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Solid GCC growth expected despite global risks, says NBK.

The next two years are expected to be a further period of solid economic growth in the GCC, supported by high oil prices, strong government financial balances and a continued wave of public spending on infrastructure projects and social items, according to NBK's latest GCC Outlook.

Real GDP growth is seen dipping from 5.1 per cent in 2012 to 3.5 per cent in 2013, though the decline is largely due to a policy-driven cut in oil output from Gulf OPEC members. Non-oil growth - a better measure of underlying economic performance - will stay close to five per cent, slightly above the average of the previous three years. Oman may be the region's fastest growing economy in 2013, knocking Qatar off the top spot it has held for eight years.

Despite a sharp drop in oil prices in Q2 2012, NBK expects regional crude oil production to stay close to its recent high of 17.2 million barrels per day (mbpd) this year, as Saudi Arabia and other Gulf exporters seek to boost stock levels to guard against non-GCC supply disruptions. Oil prices are assumed to average $110 per barrel (pb) this year and fall to $100 pb in 2013, driven by higher stock levels and a weak global economy. In response, Gulf oil production is expected to ease back next year.

However, NBK said, "The risks to the overall growth outlook have nonetheless become more apparent. A long recession or break-up of the Euro zone could generate a sharp fall in oil prices, which would weaken Gulf governments' fiscal positions, undermine confidence and potentially create challenges in financing infrastructure projects. It would also damage the prospects for those large corporates undergoing debt restructurings. Even if the Euro zone muddles through, the prospect of a major - and sudden - fiscal contraction in the US in 2013 represents a huge risk to the global economy. Under these conditions, we think Gulf non-oil growth would slow, though avoid recession.

"In spite of healthy activity levels and a pick-up in money and credit growth, inflation has generally remained low and even decelerated in some countries. On a weighted average basis, it stood at three per cent in May. The fall in global food prices of H2 2011 and soft housing markets in the UAE and Qatar have helped, but core inflation also remains subdued. Stable food prices, low inflation rates abroad, the impact of the strengthening US dollar on import prices and a continued emphasis on cost control amongst regional businesses will help keep price pressures muted. We see average inflation of close to three per cent this year and next.

GCC government spending surged by 22 per cent last year. Yet the combined GCC budget surplus actually rose to 11 per cent of GDP thanks to a 49 per cent jump in oil revenues. While the aggregate fiscal position is sound, rising spending commitments have increased vulnerabilities to lower oil prices. Budget breakeven oil prices now range from $72-115 pb, compared to around $30 pb in 2005. A sustained period of lower oil prices would increase the need for fundamental fiscal reform.

Full country-by-country analysis and forecasts for the GCC region appears in the latest GCC Outlook publication, which may be accessed on

2012 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Aug 4, 2012
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