The six Gulf Co-operation Council (GCC) countries – Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates – are expected to maintain strong economic growth in the medium term with GCC oil revenues set to exceed $600bn annually in 2008 and 2009, compared to $122bn in 2002. According to the latest economic report from Bahrain-based investment bank Gulf Finance House, GCC oil production will rise to 20 million barrels a day by 2010 from 17.5 million currently, pushing oil revenues beyond $600bn a year and enabling the GCC’s nominal GDP to rise 36% to $1100bn in 2008, up from $810bn in 2007 and double that of 2004.
Warning
With oil prices expected to remain in triple digits for the rest of 2008 and aggregate GCC government expenditure forecast to reach $300bn this year (double that of 2004), the economic boom in the region continues. But the GFH report’s author, Dr Ala’a Al-Yousef, warns: “GCC states will have to live with the paradox of low single-digit interest rates and high double-digit inflation rates. With little recourse to monetary policy tools, all eyes are on the authorities’ fiscal responses to these challenging times.”
Inflation rates in the UAE, Oman and Qatar are hovering around the 15% to 16% mark while those in Kuwait and Saudi Arabia are over 10%. Only Bahrain has a low inflation rate of about 5%. According to GFH senior economist Hany Genena: “The GCC is entering a phase of loose monetary-fiscal policy spiral, which, together with a wage-inflation spiral, have trapped the region between two impossible trinities.” Whereas the conventional trinity – fixed exchange rate, free capital mobility and independent monetary policy – suggests GCC central banks have to adopt an inappropriately loose monetary stance amid surging inflationary pressures, the GFH-designed trinity explains the difficulty of maintaining low inflation rates amid high commodity prices and low interest rates.
Good prospects
Despite the inflation concerns, the prospects for the economies and the banking sectors are very positive. With private sector projects currently under way in the region estimated at about $2000bn, investment is pouring in. The report says: “The GCC is approaching the second leg of a decade-long growth phase (2002 to 2012). During 2009/10 potential output is expected to shift forward as capacity additions come on stream across a wide range of sectors.”
Saudi Arabia’s outlook is robust, with oil prices projected to stay above $100 a barrel this year and probably next, helping push nominal output beyond $500bn this year and real GDP growth beyond 5%. In other positive signals, the twin fiscal and current account-to-GDP ratios are forecast to exceed 20% and 30%, respectively. In Kuwait, which abandoned its peg to the dollar in May 2007, oil exports are forecast to average $80bn this year and next, up from $55bn in 2006. But despite the 8.5% appreciation of the dinar against the dollar, the year-on-year inflation rate hit 11.4% this April, indicating the limited effect of the currency appreciation.
Bahrain’s role as a regional financial centre showed strong progress with wholesale and retail banking assets, at end-2007, growing by 31% year on year to $245bn including growth in credit to the construction sector of 85% as of March 2008.
The report says most GCC banks showed strong profitability: “With the exception of Saudi Arabia, year-on-year growth in net income in Q1 2008 stood in the double-digit range across most top-tier GCC banks, a reflection primarily of the rapid growth in credit, a sharp decline in funding costs (triggered by the fall in policy interest rates) and high fee-based income. In Q2 2008 we expect Saudi banks to join the GCC-wide growth momentum in bottom lines due to the accelerating growth in private sector credit (33.4% in May 2008) and the steady growth in fee-based income, particularly from investment banking operations.”
