GCC Oil Income May Exceed $180 Bn; Interest Rate Is Higher; Assets Boom.

High world crude oil prices have translated into the biggest economic boom in the six Arab Gulf Co-operation Council countries since 1974/75. This time, however, the six member-states are not squandering their money the way they did in the 1970s. Despite fears that the 25 basis points discount interest rates hike imposed recently by GCC central banks will have a dampening effect on asset prices in regional stock markets, this part of the world is set for another year of strong GDP growth in 2004 into 2005 thanks largely to the buoyant oil prices.

The latest quarterly regional economic report of Standard Chartered Bank (SCB) predicts that oil export revenues in the GCC could top $180 bn in 2004. And GCC countries are likely to achieve a fiscal surplus of $60 bn in 2004, i.e., about 15% of the GCC economy.

GDP growth rates forecast for 2004 are all high, except for Oman at 4.3%. Qatar, according to SCB, will have the highest GDP growth rate in 2004 at 10%, followed by Saudi Arabia and Kuwait at 8% each, and the UAE at 7%. According to APS estimates, Abu Dhabi's GDP growth rate in 2004 far exceeds that of Qatar.

The SCB forecasts for 2005 drop dramatically, with Saudi Arabia seen struggling to maintain a GDP growth rate above 1%. However, the SCB is assuming a big drop in world demand for Saudi oil, which is most likely not to be the case. Qatar is the only GCC economy predicted by the SCB to maintain a growth momentum of 6% in 2005.

The same applies to SCB estimates of current accounts, with Saudi Arabia projected to have a $49 bn surplus in 2004 falling to $24 bn in 2005. APS Energy Group says the SCB estimate for the Saudi surplus in 2005 is too conservative.

The latest GCC Market Review for October 2004 of Kuwait-based investment bank, Global Investment House (GIH), is bullish about the outlook for the GCC markets in 2004 and 2005; and for the world oil price scenario. Crude oil prices, says the Review, will continue to remain at a much higher level throughout the current year mainly due to strong demand, low inventory levels, continuing uncertainty over Russian oil giant Yukos, tensions in Iraq and Nigeria, and the slow rehabilitation of oil and gas supply infrastructure damaged by the hurricane Ivan in the Gulf of Mexico.

The re-election of President George W. Bush will no doubt boost the outlook for oil sentiments of the above two reports, given that demand may further rise as the US tries to restore its strategic oil stockpile to accepted levels (see OMT of this week).

However, even GIH, characterised by its generally optimistic views of the GCC markets, is hedging its bets. It says: "We don't believe the oil prices to go down substantially in the short term which will lead to a considerable fiscal surplus for all the GCC economies. However, this is not to say that the current GCC valuations are driven merely by a strong liquidity in the system. Liquidity is only one of the factors, which has been driving the markets, but the important things are the overall fundamentals and structural changes in the economies which are going to drive the GCC stock markets further".

In September 2004, the UAE and the Saudi stock markets were the strong performers with a net gain of 6.5% and 4.8% respectively. GIH dismissed concerns of over-valuation of GCC stocks in terms of price to book and historical price to earnings, and that such ratios are unsustainable especially for banks in the GCC in the short-to-medium-term.

Also dismissed by GIH and other analysts in the GCC region as unfounded are concerns about over-investment, and the fact that demand will slow but capacity will rise leading to pressure on margins. GIH's Review points to the continuing diversification of the GCC economic base away from oil, and with the opening up of other sectors such as telecoms, banking, and real estate.

Corporate earnings are up and the momentum would not be sustainable in an economic climate which is not buoyant and with plenty of business opportunities. GIH predicts that private sector finance and investment and privatisation should provide "further stimulus to GDP growth". The cement production and construction industries are singled out for buoyant growth, with GCC cement consumption estimated to increase from 38.274m tons in 2003 to 50.295m tons in 2004. Not surprisingly it recommends GCC cement companies as a good investment option.

GIH has a catchall style which is heavy on numerical increases or decreases relating to this or that stock ratio, criteria, or fundamentals. However, it pays scant attention to structural and policy details, especially factors that may impact on market risk and confidence.

The construction industry in the region, for instance, may be booming due to the buoyant real estate market as GIH has reviewed, which some analysts stress is due for a correction. However, the death of five construction workers at Dubai International Airport's expansion project has, once again, raised concerns about health and safety provisions and safeguards in the GCC. These have added to the costs of turnkey contracts and the cost risks being faced by EPC contractors.

Independent labour unions are absent, and investigations tend to be carried out internally usually by the companies involved. There is a general concern that a construction and property market boom is driving unrealistic production schedules for projects to be completed as soon as possible (see down18cNov1-04).