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GCC Economic Update

Source: Samba Financial Group

Highlights

• Stronger oil prices and an easing of the global financial crisis, have improved economic prospects in the GCC for the second half of the year. However, 2009 will still be a year of retrenchment and contraction. Real GDP growth will be stagnant, as credit growth slows sharply, private investment slumps, and oil production declines. State spending will continue to support the non-oil sector, but economic activity will be held back by the weakness in the world economy and trade.

• The economic downturn is likely to bottom out this year and GCC growth is expected to recover to 3.3 percent in 2010. This will be driven by a small increase in oil output, together with stronger non-oil growth as expansionary fiscal and monetary policies are maintained, supported by a modest global recovery in a benign inflationary environment.

• Liquidity is returning to the GCC in response to robust government measures and recovering oil prices. Access to capital markets is also beginning to pick up with new bond issuance by GCC governments, state-owned companies and banks. However, despite lower interbank rates and generally sound capital structures, GCC bank lending remained muted through the first six months of 2009, and concerns have mounted over rising loan defaults.

• To varying degrees GCC governments are attempting to ameliorate the global credit crunch and recession through robust countercyclical policies. Most 2009 budgets were based on an average oil price assumption of around $40-45/b. Thus the strengthening of prices to a projected average of $62/b this year means that expansionary policies can now be accommodated much more comfortably, and sustained into 2010. Most GCC countries are now expected to return to both current account and fiscal surpluses by 2010.

• Having been a major policy concern over the past couple of years, inflationary pressures are expected to remain muted during the next 18 months. Available data show that GCC inflation has already fallen steeply and, in a couple of countries, has switched to deflation. Inflation for the GCC as a whole is now projected to drop to 3.2 percent in 2009 from 11.1 percent in 2008.

• Following a brief period of stress in late 2008 when spreads on GCC forward exchange rates were pricing in large implicit devaluations, pressure on GCC currency pegs to the US dollar has more or less disappeared in line with successful government interventions to restore liquidity, and the recovery in oil prices since March. No change is expected in the current exchange rate pegs to the US dollar prior to the establishment of a single GCC currency. This is scheduled for 2010, although the timetable may slip.

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