Report Series The GCC 2012: Flash Economic Update Executive Summary Although the news has been mixed, recent global developments have been generally positive for the GCC. Most significant for growth prospects is the likelihood that GCC average oil production will now increase in 2012 as producers, especially Saudi Arabia, maintain elevated output levels to satisfy shortfalls perceived or real stemming from the new sanctions on Iran. There are many conflicting factors affecting oil markets, but absent a sharp downturn in the global economy, total GCC crude production should be up about 3.7 percent this year, with the largest projected increase in Saudi Arabia (5.5 percent). We have also revised up our average oil price forecast to $118/b for Brent crude in 2012. With oil prices and production high, confidence in the region has firmed. Sentiment has been further boosted as fears of a financial crisis in the Eurozone have abated in response to the massive liquidity injection from the European Central Bank. Global financial markets have reacted positively and reviving risk appetite has spurred global liquidly flows into emerging markets, including the GCC. GCC equity markets have rallied. Demand for bond and sukuk issuance is strong and pricing relatively tight. CDS spreads for GCC sovereigns have also come in during the year, despite the elevated geopolitical risk emanating from Iran. Office of the Chief Economist Economics Department Samba Financial Group P.O. Box 833, Riyadh 11241 Saudi Arabia ChiefEconomist@samba.com +4420-7659-8200 (London) This and other publications can be Downloaded from www.samba.com Overall we now project that GCC growth will hold up at 4.2 percent in 2012 as a positive contribution from oil sectors combines with sustained non-oil growth driven in large part by high public spending. Qatar and Saudi Arabia will be the strongest performers with revised growth rates of 5.7 and 4.4 percent respectively. Risks remain elevated. Global spare capacity in oil has tightened and any disruption in supplies, particularly stemming from current tensions over Iran s nuclear program, could lead to a spike in oil prices which may derail the still fragile global economy. In addition, the Eurozone debt crisis has not been resolved and adverse developments there could still prompt a credit crunch.
GCC Real GDP Growth % pa 2009 2010 2011 2012f Saudi 0.1 4.1 6.8 4.4 UAE -3.5 3.2 4.7 3.5 Kuwait -4.4 3.3 4.5 3.3 Qatar 8.7 16.3 18.9 5.7 Oman 3.7 4.8 4.0 3.8 Bahrain 3.0 4.0 1.0 2.5 GCC -0.3 5.2 7.3 4.2 GCC Inflation % pa 2009 2010 2011 2012f Saudi 5.1 5.4 5.0 4.8 UAE 1.2 0.9 1.0 1.5 Kuwait 4.0 4.1 5.0 4.0 Qatar -4.9-2.5 1.9 3.5 Oman 3.6 3.3 3.8 3.5 Bahrain 2.8 2.0 1.0 1.5 GCC 2.6 2.9 3.4 3.6 GCC Fiscal Balance % GDP 2009 2010 2011 2012f Saudi -6.1 5.2 14.8 17.0 UAE -12.6-1.4 7.9 7.0 Kuwait 28.0 21.0 23.0 24.0 Qatar 15.1 2.9 8.0 6.3 Oman -3.0 5.2 10.0 7.5 Bahrain -6.6-7.8-6.0-5.0 GCC -1.5 4.8 12.5 13.2 GCC Current Account Balance % GDP 2009 2010 2011 2012f Saudi 6.8 15.4 27.8 29.7 UAE 3.1 7.6 15.8 13.8 Kuwait 24.0 29.0 35.0 30.0 Qatar 10.2 17.1 28.7 30.6 Oman -1.3 8.8 14.0 10.0 Bahrain 2.7 4.9 8.0 8.0 GCC 7.6 14.5 24.7 24.5 Sources: IIF, IMF, Samba GCC Outlook 2012 Recent global developments have on balance been positive for the GCC Since our last report issued in late 2011 (The GCC: Economic Outlook 2012), there have been a number of important global developments that have affected the economic outlook for the GCC. While there has been both good and bad news, and downside risks remain elevated, on balance we believe that growth prospects in the region have improved, and we have revised up our 2012 projections accordingly. Most significant in terms of growth rates is our assumption that average oil production this year will now be higher than in 2011 as GCC oil producers, particularly Saudi Arabia, maintain high output levels to satisfy any shortfalls perceived or real stemming from the announced sanctions on Iran (see below). Combined with high oil prices this will provide another surge in revenues which will support robust public spending and boost confidence. The latter has already revived as fears of a financial crisis in the Eurozone this year have abated for now (see below), and returning risk appetite has seen global liquidity flowing back into emerging markets, including the GCC. GCC economic