Dubai: Economic growth prospects remain favourable for the Gulf Cooperation Council (GCC) countries, the Institute of International Finance said in its latest forecast for the region. The IIF estimates that the GCC will grow at 4.2 per cent in 2014.

Growth moderated from 5.5 per cent in 2012 to 4.2 per cent in 2013, largely due to a slower rise in crude oil production. Non-hydrocarbon real GDP growth, a more representative measure of economic activity, remained robust at 5.4 per cent in 2013, driven by higher public spending and stronger private sector activity.

Overall growth is projected to remain around 4 per cent this year due to continued restrained oil production to accommodate increased oil supply from the United States and Iraq, and tepid global oil demand.

Economic diversification in the GCC countries continues as signalled by the steady decline in the share of the hydrocarbon sector’s contribution to real GDP from 41 per cent in 2000 to 33 per cent now. However, GCC countries have not done as well in diversifying their domestic revenue base as the oil and gas sector’s contribution to budget receipts remained high at 84 per cent on average in the last three years.

“GCC countries will need to make further progress in economic diversification. Although hydrocarbon sector’s contribution to GDP has declined steadily, the budget dependence on oil revenues continues to be high,” said George Abed, senior counsellor and director for Africa and the Middle East at the IIF.

IIF estimates that some of the GCC countries’ fiscal stress could arise over the medium term if oil prices drop sharply while government spending continues to rise. Assuming an average Brent oil price of $105 per barrel in 2014 (as compared to $108 per barrel in 2013), the GCC’s external current account surplus, while declining, is expected to remain large at $287 billion in 2014. The consolidated fiscal surplus will also narrow from 10.6 per cent of GDP in 2013 to 8.3 per cent in 2014, reflecting slightly lower oil prices and higher expenditures.

As a result of the continued large surpluses, the IIF expects to see gross financial assets rise to $2.8 trillion by year-end. With relatively little external debt, the region’s net foreign assets would rise to $2.3 trillion (137 per cent of GDP) by end-2014. 

Private sector growth

Private sector growth is projected to rise further to 6.2 per cent in 2014 from 5.9 per cent in 2013, supported by buoyant domestic demand, and both private consumption and investment expenditures. Government sector growth is projected to slow to 3.5 per cent in 2014 from 5 per cent in 2013 as authorities across the GCC move to begin to rein in expenditure growth, which had been resurgent for nearly a decade.

Inflation is projected to remain subdued at about 3 per cent in 2014, reflecting both the absence of global inflationary pressure and the openness of the economies. However, in Qatar and the UAE some price pressures could emerge, driven by a rapid increase in housing and related costs. The UAE is projected to see a rise in average inflation from 1.1 per cent to 2.8 per cent as the property market recovers and the deflationary impact from rent declines is reversed.