GCC Quarterly. Quarterly. 18 April GCC oil production and price

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1 USD per barrel mn barrels per day GCC Quarterly Oil production in the GCC declined by more than 4% in Q1 213, according to Bloomberg estimates, on the back of weaker global demand. Although we retain our 213 growth forecasts for the time being on robust non-oil sector growth, if oil production continues to be scaled back, the risks to our growth outlook would be on the downside, particularly in the context of weaker than expected global growth. In its April World Economic Outlook, the IMF downgraded its global growth forecast for 213 by -.2pp to 3.3%. Quarterly 18 April 213 Data suggests that non-oil sector growth in the UAE has accelerated in Q1 213 on the back of both improving domestic demand and, to a lesser extent, demand for exports. Oil production in the first quarter was unchanged from average 212 output. Tourism and hospitality sectors continue to show strong expansion, and residential real estate prices in Dubai are continuing to recover. We retain our growth forecast of 3.8% for the UAE in 213. Saudi Arabia cut oil production by more than 7% in the first quarter, according to Bloomberg estimates. As we had assumed unchanged oil output in 213, if these cuts are sustained or increased, the risks to our 5.4% growth forecast would be on the downside. However, strong non oil sector growth, underpinned by increased government spending and robust credit growth could offset some contraction in the hydrocarbons sector. Government spending is also likely to be a key driver of growth in Qatar and Oman this year. Qatar s recently approved 213/ 214 budget provides for an almost 2% increase in spending compared to the 212/ 213 budget. However, the increased public spending, together with higher private consumption, could contribute to inflationary pressures. Kuwait was the only GCC country in OPEC to increase oil output, albeit slightly, in Q Little progress appears to have been made with implementing the government s economic development plan. The Constitutional Court ruling on the legality of last year s electoral law amendment is due on 16 June. Kuwait was the only MENA oil exporter to have its 213 growth forecast downgraded by the IMF in its April World Economic Outlook. GCC oil production and price GCC oil production (excl Oman, Bahrain) OPEC reference price Khatija Haque Senior Economist khatijah@emiratesndb.com 4 2 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Source: IMF WEO Oct 212, Emirates NBD Research 12 1

2 Contents Overview... Page 3 UAE... Page 4 UAE - Dubai... Page 5 Saudi Arabia... Page 6 Qatar... Page 7 Kuwait... Page 8 Oman... Page 9 Bahrain... Page 1 Key Economic Forecasts... Page 11 Page 2

3 % GDP USD per barrel mn barrels per day Overview Oil sector developments and outlook GCC oil production in Q1 213 declined -4.3% from average 212 output on weaker global demand, with Saudi Arabia cutting back the most. Saudi production eased to just over 9.mn bpd in Q1 from an average 9.7mn bpd last year. UAE output was flat and Kuwait increased production by 2.5%. Qatar reduced oil production by -5.5% in Q1 to 718, bpd. Notwithstanding the recent decline in oil prices, Bloomberg consensus oil price forecasts 1 for 213 are unchanged as of this writing, at USD 13 per barrel. The forecast for 214 has been revised slightly lower to USD 14 per barrel. Our base case scenario for the region at the beginning of this year was for oil output to remain unchanged on 212, with both upside and downside risks. If the cuts in oil output seen in Q1 are maintained or extended for the rest of the year, then the risks to our GCC real GDP growth forecasts, particularly for Saudi Arabia, are on the downside. However, at this stage, we are reluctant to revise our estimates for growth this year as buoyant non oil/ private sector activity may offset lower oil output, and Q1 real GDP data is not yet available. PMIs show expansion in non-oil sectors Both UAE and Saudi PMI readings showed accelerating growth in the non-oil private sectors in Q1 213, driven by both improving domestic demand and, to a lesser extent, exports. In Saudi Arabia, domestic demand is underpinned by government spending and double digit private sector credit growth. In the UAE, domestic demand is likely supported by strong growth in manufacturing, tourism (which has boosted retail trade and services), as well as transport and logistics. Improving consumer confidence and the continued rise in real estate prices has also likely contributed to the private sector recovery in the UAE. Government spending to underpin growth in Qatar, too The 213/ 214 budget recently approved by the Emir of Qatar supports our view that government will remain a key driver of non-oil growth in the region this year. Budgeted expenditure was higher than we had forecast at QAR 21.6bn, with development spending accounting for more than 35% of the total budget. However, higher government spending is likely to contribute to inflationary pressures in Qatar, which has already seen headline inflation rise to its highest rate in more than four years. Although food and housing contributed significantly to the rise in CPI in Q1, there is evidence of demand driven inflation in the services sectors. Public sector wage increases and double digit private sector credit growth will also continue to support domestic demand. GCC Oil output and price 14 GCC oil production (excl Oman, Bahrain) 2 12 OPEC oil price Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Source: Bloomberg, Emirates NBD Research Purchasing Managers Indices 65 UAE Saudi Arabia Source: Markit/ HSBC, Emirates NBD Research Average* GCC budget balance e 213f 1 We average WTI and Brent forecasts, as this is a reasonable proxy for the OPEC reference price. * Nominal GDP weighted average Page 3