growth has been revised up Overall we now project that GCC growth will hold up at 4.2 percent in 2012, following over 7 percent growth in 2011, as a revised positive contribution from oil sectors combines with sustained non-oil growth driven in large part by high public spending. Qatar and Saudi Arabia will be the strongest performers with growth rates upgraded to 5.7 and 4.4 percent respectively (see tables). Abu Dhabi s recent commitment to press ahead with large-scale development projects will provide a boost to the UAE, which has already seen strengthening activity in Dubai s traditional non-oil sectors, and help counter the adverse impact of slower global growth and restrictions on doing business with Iran. While real GDP growth will remain healthy in the UAE, Oman and Kuwait, the outlook in Bahrain remains somewhat clouded by political tensions which will likely limit growth to 2.5 percent. This improved GCC growth performance is still expected to take place in a relatively benign inflationary environment. High public spending will generate inflationary pressures in the region, but headline inflation rates should remain modest (see table), held down by declining inflation in trading partner economies, a relatively firm US dollar, and generally weaker commodity price increases. Still weak real estate markets will also contain pressures in countries like the UAE, Qatar and Bahrain. 1
OPEC Spare Capacity Jan. Sustainable Spare mb/d Supply capacity* capacity Saudi 9.85 11.9 2.03 Nigeria 2.04 2.45 0.41 UAE 2.58 2.74 0.16 Kuwait 2.56 2.84 0.28 Iran 3.45 3.51 0.06 Libya 0.98 1.00 0.02 Angola 1.73 1.90 0.17 Venezuela 2.48 2.54 0.06 Algeria 1.29 1.30 0.01 Qatar 0.82 0.90 0.08 Ecuador 0.48 0.51 0.03 OPEC-11 28.26 31.57 3.31 Iraq 2.65 3.00 0.35 Total OPEC 30.91 34.57 3.66 Source : IEA * levels reached within 30 days GCC Oil Production mb/d 2009 2010 2011 2012f Saudi 8.11 8.24 9.32 9.83 UAE 2.26 2.30 2.48 2.53 Kuwait 2.26 2.30 2.43 2.44 Qatar 0.80 0.81 0.84 0.84 Oman 0.71 0.74 0.76 0.78 Bahrain 0.18 0.18 0.18 0.18 GCC 14.31 14.57 16.01 16.60 % change -10.3 1.8 9.9 3.7 Source: PFC, Samba With both oil prices and GCC crude production now expected to be higher than in 2011 (see below), public finances should remain healthy despite large spending commitments. With the exception of Bahrain, GCC states will continue to post large fiscal surpluses. Public debt levels will remain low (although GRE debt and refinancing continue to be problematic in Dubai), and external savings will be bolstered on the back of sustained large current account surpluses. The twin fiscal and current account surpluses for the GCC as a whole are now expected to remain at around 13 percent and 24 percent of GDP respectively in 2012. Global developments and impact Oil supply uncertainty prompts higher GCC output There is considerable uncertainty in the oil market as a result of the recently enhanced US sanctions aimed at financial institutions dealing with Iran, and the pending EU ban on Iranian oil imports (affecting around 550,000 b/d) which comes into effect in July. The situation has not been helped by unexpected supply disruptions in South Sudan and current outages in Canada and the North Sea, which are compounded by the loss of Syrian exports and problems in Yemen. With oil demand strong in emerging markets, Brent prices have risen to $120-125/b and there is talk of another release of strategic crude stocks, as happened last year, to contain price increases. That said, physical markets currently remain reasonably well supplied. But this largely reflects the fact that GCC producers, and especially Saudi Arabia, have raised production to meet demand as buyers look to line up alternative supplies. This in turn has reduced global spare capacity, elevating concerns over potential supply disruptions and keeping upward pressure on prices. Saudi production is now running at between 9.8-10mb/d, implying spare capacity of around 2 mb/d out of total effective OPEC spare capacity of less than 3 mb/d (according to the IEA), its lowest level since end-2008. It is increasingly hard to predict how oil markets will evolve over the year, but absent a sharp downturn in the global economy which drags down oil demand, it now seems likely that GCC oil producers will maintain higher output levels (see table). The biggest projected increase will be in Saudi Arabia (5.5 percent), with overall GCC crude output up around 3.7 percent this year. Most oil market analysts still expect supply growth to exceed demand growth this year, although optimism over anticipated strong gains in non-opec production is starting to wane. However, despite relatively healthy physical balances, concerns over lower stock levels, limited spare capacity and geopolitical risks, are likely to keep oil prices elevated. We now project that 2
