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Gulf economies grew 7.4% last year

UAE, Qatar and Saudi Arabia main engines of growth as nominal GDP touches $1.34tr

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Gulf News

Dubai: The real gross domestic product (GDP) of the oil-rich six Gulf states registered a year-on-year growth of 7.4 per cent in 2011, up from 4.8 per cent in 2010, according to National Bank of Abu Dhabi report.

The GCC's nominal GDP reached a record $1.34 trillion (Dh4.92 trillion) in 2011, a sharp increase from $1.08 trillion in 2010.

The GCC economy is estimated to be the 14th largest in the world in 2011 after Australia.

Qatar, Saudi Arabia and the UAE were the main engines of GCC growth in 2011, with the latter two benefiting from higher oil production to compensate for the disruption in Libyan oil supplies.

The average oil price in 2011 was $105.50 per barrel (Dubai spot), up 35.2 per cent from 2010 and higher than the 2008 price which averaged $94 per barrel. As a result, the GCC's nominal GDP is projected to be up 24.6 per cent year-on-year in 2011, after 17.7 per cent growth in 2010.

These growth rates are in stark contrast to 2009 when GCC nominal activity contracted by 19 per cent.

Global slowdown

"Real and nominal GDP growth rates in the GCC are expected to slow down in 2012 because oil production and prices are not expected to be higher," Dr Gıyas Gökkent, NBAD's group chief economist, said.

"There may be a reduction in GCC oil output as Libyan supply comes back on stream and oil prices may come under pressure due to an expected global slowdown."

The upside risk to oil prices looks likely to hinge on geopolitical tension. The effect of the boost from natural gas expansion to Qatar's output growth will fade going forward as the country has a self-imposed moratorium on further development and current targets have been achieved.

"GCC real GDP growth is forecast to ease to 4 per cent in 2012. Prospects remain clouded depending on the severity of the fallout from the sovereign debt crisis in the Eurozone periphery," he said.

"The US Energy Information Administration projects oil prices at about $100 per barrel provided the global economy does not slow down markedly. Under this assumption, forecasts indicate that the GCC's nominal GDP will be $1.36 trillion in 2012. The UAE's nominal GDP is forecast to rise to $344 billion in 2012."

The pace of non-oil growth is expected to remain at a similar level to that in 2011. Broadly, the strength of non-oil activity across the GCC will be a function of credit growth.

Qatar's non-oil sector continues to grow the most rapidly in the GCC and an annual loan growth of 23.8 per cent as of November 2011 reflects the breakneck speed of growth there.

"The region has experienced tremendous transformation and rapid change amidst global uncertainty," Abdullah Al Awar, chief executive officer of the DIFC Authority, said.

"In 2011 two developments affected the outlook of the region: the political and social unrest following the surge in global oil and food prices," he added.

"Although the long-term benefits of the Arab Spring are indisputable, since the beginning of this year the region has witnessed econ-omic pressures driven by internal and external sources. Hence, a broad reform agenda needs to be identified to rebuild those affected countries and to rekindle organic economic growth," he said.

"Infrastructure development is particularly important, as it is the foundation of overall economic growth. There is a lot to be done to identify opportunities and manage investment risks in the region."

Pace of lending

The pace of lending has been picking up in Saudi Arabia in recent months and the banking system has adequate liquidity to support this with a loan to deposit ratio of 80 per cent, Gokkent said.

"The fiscal stimulus packages that were unveiled in [the first quarter of 2011] will lead to greater non-oil activity in Saudi Arabia. The UAE remains a two-tier story in respect to where credit growth is likely to come from. Loan growth has been more rapid for Abu Dhabi-based banks than the remainder of the UAE banking system since 2008 and this state of affairs is likely to persist," he said.

The fiscal and current account balance outlooks remain positive across the region in the base case outlined above. GCC budgetary expenditures remain at record levels as these economies have pushed ahead with diversification and also responded to political turmoil in the Middle East and North Africa with higher spending.

The fiscal breakeven oil price in a number of other GCC economies hovers in the $80 per barrel range. Oman announced that the fiscal breakeven oil price for its 2012 budget would be $88 per barrel.

These levels are more than two to three times the fiscal breakeven oil price in 2005-2007 and represent a source of vulnerability in case of a fall in energy prices.

"Events in the region show clearly the role Pol-itical Risk Insurance can play in attracting foreign investment into countries which need it the most," Dr Abdul Rahman Taha, chief executive officer of the Islamic Corporation for Insurance of Investments and Export Credits, said.

Inflation factor

Inflation eased broadly in 2011, reflecting the dissipation of price pressures and, to some degree, price controls. Commodity prices came off their highs earlier in the year.

The Food and Agriculture Organisation's food price index was down 9.5 per cent in November 2011 from its peak in February.

The strength of the US dollar is disinflationary for regional economies.

The large recent salary increases to government sector employees in the region could lead to some demand pull pressure, but given muted credit growth and limited cost push pressure, inflation is not a concern at this time.

The consumer price index in the UAE was actually down 0.1 per cent in November 2011 from a year earlier. At the other end of the spectrum, the inflation rate in Saudi Arabia stood the highest in the GCC at 5.2 per cent year-on-year.

Large spending plans in a number of countries mean that some inflationary pressure may arise, but this is likely to be contained. Inflation in the GCC is expected to remain in low single digits in 2012.