GCC ECONOMIC OVERVIEW
The GCC is an oil-based region with the largest proven crude oil reserves in the world (486.8 billion barrels), representing 35.7% of the world’s total; while the OPEC accounts for 70% of the world’s total proved crude oil reserves. This region ranks as the largest producer as well as exporter of petroleum and plays a leading role in the world in general and OPEC in particular. The six countries of the GCC region have enjoyed a spectacular economic boom until late 2008. The GCC economy tripled in size to $ 1.1 trillion during 2002 to 2008. GCC countries account for 52% of the total OPEC oil reserves and 49% of the total OPEC crude oil production. For the GCC region, oil and gas sector represents approximately 73% of total export earnings, roughly 63% of government’s revenues and 41% of its GDP. The yearly average oil price for the OPEC basket declined by (-35.4%) to $61.06 per barrel in 2009 compared to US$ 94.45 per barrel in 2008, mainly attributed to the global financial and economic crisis and the slump in global demand for energy. Crude oil price however touched an all-time-high of $147.27 a barrel in New York on 11th July 2008 but prices plunged thereafter. The YTD (Jan – Apr) 2010 average prices of OPEC Basket crude oil, BRENT (British Oil) and WTI (U.S. Oil) stood at US$77.20/b, US$78.47/b and US$80.18/b respectively, compared to $44.79/b, $45.95/b and $44.71/b, respectively for the same period of 2009. The region is continuing its economic reform program, focusing to attract domestic, regional and foreign private sector investment into oil & gas, power generation, telecommunications, and real-estate sectors. The slump in global oil market due to the global financial and economic crisis slowed the pace of investment and development projects, but the recent global economic recovery will result in a sharp rebound in the region’s economic activities.
The GCC region’s economy has tripled in size during 2002 to 2008. A combined nominal GDP of the region grew at the highest ever rate of 28.9% to US$1076.8 billion in 2008 compared to a growth rate of 14.2% to US$835.6 billion in 2007. The robust economic performance is attributed to strong global oil demand until late 2008; better geo-political environment; acceleration of reform measures; strong boost in privatization activities; growth of assets of central banks and the strength of the GCC corporate sector. Nominal GDP decreased by -19.3% to $868.5 billion in 2009 due to the global financial and economic crisis, and the world oil market slump. Nominal GDP is expected to rebound, growing by 17.6% and 9.5% to $1021.3 billion and $1118.2 billion in 2010 and 2011, respectively, because of the expected global economic recovery. In real terms, the economy of the region grew by 6.4% in 2008 compared to a rate of 5.1% in 2007, but declined sharply to 0.5% in 2009. Real GDP is expected to rebound and grow at the rates of 4.2% and 4.7% in 2010 and 2011, respectively.
This region has a proven track record of very low inflation rates over a long period of time, especially until 2004, attributed to the prudent management of the fiscal and monetary policies and the adequate availability of goods & services in the region. Inflation remained benign between 0.2% and 2.1% during 2001 to 2004, but the region witnessed an explosive rate of inflation of 10.7% in 2008 compared to 6.7% in 2007. This relatively higher inflationary pressure in general was mainly attributed to imported inflation; depreciation of the US Dollar against world major currencies; low interest rates; ample liquidity; high spending; shortage of housing; demand/supply imbalances for goods and services, especially food, beverages, and construction material etc. CPI inflation was slowed down to 3.3% in 2009 due to wise and timely policies of the governments of the region in view of slackening global energy demand and the world financial crisis. Inflation is expected at 4.1% each in 2010 and 2011.
The GCC region has posted a budget surplus of 25.3% of GDP in 2008 compared to 17.7% of GDP in 2007 due to high oil prices and increased oil production levels, coupled with a surge in non-oil revenues. High oil revenues earned by the region in the past resulted in strong capital spending. Fiscal surplus dropped to a 3.3% of GDP in 2009 due to the global financial crisis and the slump in the world oil market. The region is expected to realize a higher surplus of 4% of GDP each in 2010 and 2011 due to a recovery in the global oil demand and the corresponding increase in oil revenues. The region is aware of the fiscal reforms needed to reduce dependence on the oil sector to achieve fiscal discipline. Goal of achieving diversification is well in progress in the region despite the global financial and economic crisis, which made little impact on the economies of the region compared to the rest of the world.
The monetary policy of the region will remain focused on maintaining a fixed exchange rate regime with the US Dollar. Kuwait was the sole exception to this, as Kuwaiti Dinar was de-pegged to the US Dollar on 20th of May 2007. The GCC central banks' policy of limited foreign borrowing has kept liabilities low and thus contributed significantly to the long-term stability of the GCC currencies against the US Dollar. Although the US Dollar depreciated against the Euro, the Japanese Yen and the UK's Pound Sterling during the past three years, the USA is a major trading partner in the GCC region, therefore the GCC currencies’ peg to the US Dollar is in the interest of the GCC countries. A robust global oil market demand will enable further growth of the region’s foreign currency reserves, and ensure that there is no pressure on the currencies' peg. Moreover, none of them will revalue unilaterally, as they continue to plan for a GCC single currency. Total reserves minus gold of this region stood at US$ 107.24 billion at the end of 2008 compared to US$ 100.76 billion at the end of 2007. These reserves declined slightly to US$101.5 billion in 2009, and are expected at $100.2 billion and $101.3 billion in 2010 and 2011, respectively.
The UAE has enjoyed huge surpluses on trade and current accounts during 2004 to 2008 on the back of high oil export, non-oil and re-export earnings. But due to the global financial and economic crisis, and the world oil market slump, a deficit of (-$7 billion) (-3.1% of GDP) was realized in 2009 compared to a surplus of $22.2 billion (8.5% of GDP) in 2008. However, the balance of current account is expected to rebound and achieve surpluses of $19.8 billion (7.8% of GDP) and $20.9 billion (7.7% of GDP) in 2010 and 2011, respectively, on the back of expected increase in earnings from oil, non-oil exports and re-exports.