David Hauner, head of emerging EMEA economics at Banc of America Securities – Merrill Lynch, provides an economic snapshot of the emerging markets from the Arabian Gulf. The following is an extract from a BAS-ML Emerging EMEA Economic Weekly report out this week titled: Fiscal vulnerabilities rising.
Saudi Arabia
As the world’s largest oil producer, Saudi Arabia bears the brunt of mandated production cuts which will see the oil sector contract in 2009 (BAS-ML estimate: -10%), leading to a contraction in overall growth of -0.2%YoY from 4.2% growth in 2008. The non-oil sector growth will remain positive and will be supported by continued fiscal stimulus, as the government remains committed to its development plans. Despite the dimmed global outlook, Saudi’s large, closed and under penetrated market is a stable source of growth. Still, as oil prices fall this will lead to erosion of the current account surplus (BAS-MLe: 3.7% of GDP) and a budget deficit (BAS-MLe: -1.9% of GDP). Inflation will come down in 2009 (BAS-MLe: ave. 3%YoY) due to slowing economic activity and stronger US dollar.
Qatar
Qatar will remain one of the fastest growing (BAS-MLe. 5.7%) economies despite lower oil prices, thanks to its status as the largest exporter of LNG (which has long-term, fixed contracts) in the world. Still, as a result of OPEC mandated cuts hydrocarbon sector growth will fall to the single digits. The non-oil sector will also slow as the investment driven, capital intensive growth is capped by the credit crunch and global economic downturn (BAS-MLe. 5.0% YoY). Budget and current account surpluses will be eroded in line with oil prices (BAS-MLe: -2.2% and 5.8% of GDP, respectively). Inflation will also decline in 2009 (BAS-MLe. 2% YoY) largely due to falling housing prices.
Kuwait
The Kuwaiti macro story continues to be driven by oil, which has afforded the state the largest surpluses in the GCC region. Despite the fall in oil prices the current account and budget will remain in surplus (BAS-MLe: 27.8% of GDP and 8.9% of GDP respectively) owing to limited investment and spending commitments. The lack of political determination for diversification has caused Kuwait to lag most of its GCC neighbours so far and economic activity (BAS-MLe. -1.9% YoY) will be further hit by contraction in the oil sector in 2009. Still the sovereign’s large pile of cash should help the smooth the landing with strong government spending. Inflation as elsewhere continued to climb in 2008 (10.6% YoY) but will come down as growth slows in 2009 (BAS-MLe: ave. 2.8% YoY).
Oman
As a small, open economy with limited surpluses, Omani growth will have less cash to ensure a smooth landing in the face of the global downturn (BAS-MLe. 1.5% YoY). The economy was heavily reliant on high oil prices and boosting its hydrocarbon output to diversify away from oil and secure the revenues necessary for its plans. A US$15bn investment plan for the oil and gas sectors may be reconsidered due to high recovery costs, limited reserves and low oil prices. Non-oil growth will also stall given dependence on the services sector, especially tourism (BAS-MLe: ave. 2.0% YoY). Inflation (BAS-MLe: ave. 3.2% YoY in 2009) pushed up by food and rent prices, along with negative real interest rates, will come down with lower commodity prices, rents and credit expansion.
Bahrain
While the non-oil sector is the main driver of the resource-poor Bahraini economy, growth (BAS-MLe: 1.8% YoY in 2009) will come under pressure as financial services, the country’s largest sector, faces global headwinds. With limited petrodollars the country will struggle to maintain a strong fiscal stimulus to boost non-oil growth (BAS-MLe: 2% YoY) as lower oil prices push the budget into deficit (BAS-MLe: -4.3% GDP). Real estate, construction and finance accounts for 50% of non-oil growth in Bahrain, and the outlook for all these sectors have turned negative. Inflation should ease in 2009 (BAS-MLe: ave. 2.0%).
UAE
The UAE is the GCC’s most diversified, open and most leveraged economy which leaves it the most vulnerable in the
region. Domestic credit expansion, high population growth (c.6% YoY), infrastructure spending and the vibrant non-oil sectors (8.6% YoY) supported strong growth in the UAE of 7.4% YoY in 2008. In 2009, tight US dollar liquidity and less available external financing will pull down credit expansion, reduced infrastructure spending and ease real estate sector growth. As a result, the domestic credit crunch, global downturn and cuts in oil output (BAS-MLe: -9.5% YoY) will result in economic contraction (BAS-MLe: -1% YoY). Lower oil prices combined with lower output will drag the current account and fiscal balance into negative territory (BAS-MLe: -4.6% and -2.4% of GDP, respectively).
These finding were published by Banc of America Securities – Merrill Lynch, and authored by David Hauner, head of
emerging EMEA economics at BAS-ML.
