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High oil prices, broad based business recovery, and rising foreign capital inflows are expected to see faster economic recovery in GCC led by the UAE and Saudi Arabia. Image Credit: Ahmed Ramzan/Gulf News

Dubai: High oil prices, broad based business recovery, and rising foreign capital inflows are expected to see faster economic recovery in GCC led by the UAE and Saudi Arabia, according to economists.

“Elevated oil prices, higher oil production and robust momentum in non-oil activity, buoyed by rapid vaccination, will see GCC GDP growth print at 6.1 per cent in 2022 – fastest pace of cyclical expansion since 201,” said Ehsan Khoman, Head of Emerging Markets Research at MUFG.

Based on consistent improvement in economic conditions led by improving fiscal and external balances, many economists have revised their growth outlook of GCC in recent weeks.

The Institute of International Finance (IIF) has forecast GCC’s aggregate growth to pick up from 2.8 per cent in 2021 to 5.2 per cent in 2022 supported by higher hydrocarbon production and prices leading to combined current account surplus to surge from $131 billion in 2021 to $182 billion in 2022.

The International Monetary Fund (IMF) is expected to revise the region’s GDP outlook upwards in its World Economic Outlook Report towards the end of January.

Economists see Saudi Arabia and the UAE leading GCC’s real GDP growth in 2022 given the impressive recovery in non-oil GDP, with a rebound in domestic demand and higher investment levels.

The latest PMI data signals that readings remains robust in both countries, strengthening the view that rising oil prices and low COVID-19 infection rates are set to deliver a cyclical lift for the region.

Fiscal strength

Higher government revenues from rising oil prices and spending cuts following the COVID-19 crisis has seen marked improvement in government balance sheets with drastic reduction in budget deficits.

Improved government finances have seen the sovereign credit profiles of most GCC countries improving. With better fiscal strength and credit standing most GCC states stand to benefit in terms of stabilization of credit ratings.

“From a relative basis, GCC real GDP growth will cyclically lead all other major regions across the world in 2022 bar Asia owing to a combination of higher oil (prices and production) and non-oil growth, buoyed by broader structural support,” said Khoman.

Capital flows

Rising regional economic competition combined with rapid economic reforms have added impetus to non-oil economic activity across GCC leading to higher foreign investment.

The latest estimates by the Institute of International Finance (IIF) show non-resident capital flows to the six GCC states reached $142 billion in 2021, an increase of $21 billion from 2020. This increase was driven by a surge in foreign direct investment (FDI), particularly to Saudi Arabia and the UAE.

“We expect higher FDI in the energy sector in the kingdom to raise crude oil and natural gas output capacity. In the UAE, elevated FDI is driven by the friendly business environment, excellent infrastructure, predictable policies and political stability,” said Garbis Iradian, Chief Economist, Middle East and North Africa of IIF.

Impact of rate hike

GCC’s banking sector is well-geared to support the post-COVID recovery of the region’s economies.

Unprecedented monetary policy and support measures announced during the pandemic have strengthened the financial system, with the economic recovery firmly on-track, authorities are slowly withdrawing support measures.

Although regional interest rates are set to go up in tandem with the Fed rate hikes, higher oil prices and lower requirement for government borrowings in the context of improving fiscal situation rate hike impact on government finances are expected to be negligible.