Can Gulf economies ride a wave of higher growth? Oil prices should help
Oil prices are surfing at optimum levels, which will play just right for GCC state budgets
As we approach 2024, the global, regional, and local economic landscapes are passing through significant transformations, which would eventually impact at multiple levels.
It is crucial to analyze these to understand their effect on investor behaviour as well as the investment strategies of governments, particularly on public spending. Economic growth is largely influenced by the scale and focus of such spending, making it vital to consider all key future developments in this area.
The oil industry continues to play a significant role in shaping government spend and, subsequently, affect the performance of multiple sectors, including the financial and trade. The outlook for oil appears promising, with Goldman Sachs having indicated in November that average prices for 2024 could reach $92 per barrel. This projection is underpinned by strong demand and limited supply.
To put this into perspective, the World Bank reports that this year's average oil price was $81. It, in turn, means GCC countries will be comfortably placed, as earnings at these price levels should yield the necessary revenues for balanced national budgets - or even get surpluses rather than the previously declared deficits.
Fortunately, the Gulf economies are set to be among the least affected, thanks to their robust financial positions from high oil prices, a trend anticipated to continue.
Another factor set to impact the economic landscape of the GCC is the anticipated cuts in interest rates in 2024. This trend appears likely following the decision this month by the US Federal Reserve to maintain interest rates in the range of 5.25–5.5 per cent, a stance mirrored by the European Central Bank and the Bank of England.
Fitch Ratings, the credit rating agency, has indicated the Fed may reduce interest rates three times in the coming year, after a potential, yet uncertain, final increase in January. Given the pegging of their currencies to the dollar, GCC central banks are expected to align with any such changes.
Curbing menace of high inflation
Such shifts are likely to have gradual, yet significant, effects on Gulf economies. Over the past three years, they have been impacted by consecutive interest rate hikes, implemented by Washington and Brussels to curb inflation that soared to unprecedented levels of 10–12 per cent. (Some countries successfully managed to lower the inflation rate to 3–4 per cent, inching closer to the targeted 2 per cent.)
The Gulf economies found themselves in a situation where they had to refrain from raising interest rates, which can hinder economic growth. This was primarily due to the absence of high inflation rates, as all GCC countries maintained rates below 3.5 per cent. However, the currency peg to the US dollar limited such options, and having to align interest rate policies with the dollar peg.
This had notable impact on key sectors such as services, real estate, and the financial services. Some companies experienced profit declines primarily attributed to the increased cost of borrowing.
As the phase of reducing interest rates starts in 2024, a return to normalcy is expected to unfold, aligning well with the economic conditions of the Gulf. This should stimulate an uptick in business activity and foster higher growth.
Companies and institutions in the Gulf, strained by high lending costs, faced challenges including declining share prices and profits due to heavy debt service obligations. With lower interest rates, they should see gradual improvement in profitability.
A new recession?
Despite developed economies successfully navigating away from the danger of stagflation, discussions persist about the potential emergence of a new global recession. In such an event, the global economy, including trade in goods and services, could experience a notable slowdown, which would have varying impacts on different countries.
Fortunately, the Gulf economies are set to be among the least affected, thanks to their robust financial positions from high oil prices, a trend anticipated to continue.
It remains critical to monitor developments to preclude any surprises. This proactive approach is particularly important in light of predictions about significant geopolitical changes in the Middle East, which could influence the economic conditions…