4 % y/y mn bpd USD per barrel UAE Oil output was flat in Q1 213 The UAE s oil production averaged 2.64mn bpd in Q1 213, unchanged from average 212 output and despite an overall decline in GCC oil production over the period. This is broadly in line with our expectations for the UAE this year. There is consequently no change to our annual 213 growth forecast due to higher or lower than expected oil production at this stage. Non oil sectors expanded in Q1 Although the Purchasing Managers Index (PMI) dipped slightly in March, readings for the first quarter indicated robust expansion in the non-oil private sector. Incoming new business continued to score above 6, and the easing in demand appeared to be in the export orders component. Employment has continued to rise steadily according to the PMI surveys, and this should continue to support consumer confidence and overall domestic demand. Inflation remains contained The March PMI data also showed a decline in output prices, despite a continued rise in input prices, which suggests that there is still excess capacity in the UAE economy. This should help to keep overall inflation contained, despite higher housing costs. Food prices, the other main component of the CPI basket, were still on a downward trend in Jan-Feb 213. However, as domestic demand continues to improve and higher rents start to be reflected in the CPI, we expect average inflation to rise to 2.5% this year from.7% in 212. Oil production 2.9 Oil production (lhs) Oil price (rhs) Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: Bloomberg, Emirates NBD Research PMI Credit growth remained weak in Q4 212 Bank loan growth slowed to 2.6% y/y in December 212, down from 3.8% y/y in December 211 and a 212-peak of 3.7% y/y in July, despite strong growth in bank deposits. This may be attributed to banks preparing for higher liquidity requirements under BASEL III, as traditional loans are not liquid assets. However, banks may be providing finance to large corporates in alternative ways, such as by buying (more liquid) bonds rather than through traditional loan facilities. Money supply growth also slowed in December 212, reaching 4.4% y/y, despite a double digit increase in M1 (cash in circulation and demand deposits). Quasi money was broadly unchanged y/y. We expect money supply growth to accelerate in 213, in line with our growth and inflation forecasts, and as the UAE is likely to remain a safe haven for depositors. 48 Source: Markit/ HSBC, Emirates NBD Research Bank deposit and loan growth 2 Bank deposits Bank loans Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Page 4

5 % y/y % y/y % % y/y UAE - Dubai Hotel occupancy and RevPAR Tourism showing no sign of slowing 12 Occupancy rate (lhs) Growth in RevPAR (rhs) 6 Dubai Airport arrivals and hotel occupancy data for the first two months of this year suggest the tourism sector is still enjoying strong growth, even after two years of expansion. 8 4 Hotel occupancy averaged 88% in Jan-Feb 213, up from 85.7% in the same period last year. Revenue per available room was up 1% y/y as hotels took advantage of strong demand and their pricing power to raise rates. 4 2 Passenger traffic through Dubai Airports was 13% higher y/y in Jan-Feb, driven by a sharp rise in the number of regional visitors. The number of visitors from Saudi Arabia alone grew over 4% y/y in the first two months of this year as air links between Dubai and the Kingdom expanded and new routes were added. Saudi Arabia is now Dubai International s third biggest international market, after India and the UK. -4 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: STR Global, Emirates NBD Research Dubai Airport traffic -2 Air cargo volumes have also shown strong growth in the first two months of this year on an annual basis, despite declining m/m. Residential real estate prices continue to rise Q1 213 saw no slowdown in the pace of residential real estate price growth, according to data from Cluttons. Midrange villas and low-end apartments saw the fastest price growth in March, rising 35.1% y/y and 32.5% y/y respectively. High-end villas and apartments, as well as mid-range apartments saw steady growth of 23-25% in Q Higher housing costs are starting to be reflected in Dubai s official CPI, but the magnitude of the increase is not nearly as high as market data shows, due to the different survey methodologies. Real time market data captures the price of real estate sold at the point of sale, or rental rates for new contracts as they are renewed, whereas the CPI in any month will survey a mix of both new and ongoing rental contracts/ housing costs. The housing component of Dubai s CPI rose 1.5% m/m in January and just.1% m/m in February, while annual price changes are still negative. While we do expect Dubai s CPI to register further increases in housing costs this year, the magnitude of the increase is likely to remain well below the double digit increases reflected in the market data, as the decline in official housing CPI in was substantially less than the reported decline in market prices over the same period. 4 Passenger traffic 3 Cargo volumes Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: Dubai Airports, Emirates NBD Research Real estate prices and housing CPI 4 Mid-range villas Mid-range apartments 3 Housing CPI Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: Bloomberg, Haver Analytics, Emirates NBD Research Page 5

