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GCC insulated from global shocks
Issac John / 19 November 2012
Slower growth in the US, eurozone and China would have knock-on effects in the GCC, but the region is “insulated” from potential global economic shocks on the back of strong sovereign wealth fund assets and international reserves, according to Qatar National Bank, or QNB.
The regional macroeconomic environment now is stronger than it was in 2009, which should help insulate the GCC from global economic shocks, the bank said in a report.
International reserves have risen steadily over the last three years, reaching $694 billion (20 months of import cover) in June 2012, up by 47 per cent from $473 billion(18 months of import cover) in 2009.
Additionally, the region’s sovereign wealth funds, or SWFs, have external assets valued at just under $1 trillion, according to the IMF. Therefore, SWF assets and international reserves collectively total over 120 per cent of regional GDP.
The knock-on effect on the GCC will be mainly through weaker demand for oil from the hard-hit economies and its impact on oil prices, the bank said.
“The outlook for the global economy remains gloomy with some key risks: a looming fiscal crisis in the US, potential for further disruption from eurozone sovereign debt crises and a potential slowdown in the Chinese economy from previously high growth,” the report said.
The International Monetary Fund, or IMF, estimates that one per cent lower real gross domestic product, or GDP, in either the US or euro area would lead to 0.4 per cent lower GDP in the GCC a year later, while a one per cent fall in China’s growth would lead to a 0.1 per cent fall in the GCC.
Since over a fifth of GCC oil exports are to China, the EU and the US, a simultaneous demand shock in these countries could have a significant impact on demand for GCC exports, the bank observed.
“Slower growth in these major economies — responsible for 44 per cent of oil and 35 per cent of gas consumption — would be likely to drive down hydrocarbon prices. This in turn will have a stronger impact on GCC export revenue, reducing fiscal and current account surpluses and potentially leading to weaker economic activity,” QNB said.
During the global recession in 2009, oil prices fell by 37 per cent and liquefied natural gas spot prices by 27 per cent. As well as reducing export revenue, this contributed to a 0.2 per cent contraction in GDP in the GCC as oil production was lowered in response to lower demand and prices. “Consequently, some investment plans were scaled back with the deteriorating economic climate,” it said.
However, in terms of the domestic economy, the buffers have narrowed. While rising government spending, particularly on wages, has supported the non-oil economy, it has also driven up the fiscal breakeven oil price (the price at which government budgets are likely to be balanced). In Qatar and Kuwait, the breakeven price rose by just over $15 a barrel from 2008-12 to around $40 and $50 respectively. In Oman, Saudi Arabia and the UAE, the breakeven price is around $80.
The bank argued that although this remains below oil prices of over $100, a sustained drop in oil prices could prompt some GCC countries to implement fiscal consolidation, which may lead to softer growth in the non-oil economy.
The IMF recently analysed the impact on GCC fiscal and external balances of a $30 drop in the price of a barrel of oil to around $70 in 2013, with prices remaining lower and declining to $60 in 2017.
According to the QNB Group, it is important to note that the IMF scenario is extreme. It would probably require a series of crises to unfold, such as sequential sovereign defaults in Europe, combined with a failure to avert the US fiscal cliff and a credit implosion in China. All these events unfolding in the near future could be enough to drive oil demand and prices down to $60 for a sustained period. In comparison, QNB Group expects that oil prices will remain broadly stable at $110 in 2013.
The IMF estimates that its low oil price scenario would erode the overall GCC current-account surplus (currently around 25 per cent of GDP) by 2017. The IMF has observed in its IMF’s latest Middle East, North Africa and Pakistan Outlook report that GCC growth remained robust, but is expected to slow from 7.5 per cent in 2011 to 5.5 per cent in 2012 and to 3.73 per cent in 2013, mostly due to a tapering off of oil production.
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