Arabia is expected to reach its target production capacity of 15 mbd by end-2015 (it was raised to 12.5 mbd, as planned, in June of this year). Gas production in the region (largely in Qatar) is expected to increase sharply from 4.3 million b/d of oil equivalent in 2008 to 6.3 million b/d by 2010 (accounting for one-fifth of the expected increase in world demand for gas).
Sharply rising imports have mitigated the severity of the global imbalances. A large portion of the region's oil revenue has been used to invest in infrastructure investment and oil and gas sectors, increasing import demand and raising production and refining capacity. A significant portion of oil revenues is being recycled into other Arab countries through remittances and FDI flows. And, the GCC's institutions are heavy foreign investors, notably as major buyers of U.S. Treasuries.
Mr. Abed said, "It is important that the GCC countries advance their structural reform agenda, especially as the current crisis has reduced medium-term growth prospects. Potential growth may be affected by lasting damage on labor markets (particularly with the departure of significant number of expatriates from Kuwait, Qatar, and the UAE) and the productive capital stock."
The IIF added that there are downside risks to its baseline scenario. A prolonged global slowdown or a double-dip recession could slow non-hydrocarbon growth further by reducing the scope for government fiscal stimulus through much lower oil revenues. Also, consumer and investor confidence could weaken further. Moreover, the sharp slowdown in credit growth may expose problem loans that have been masked by the generally favorable economic conditions in the region. However, further government intervention can be expected in the event of unanticipated problems in the financial sector.
Emily Vogl, Frank Vogl