World Economic Outlook 2010 2011f 2012f Real GDP growth (percent, annual) World 5.1 3.7 3.2 US 3.0 1.8 2.0 Japan 4.0-0.5 1.6 Euro area 1.8 1.5-0.5 Emerging Markets 7.3 6.0 5.5 Official policy rate (end period) US 0.25 0.25 0.25 Japan 0.10 0.10 0.10 Euro area 1.00 1.00 0.75 ($/b, period average) Brent crude oil price 79.5 111.8 118.0 Source: Samba estimates and forecasts Brent will average $118/b in 2012, up about 6 percent from last year, while WTI will continue to trade at a large discount given the increasing supply and distribution issues at the Cushing, Oklahoma pricing point. Global growth outlook little changed but confidence has improved We still expect global growth will slow to 3.2 percent this year, although prospects in the US look stronger where we have revised up our growth projection to 2 percent. However, we continue to forecast a recession in the Eurozone, and a significant slowdown in emerging markets, much of it reflecting knock on effects from the EU slump. The EU is China s largest trading partner and it is notable that the Chinese authorities have recently reduced China s growth forecast to 7.5 percent. That said, markets have gained confidence from moves by the ECB to stabilise banks in the Eurozone, as well as from the positive results of recent bank stress tests in the US. This easing of financial strains and risks is helping foster a more positive outlook that continuing global challenges can be overcome. Financial crisis in the Eurozone has been averted (for now) A looming financial crisis in the Eurozone has been averted. The sovereign debt crisis still rumbles on and risks that the zone will eventually fracture remain real. But the provision of unprecedented liquidity by the European Central Bank (ECB) has prevented what was shaping up to be a severe credit squeeze this year. In December, and again in February, the ECB launched Long-Term Refinancing Operations (LTRO) which have provided more than Euro 1 trillion in liquidity to banks in the form of three-year loans at 1 percent interest. This will be more than sufficient to help them meet their refinancing needs this year, easing funding pressures and improving perceptions of credit risk (although counter-party risk remains elevated). Some of this liquidity has also apparently flowed into troubled sovereign bonds, helping dampen yields, particularly in Italy and Spain where 10 year yields had topped 7 percent as recently as January. The Eurozone has also managed to avoid a disorderly default in Greece, pushing through a second bailout which included large losses for private bond holders. However, despite the orderly default (which has triggered pay outs on credit default swaps), Greece s debt and deficit positions still appear untenable, and a third bailout will probably be needed as fiscal austerity stifles growth needed to bring financial ratios under control. Greece s eventual exit from the Eurozone remains a strong possibility. Meanwhile, market attention is now likely to focus on the dire 3
position of Portugal and the struggling Spanish economy, although both situations should be contained this year. Global financial markets have reacted positively The LTROs have provided a boost to global financial markets as contagion fears have abated and confidence has revived with the flood of ECB liquidity adding to that already provided by the US Federal Reserve, Bank of England and Bank of Japan. Equity markets have rallied strongly, bond yields have tightened, risk perceptions have improved, and the VIX volatility index (also known as the fear index ) has fallen back below the average seen in 2003-08 before the global crisis. Capital flows to emerging markets have picked up as markets have shifted to risk on mode. The feel good factor has been enhanced by favourable economic data out of the US which has trumped weaker Chinese growth prospects and elevated