6 % y/y mn bpd USD per barrel Saudi Arabia Oil production declined more than 7% in Q1 Bloomberg estimates put average oil production in Q1 at 9.3mn bpd, -7.3% lower than average 212 output. As the largest producer in OPEC, Saudi Arabia was always the country most likely to adjust production to prevent massive swings in the oil price. In Q1 213, the OPEC reference price averaged USD 19.5 per barrel, unchanged from the 212 average price. However, as our 5.4% 213 real growth forecast assumes no change in Saudi oil production this year, if the lower production levels seen in Q1 are sustained for the rest of the year, or indeed if production falls further, then the risks to our growth forecast are skewed to the downside. Oil production 1.5 Oil production (lhs) Oil price (rhs) Jan-12 May-12 Sep-12 Jan-13 Source: Bloomberg, Emirates NBD Research Non oil sectors showing robust growth PMI data for Q1 show that the non-oil sectors are continuing to show strong expansion, even off the high 212 base, with readings near 6. The new orders sub-index has consistently posted readings above 65 in Q1 213, and new export order growth has also been robust. Growth in the non-oil sectors is no doubt underpinned by expansionary fiscal policy in the Kingdom, in line with our expectations. Given the strength of non-oil growth year-to-date, we are reluctant to downgrade our 213 growth forecast at this stage, despite the decline in oil production in Q1. We will reassess our growth forecasts for the Kingdom once we have Q1 real GDP data and oil production data for Q Lending to public sector picks up in Q1 213 After declining for most of 212, public sector borrowing increased sharply in Q1 213, reaching 15.2% y/y in March. The rise appears to be due to increased central government borrowing, rather than public sector enterprises. This suggests some acceleration in the pace of infrastructure and other spending at the central government level. Private sector credit growth has been stable at just under 16% y/y in the first two months of this year. On the consumer side, growth in real estate finance remains strong as the authorities push ahead with efforts to provide new housing and banks appear more willing to offer housing loans. Real estate finance accounted for 13% of total consumer loans at the end of 212, up from 8.6% at the end of 28. Inflation remains contained Consumer inflation averaged 3.9% y/y in Q1 213, from 4.% in 212. The strong USD has helped to keep imported inflation (including food) in check, and so far it appears as if higher services costs are the main contributors to headline inflation. We expect average inflation to accelerate to 4.5% this year. PMI Source: Markit/ HSBC, Emirates NBD Research Credit growth 3 Private sector Public sector Page 6

