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Oil Price Rise Boosts GCC Recovery Prospects

DUBAI— The prospects of an early economic recovery in the GCC have brightened, with oil prices surging significantly higher than the $35-40 per barrel budgeted by member countries for 2009, a Saudi investment 
company said.

With the GCC economies now poised to earn an additional $16 billion every month due to higher oil prices, policymakers will have more authority and freedom to increase public spending to support economic activity, said the latest study by NCB Capital, the investment arm of Saudi National Commercial Bank. “Higher than previously estimated oil export earnings have shored up confidence in the private sector and increased the chances of an early economic revival,” the study said.

Dr Jarmo T. Kotilaine, Chief Economist of NCB Capital, said the GCC economic recovery depended a great deal on the revival of economic activities in the industrialised and emerging nations because of the impact their prospects will have on the all-important 
oil price.

The study noted that a spate of measures taken by regional governments to cushion the impact of the credit crunch could prevent a sharp contraction in their economies but was unlikely to spur growth.

“While policymakers have made impressive efforts to promote consumer spending, confidence remains fragile, not least because of the persistent troubles of Dubai and concerns over the financial health of parts of the corporate section in view of recent revelations. These problems have in turn delayed recovery in the credit and equity markets,” Kotilaine said.

Prospects for a sustained recovery were improving, even if they remain vulnerable to swings in sentiment elsewhere given the faster-than-expected turnaround in oil prices, which look likely to average $60 per barrel in 2009 and even higher in 2010, NCB Capital said. “The fiscal situation for 2009 already looks much stronger than estimates suggested during the beginning of the year,” it said.

The UAE, along with Qatar and Kuwait, which have budget break-even oil prices of lower than $50 per barrel, are set to post surpluses, the study said.

“Despite the increase in counter-cyclical spending by Saudi Arabia, the Kingdom might end the year with a marginal budget surplus of around 0.5 per cent of GDP, in stark contrast to the IMF forecast of 4.9 per cent deficit,” 
it said. However, the least hydrocarbon-sensitive economies in the GCC — Bahrain and Oman — will likely post the highest deficits, which will be met with accumulated reserves and new borrowings.

The GCC’s regional economy tripled in size, in terms of nominal gross domestic product, or GDP, during 2002-2008 to nearly $1.1 trillion, due largely to strong global oil demand, increased public spending, sustained economic reforms and the growing strength of the GCC corporate sector. In real terms, the GCC economy grew by 6.6 per cent in 2008 compared with 5.2 per cent in 2007, the NCB Capital said.

“The GCC region was able to post record-high fiscal and current account surpluses during the recent boom,” 
it added. The regional aggregate budget surplus in 2008 was 28.7 per cent of GDP, while the current account recorded the highest-ever surplus of 27.2 per cent of GDP in 2008 due to high oil prices and increased oil production levels. — issacjohn@khaleejtimes.com