KFH-Research prepared a report about the economies of GCC countries, where it expected that economies in that region will witness 6.5% growth in 2012 as a result of the support received by oil and gas sectors. The report also expected the total commercial balance will achieve a surplus that varies between USD 400-500 billion.
In addition, the report mentioned that the average inflation rate in GCC countries will increase to 4% this year, in light of the increasing prices of food items. It stated that interest rates will remain stable until 2014.
2012 Economic Outlook
Overall economic outlook remains positive for the Gulf Cooperation Council (GCC) at 6.5% y-o-y in 2012 (2011: 6.0% y-o-y) with continued support from the hydrocarbon sector. Crude oil price is expected to average USD96.8pb in 2012 and USD97.0pb in 2013 (2011: USD95.0pb) mainly due to strong demand from the emerging markets. The GCC is expected to benefit from the increased reorientation of external trade demand from developed countries in the West towards fast-growing emerging markets. Asia will be the most important emerging market region for the GCC as we believe oil consumption will grow by 4.4% per year on average over the next five years. Meanwhile, aggregate trade balance is expected to record a massive trade surplus of USD400.0-500.0bln in 2012 (2011: USD520.0bln) on the back of robust hydrocarbon exports.
Non-oil Sector Developments
According to the World Bank's "Doing Business (DB) in the Arab World 2012" report, governments in thirteen out of twenty Arab economies have implemented twenty regulatory reforms between June 2010 and May 2011 aimed at improving business environment for local entrepreneurs. Over the past 6 years, 94.0% of the eighteen Arab economies in the survey made their regulatory environment more business-friendly. We expect foreign direct investment (FDI) inflows into the GCC and productivity to improve in the coming years as significant number of business reforms are being implemented.
Inflation across the GCC showed a mixed trend in 1H12 as compared the pace in 2011, induced by a stronger USD, to which all GCC countries peg their currencies. Rental inflation divides the GCC region, with housing prices dampening overall price pressure in Bahrain, UAE and Qatar, but elevating in Saudi Arabia, Kuwait and Oman. The government's increased spending has put upward pressures on prices in Saudi Arabia and Kuwait. Meanwhile, falling rents curb the overall inflation from rising further in Qatar, UAE and Bahrain due to oversupply of house and government measures to restrain housing prices. Inflation has stabilized at levels well below the pre-crisis trend, helped by price control measures. For 2012, inflation rate in the GCC is expected to increase to 4.0% (2011: 3.7% y-o-y) due to rising food prices. The GCC countries are highly dependent on imported food, particularly cereals, oils and sugar. In the event of further food price increases, the GCC is expected to face higher import bills which will translate into domestic inflation.
Pegging of the GCC currencies to the US dollar inhibits flexibility of the interest rate movements in the GCC. We forecast policy rates in the GCC countries will remain untouched until 2014 as the Federal Reserve pledged to keep the US interest rates closer to zero in the next two years. We also believe that the GCC will remain committed in pegging its currencies against the US dollar, as it provides stability and the authorities seem not keen in changing the system.
Fiscal expenditure of the GCC is expected to remain high in 2012 as governments in the GCC continue to expand subsidies, transfers and public-sector wages to meet higher social demands and reduce unemployment. However, we expect GCC's fiscal balance to record a surplus of 15.3% of gross domestic product (GDP) in 2012 from 12.9% of GDP in 2011 as increased government expenditures will be counterbalanced by higher oil revenues.
The European Union (EU) is the largest trading partner for the GCC at 13.4% of total GCC's trade and 6.8% of total GCC's exports in 2010. In 2011, 78.9% of the GCC's exports to the EU were from mineral fuels and lubricants-related products. Exports demand from the euro-area, particularly for oil will remain weak following the sovereign debt crisis. Slower economic activities will lead to slower consumer demand for goods and services.