Growth story: The non-oil-and-gas economy takes the lead as expansion continues

With public expenditure rising and a general improvement in international economic conditions in recent years, growth estimates across the region for the six GCC member states are expected to be in the 4-5% range, with the non-oil-and-gas economy also taking the lead, once again outstripping hydrocarbons in terms of the rate of expansion.

Priorities

Notwithstanding, there are still some uncertainties and challenges. With the member states located in a region affected by long-standing political and security risks, such factors have to be built into any assessment. At the same time, energy price fluctuations and the vagaries of global demand, along with the impact of tapering in the US, are also likely to have outcomes in the Gulf – particularly where currencies are still pegged to the US dollar.

Yet the sheer scale of the expenditure already under way, along with expected boosters to this from the next phases of major public and private investment programmes, make for a likely continuing growth story, drawing in significant international interest.

Common Factors

Although each GCC country has particular circumstances, all are affected by a number of common global economic and financial factors. The first of these is oil and gas prices, especially given the key role that the GCC plays in meeting international demand for these vital commodities.

With the 2008 global financial crisis, oil and gas prices initially fell considerably, in turn negatively affecting GCC economies. Since late 2010, however, they have been gradually regaining pre-crisis levels, despite occasional slumps. In 2013 oil prices largely held steady at over the $100-a-barrel mark for Brent, with factors such as supply disruptions in Libya keeping prices elevated. The IMF calculated $104.11 as the yearly average barrel price for Brent.

Despite this stable trend, most governments among GCC member states set their budgets according to more conservative assumptions; Qatar, for example, assumed a $65 a barrel price for 2013/14, while Kuwait used $70 and the UAE set $89. Budgets so far announced for 2014/15 have stayed true to this policy, too, with Qatar maintaining its $65 a barrel assumption, while Kuwait went up to $75.

Conservative budgets have resulted in some large surpluses in the region in recent years, giving current public expenditure programmes a robust financial base, while cushioning against any future price shocks.

Early signs are that budget assumptions should also result in surpluses for 2014/15, if the forecasts for Brent circulating at the start of the second quarter of 2014 prove accurate. The US Energy Information Administration (EIA) expects $104.88 a barrel, while the IMF assumed $104.17 at that time.

Yet, in the longer term, most analysts see prices falling. This is largely due to supply-side changes. For example, there is the growing impact of fracking, particularly in the US, which may even become the world’s largest oil producer by 2020, according to the International Energy Agency. More immediately, it is thought that supply is likely to rise with the return of Libya as a producer, while Iraqi oil should also flow in greater quantities. Recent moves of rapprochement between the US and Iran may also enhance global supply.

Looking Ahead

At the same time though, these increases are likely to be partly offset by decreasing or plateauing supply from the GCC countries themselves. This is partly to do with the natural exhaustion of reserves, and also to do with deliberate policies of conservation, such as Qatar’s moratorium on gas exploration, which is due to run into 2015.

On the demand side, much depends on the overall level of global economic activity. The IMF’s 2014 “World Economic Outlook” report forecasts global economic growth of 3.6% in 2014, up from around 3% in 2013, with 2015 predicted to see 3.9%. Developed economies will see growth nearly double to 2.25%, while emerging market growth will be roughly 5% in 2014 and 5.25% in 2015. China, on which much activity depends, should see growth stabilise at about 7.5%.

International trade volumes have also been growing and are expected to continue to do so. The 2014 IMF report notes that the global volume of trade in goods and services increased by 2.8% in 2012, then 3% in 2013. The forecast for 2014 is 4.3%, followed by 5.3% in 2015. This represents a significant uptick, with the GCC likely to benefit directly, given the importance of international markets to member states. Calculated all together, the IMF predicts that the oil price per barrel will reach $98.47 in 2015, while the EIA forecasts $100.92. Both estimations still allow for a large margin in GCC budgets so far announced, yet underscore the need for more stringent management of resources and expenditures going forward.

Diversifying

The trend also makes clear the importance of non-hydrocarbons for ensuring continued economic growth. Diversification has been a policy across the GCC for a number of years, with the results already demonstrable. Indeed, a February 2014 report by Kuwait Finance House Research suggested, for example, that while the GCC economy as a whole would expand 4.5% in 2013/14, growth in the non-hydrocarbons sector would exceed this, at 6%. Much of the growth in the GCC over the next few years will come from large-scale, non-oil-and-gas infrastructure investments. Around $2.4trn in projects are either planned or under way at present among member states, according to business intelligence publication MEED. The healthier state of the international economy following the subsidence of the 2008 global financial crisis has been a major boon.

Foreign direct investment (FDI) in the GCC is also likely to accelerate going forward, with non-oil-and-gas projects acting as magnets for investment. The UAE, for example, expects FDI to increase from $12bn in 2013 to $14.4bn in 2014. The positive overall scores for GCC economies in the World Bank’s 2014 ease of doing business report is also helping to attract investors. At the top of the bloc in the latest rankings are the UAE at 23rd and Saudi Arabia at 26th, followed by Bahrain, Oman and Qatar in succession at 46th, 47th and 48th, respectively. Meanwhile, Kuwait has some work to do to catch up from its spot at 104.

Attractive Ratings

The credit ratings issued to GCC economies also contribute to strong investment sentiment. Moody’s, for example, rates Saudi Arabia Aa3, while the UAE, Qatar and Kuwait all received Aa2. Oman and Bahrain are Aa1 and Baa2, respectively.

The US Federal Reserve’s quantitative easing policy, meanwhile, which began to taper off in 2014, has helped to keep global liquidity levels high in recent years. This affects GCC countries in a number of ways. All of the GCC states except Kuwait have their currencies pegged to the US dollar (and Kuwait maintains a basket peg, widely thought to include the dollar), meaning that as US interest rates rise, central banks in the Gulf must follow suit. Thus, finance becomes more expensive, potentially affecting project development. Yet the effect of this on GCC currency rates has been generally muted. Certainly, the peg has been well supported and GCC bond yields have benefitted, while, with the exception of Kuwait, there has been little forward stress on GCC currencies since tapering began. Perceptions of low risk and strong buffering have in fact protected the GCC from many of the cross currents visible in emerging markets in 2013/14. While many of these markets’ stock exchanges saw poor results in 2013/14, the GCC’s exchanges all outperformed the MSCI Emerging Markets index.

As the dollar strengthens, oil and gas revenues also increase, as they are priced in dollars, boosting revenue for the GCC. At the same time, however, there may be some inflationary pressure, as imports, often also priced in dollars, rise in price too.

Growth Prospects

Most analysts do not see this as a major factor though, with price hikes more likely to be the results of bottlenecks in supply, as major construction projects in particular choke up ports. One recent cause of inflation – real estate prices – also seems to be generally under control in GCC countries, although this continues to be closely monitored. In early 2014 there were signs that rental increases were coming down in Qatar, although they were creeping up still in the UAE.

Putting all these factors together, most economists remain confident that the GCC will see a positive 2014. Indeed, the IMF forecasts a growth rate of 4.1% for the year, which most other estimates echo. While tapering may affect global liquidity, the GCC looks likely to maintain a high level of liquidity due to ramped up public expenditure. The region’s banking system also remains well provisioned and capable.

The main area of uncertainty lies in the wider regional risks. Although GCC economies have performed well in the face of turbulence in neighbouring Arab states, this volatility is likely to continue to have an influence on events in the Gulf. At the same time, the GCC has long been adept at guarding interests against such uncertainties. With a growing population, major projects to implement and strong economic credentials, the GCC region looks set for a busy year ahead.

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The Report: Saudi Arabia 2014

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