geopolitical risks and higher oil prices stemming from Iran. GCC markets are benefiting GCC equity markets have benefited from both the global rally in financial markets and improved perceptions of regional growth as higher oil prices support sustained public spending. With the exception of Qatar, all GCC stock exchanges were up year-todate in mid-march. Gains were particularly impressive in Dubai (23 percent) and Saudi Arabia (19 percent). Meanwhile, appetite for GCC bond and sukuk issuance is healthy and pricing relatively tight. Yields on 10-year sovereign bonds are currently around 3.2-3.7 percent for Abu Dhabi and Qatar, against 2.3 and 2 percent for the US and Germany respectively. CDS spreads for GCC sovereigns have also tightened during the year, despite the elevated geopolitical risk emanating from Iran. Risks remain Oil price spike could derail global growth While supply uncertainty and high oil prices are bolstering GCC finances, they also present a risk to the global economy. Given relatively low crude stock and spare capacity levels, any significant supply disruptions could lead to a sharp spike in prices. This would be particularly severe if it involved some sort of conflict with Iran and disruptions to the flow of oil out of the Gulf. With the global economy still fragile a spike in prices to $150/b plus, could derail growth and drag down oil demand with it. The GCC could then face a situation of falling prices and demand, as well as a weaker external environment, all of which would weigh on economic growth. 4
Intensification of Eurozone debt crisis could prompt credit crunch Peripheral Eurozone countries may struggle 2012 (%) Portugal Italy Ireland Spain GDP Growth -3.3-1.4 0.0-1.0 Debt/GDP 106 120 107 70 Deficit/GDP -4.8-2.2-8.8-5.0 Unemployment 14.1 9.0 14.6 23.9 Source: Bloomberg consensus, OECD While financial conditions have improved in the Eurozone, the debt crisis has not been resolved, and the strength and duration of the current rally in financial markets may well be tested in the coming months. Slumping growth in peripheral countries could trigger a loss in confidence in their ability to address excessive debt and deficits. If this were to push one of the larger countries into default, then a financial crisis would almost certainly follow, and the ensuing credit crunch would ripple through the global financial system with adverse consequences, including for the GCC. It is also possible that Greece could decide to leave the Eurozone which could prompt similar financial disruptions. Geopolitical risks remain a concern Tightening sanctions on Iran are raising geopolitical risks in the region Iran remains a major concern. Talks are to resume over its nuclear program, but there appears little confidence that progress can be made. While the US appears reluctant to engage militarily, particularly during an election year, an Israeli strike cannot be entirely discounted. In addition, the intensification of sanctions on Iran (30 Iranian financial institutions have now been barred from the international bank transfer system, SWIFT) could prompt unpredictable response from Tehran ranging from closing the Straits of Hormuz, to stirring unrest in places like Iraq, Lebanon, Syria, Afghanistan and possibly Bahrain. This plays into the broader uncertainties facing the MENA region which is still working its way through the repercussions of the Arab Spring, and where spheres of influence are changing and issues remain unresolved, particularly in Syria. 5
Keith Savard Director Economic Research Keith.Savard@samba.com James Reeve Senior Economist James.Reeve@samba.com Andrew Gilmour Senior Economist Andrew.Gilmour@samba.com Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and should not be treated as a substitute for specific advice and due diligence concerning individual situations; 2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or 3. Are not intended to constitute a guarantee of future performance. Accordingly, no representation or warranty is made or implied, in fact or in law, including but not limited to the implied warranties of merchantability and fitness for a particular purpose notwithstanding the form (e.g., contract, negligence or otherwise), in which any legal or equitable action may be brought against SAMBA. Samba Financial Group P.O. Box 833, Riyadh 11421 Saudi Arabia 6