Driven by high oil revenues GCC rebound to remain strong till 2023

The International Monetary Fund economists expect countries in the Middle East, especially the GCC, to gain up to $1.3 trillion in the next four years from additional oil revenues



The Gulf states are major hydrocarbon producers and are benefiting from the surge in oil prices. — File photo
The Gulf states are major hydrocarbon producers and are benefiting from the surge in oil prices. — File photo
by

Issac John

Published: Thu 8 Sep 2022, 7:02 PM

High oil revenue and easing of pandemic restrictions are creating positive spillover effects on the GCC’s non-oil sectors and accelerating an economic rebound that will remain strong through 2023, economists and analysts said.

After expanding by four per cent in 2021, the real GDP in the non-hydrocarbon sector is expected to grow by 3.6 per cent in 2022 in the GCC, still, well above the average 2.3 per cent growth rate between 2016 and 2019, analysts at Moody’s Investor Service said.

“The Gulf states are major hydrocarbon producers and are benefiting from the surge in oil prices. Despite the recent modest easing in prices, we expect the price of Brent crude to remain at $105 per barrel in 2022 and at $95 per barrel in 2023, well above the 2021 average of $70 per barrel. Also, as it braces for a global economic slowdown to hit demand, Opec+2 agreed to start reducing oil production by October 2022,” Badis Shubailat, an analyst at Moody’s Investor Service said.

The International Monetary Fund economists expect countries in the Middle East, especially the GCC, to gain up to $1.3 trillion in the next four years from additional oil revenues. The gains, due to high oil prices, will provide 'firepower' to the sovereign wealth funds (SWFs).

IMF director for the Middle East and North Africa, Jihad Azour has said that most of the oil and gas exporters in the region have large SWFs and have been using them to use the windfall in further investments. He estimates the GCC growth rate at 6.4 per cent.

Islamic banks boost

Moody’s observed that high commodity prices and the easing of pandemic restrictions will also be supporting strong economic recovery across major Islamic finance markets over the next 12 to 18 months, boosting the financial performance of Islamic banks. The Gulf states, Malaysia and Indonesia are benefitting from a price surge in key exports like hydrocarbons and palm oil.

“Economic growth of GCC countries, Malaysia and Indonesia is accelerating in 2022 and will remain strong in 2023, driven by the easing of pandemic restrictions and the high prices of commodities such as hydrocarbons and palm oil. Inflation in these countries will also remain moderate because of government subsidies and policy rate hikes,” said Shubailat.

The economic rebound will keep the asset quality of Islamic banks stable while driving up profitability. Islamic banks can therefore maintain strong capital and liquidity buffers, enabling them to capitalise on the growing demand for Shariah-compliant financial services, Moody’s said.

Strong economic recovery will keep the asset quality of Islamic banks stable. Improving economic conditions will keep the performance of Islamic financing stable despite the unwinding of regulatory forbearance. The focus on retail financing will support asset quality because of its secured and diversified nature and prudent underwriting by Islamic banks. In addition, financing to public-sector employees, who enjoyed stable employment during the pandemic, constitutes the lion's share of retail financing in the GCC region.

“Over the longer term, Islamic banks in the GCC will also benefit from the economic diversification agendas of countries, which aim to promote higher employment levels among citizens in the private sector. There will also be growth opportunities in the housing market as a result of state-led homeownership programs, particularly in Saudi Arabia. Still, economic diversification plans are significant undertakings and their successful implementation is not guaranteed,” the rating agency said.

Strong provisioning buffers built up during the pandemic will also mitigate asset risks. Profitability will recover to pre-pandemic levels. The return on average assets of Islamic banks will improve as provisioning needs decline since they have set aside sufficient reserves through precautionary provisioning. Their profitability will also be driven up by the rise in interest rates, particularly in the Gulf states where domestic currencies are pegged to the US dollar. Their cost-income ratios will remain stable, with increases in technology spending offsetting efficiency gains from digitalization. Islamic banks will have ample capital and liquidity to grow further. They will continue to maintain strong capital and liquidity buffers, enabling them to capitalise on the demand for Shariah-compliant financial services, Moody’s noted.

— issacjohn@khaleejtimes.com


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