7 % y/y % y/y % y/y Qatar 213/ 214 Budget approved Qatar has approved a 213/ 214 budget with total expenditure of QAR 21.6bn, slightly higher than our 24.5bn forecast. The figure is 18% higher than the 212/ 213 budget but only 1% higher than our estimate for expenditure in the last fiscal year, which ended 31 March 213. Development/ capital expenditure is projected to reach QAR 74.9bn, higher than our forecast of QAR 71.4bn and 2% higher than our estimate for capex in 212/ 213. Education spend, and wages and salaries are also set to rise sharply this fiscal year. As always, the authorities have conservatively projected revenue at QAR 218.1bn in 213/ 214, based on an average oil price of USD 65 per barrel. We expect revenues to reach QAR 257.bn, resulting in a surplus of QAR 46.4bn. This is substantially higher than the official budget surplus projection of just QAR 7.4bn in 213/ 214. Budget expenditure growth 3 Total expenditure Development spending e 21f e 213f -5 Source: IMF, National sources, Emirates NBD Research Credit growth The official press release indicated that the surplus for 212/ 213 was just QAR 27.7bn, well below our estimate of QAR 67.1bn. However, no further details on the 212/ 213 budget outcome have been made available. Overall, the budget is in line with our expectations and we are not concerned with the projected narrowing of the budget surplus. The key issue is how efficiently and effectively the government is able to manage the execution of the budget, as anecdotal evidence suggests that infrastructure projects over the last few years have been subject to delays and overspend Public sector Private sector Public sector credit growth slowed in Q1 After strong growth in 212, public sector borrowing declined m/m in January and February. Annual growth is public sector credit slowed to 34.8% y/y in February, down from almost 1% y/y in May last year and the slowest pace of growth since January 212. Private sector borrowing appears to have stabilized around 14% y/y. Broad money supply growth has accelerated to 36.7% y/y as quasi money particularly fx deposits have more than doubled on an annual basis as of February 213. Demand deposits have also increased sharply in the first two months of this year. Continued strong growth in money supply may prompt the central bank to tighten liquidity conditions through additional bond and t-bill sales, or to discourage further deposit growth by lowering the deposit rate, particularly in the context of higher inflation. Headline CPI rose to 3.6% y/y in March, the highest reading in more than four years. Housing and food costs were the main drivers of inflation in Q1, although services such as transport, entertainment & recreation have also contributed. Source: Qatar Central Bank, Emirates NBD Research Money supply growth 25 M2 (excl govt. deposits) 2 FX deposits M3 (incl govt deposits) Source: Qatar Central Bank, Emirates NBD Research Page 7

8 % y/y mn barrels per day % y/y Kuwait GDP growth Oil production increases in Q1 213 Kuwait was the only GCC state to increase oil production in Q1, raising average output to 2.86mn bpd from an average 2.79mn bpd in Kuwait Oil is also planning to increase natural gas output by 2.5bcf/d by 23, through increased production from existing fields as well as searching for new gas deposits, according to Chairman Sami al-rashaid. With very little progress on non-oil sector projects, Kuwait s economy remains heavily dependent on hydrocarbons for both revenue generation and real GDP growth. Significant progress with diversification and implementing the substantial economic development plan is unlikely to occur until there real co-operation between parliament and the executive. The Constitutional Court is due to rule on the Emir s electoral law amendment on 16 June. If the Court rules that the Emir s October 212 decree amending the law to be unconstitutional, this would effectively dissolve the current parliament and open the way for another round of elections. In this scenario, the risks to our growth forecast for 213 would be on the downside. Indeed, in its latest World Economic Outlook, the IMF has downgraded its 213 forecast for real growth in Kuwait from 1.9% to 1.1%, well below our 3.% forecast. New plans to reduce number of expatriates In March, the authorities announced plans to reduce the number of foreign workers in Kuwait by 1, per year over the next 1 years, cutting its expatriate population by half over the period. The measures to restrict visas for foreign workers are expected to come into force in April. About 8% of the national workforce is employed in the public sector, and the wages and salaries accounted for almost a quarter of total budget spending in 211. The measures to reduce foreign workers are aimed at encouraging greater private sector employment of nationals f 213f Oil production Jan-12 May-12 Sep-12 Jan-13 Source: Bloomberg, Emirates NBD Research Inflation 6 Inflation eases to 2.1% in February Inflation has remained relatively contained in Kuwait, easing to 2.1% y/y in February from 2.6% y/y in December. Food prices have declined m/m for the last 3 months, while housing costs have been flat in Jan-Feb. We expect inflation to accelerate modestly to average 3.5% in Page 8

9 % y/y % GDP Th. Bpd Oman Growth on track in Q1 213 Oman has increased oil production by 2.6% in Q1 213, compared with average 212 output. It is the only GCC country that we had anticipated would increase oil production this year, and the data year-to-date supports our view. Non-oil sector growth this year should be underpinned by government spending; the official budget for 213 provides for total expenditure of OMR 12.9bn, up more than 2% on the 212 outcome. Although the 212 budget posted a higher than forecast surplus (1.4% of GDP), we expect the budget to run a small deficit of -OMR.4bn (-1.3% of GDP) in 213. Already data for the first two months of this year show a narrowing of the budget surplus by 17% over the same period last year, as both investment and current spending rose. The 212 budget data showed that expenditure was less than we had projected, with investment spending down -1% y/y. We expect investment spending to rise in 213 as the government pushes ahead with infrastructure projects. Inflation remains contained Inflation eased to 2.3% y/y in February, and there is little evidence of demand driven inflationary pressure building in the economy. Increases in housing costs have been modest since Q4 212, and imported inflation (including food) has been contained, no doubt helped by a strong USD year-to-date. Money supply and credit growth slow Money supply growth appears to have stabilized around the 1% y/y mark in the first two months of this year, after peaking at over 17% y/y during 212. Declining FX deposits have been a key factor in keeping money supply growth contained. On the credit side, both public and private sector borrowing have slowed, although both remain in excess of 1% y/y. Oil production Source: Bloomberg, Emirates NBD Research Budget balance e 213f Credit growth 1 8 Private sector Public sector enterprises Page 9

10 % y/y % y/y Bahrain GDP growth 212 growth slower than expected Bahrain s economy expanded 3.4% in 212, slightly lower than the 3.8% we had forecast. An -8% contraction in the mining & quarrying sector (hydrocarbons) was offset by growth in all the other sectors of the economy. Manufacturing (9.2% y/y), and government services (7.1% y/y) accounted for most of last year s annual GDP growth as together they make up around 28% of Bahrain s GDP Financial services, which account for 17.4% of GDP, grew just 3.5% in real terms last year. The hospitality sector bounced back strongly (26.4% y/y) after contracting sharply in 211, but accounts for less than 3% of overall GDP. Utilities grew 6.2% y/y in 212, up from under 3% in 211, and transport & communication expanded 7.3% y/y. The trade sector grew 3.9% last year reversing the -1.8% contraction in e 213f We expect growth to slow to 2.8% in 213, with government spending likely remain a key driver, as it is elsewhere in the region. Inflation was contained in Jan-Feb 213 The annual inflation rate eased to 2.3% y/y in February, down from more than 4% y/y in March 212, despite higher food and housing costs year-to-date. Services prices have been flat and transport costs eased in February as well. We expect inflation to average 3.2% in 213, up from 2.8% last year. Inflation Headline CPI Housing Food -2 Page 1

11 Key Economic Forecasts: UAE National Income f 213f Nominal GDP (AED bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth* (% y/y) Abu Dhabi* Dubai* Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure * Abu Dhabi s real growth data are Emirates NBD estimates and forecasts. Dubai s real growth data are sourced from Dubai Statistics to 211, with Emirates NBD forecasts for 212 and 213. UAE real growth data are sourced from NBS to 211, with Emirates NBD forecasts for 212 and 213. Source: Haver Analytics, IMF, National sources, Emirates NBD Research Page 11

12 Key Economic Forecasts: Saudi Arabia National Income f 213f Nominal GDP (SAR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Hydrocarbon Non- hydrocarbon Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP SAMA's Net foreign Assets Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Public debt Page 12

13 Key Economic Forecasts: Qatar National Income f 213f Nominal GDP (QAR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Hydrocarbon Non- hydrocarbon Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Total external debt % GDP Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Source: Haver Analytics, IMF, Emirates NBD Research Page 13

14 Key Economic Forecasts: Kuwait National Income f 213f Nominal GDP (KWD bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Hydrocarbon Non-hydrocarbon Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Source: Haver Analytics, IMF, Emirates NBD Research Page 14

15 Key Economic Forecasts: Oman National Income f 213f Nominal GDP (OMR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Page 15

16 Key Economic Forecasts: Bahrain National Income f 213f Nominal GDP (BHD bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Page 16

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18 Emirates NBD Research& Treasury Contact List Emirates NBD Head Office 12th Floor Baniyas Road, Deira P.O Box 777 Dubai Aazar Ali Khwaja Executive Vice President, Global Markets & Treasury aazark@emiratesnbd.com Tim Fox Head of Research & Chief Economist timothyf@emiratesnbd.com Research Khatija Haque Senior Economist khatijah@emiratesndb.com Irfan Ellam Head of MENA Equity Research MohammedIE@emiratesbank.com Aditya Pugalia Research Analyst adityap@emiratesnbd.com Sales & Structuring Head of Sales& Structuring Sajjid Sadiq Sayed sayeds@emiratesnbd.com London Sales Lee Sims +44 () simsl@emiratesnbd.com Saudi Arabia Sales Numair Attiyah numaira@emiratesnbd.com Singapore Sales Supriyakumar Sakhalkar supriyakumars@emiratesnbd.com Group Corporate Communications Ibrahim Sowaidan ibrahims@emiratesnbd.com Claire Andrea clairea@emiratesnbd.com Page 18