JEDDAH: The combined external current account surplus of the member countries of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) – is set to more than double this year to around $292 billion from $128 billion, and this will take their gross total foreign assets to a projected $1.7 trillion (against foreign liabilities of $0.5 trillion), the Washington-based Institute of International Finance (IIF) said. "About one-half of the GCC's gross assets are held by sovereign wealth funds. Despite the turmoil in the region, we do not expect to see significant shifts in funds managed by the sovereigns as a specific response to the crisis," said Dr. George T. Abed, IIF senior counselor. IIF Managing Director Charles Dallara said "the unfolding developments across the economies of the Arab world will continue to have major ramifications for the global economy in the immediate period ahead. The economic challenges facing many Arab countries today are being compounded by rising inflation, led by higher global commodity prices and substantial increases in government spending. These countries need to develop economic policies that offer prospects for growth and in this context it will be important that they make every effort to stimulate private investment." The IIF said that for oil importers as a group, the economic toll from the political upheaval will translate into a collapse in growth in 2011 and a rebound to a forecast 4.4 percent real growth in 2012 crucially depends on the regional unrest coming to an end in the next few months. Output this year in Egypt, Tunisia, and Syria is expected to contract between 1 percent and 3 percent, while growth in Lebanon and Jordan will decelerate to 3 percent. Growth in Morocco is projected at 3.7 percent, driven in part by a rebound in agricultural output. Abed noted "the oil-importers face considerable downside risks to growth. Not only is the political reform process unlikely to be smooth and could drag on beyond 2011, further delaying investment decisions and slowing any economic recovery, but investigations into political corruption are adding to business uncertainties." Furthermore, "in this very difficult environment, and amid major pressures to institute far-reaching political reforms, it is absolutely critical that the transition authorities in Egypt and Tunisia place a high priority on structural economic reform." "As the international community works with the new governments in the region it needs to recognize that the Arab world has the highest unemployment among developing regions, the highest jobless rates among youth, and the lowest economic participation rate among women. Moreover, meeting the employment challenge calls for the transformation of the region's societies and traditional economic structures, which have missed out on the globalization of technology and manufacturing. As a result, the region lacks vibrant manufacturing and service sectors that can provide adequate jobs to new entrants to the labor force." Most of the oil-exporting countries are likely to see significant real growth this year, including Iraq, which grew by just 0.9 percent in 2010 but which is now likely to grow by 11 percent in 2011 and by 11.5 percent next year. High global oil demand and high prices are key factors for the GDP growth of these countries. The IIF said its projections are based on estimated average prices of $115 and $110 per barrel respectively for 2011 and 2012, up from $80 per barrel in 2010. "Government spending in the GCC as a whole is projected to increase by 25 percent this year. This would raise further the breakeven price of oil that balances their budgets. In Saudi Arabia, the breakeven price of oil that balances the budget will jump from $68 per barrel in 2010 to $85 per barrel in 2011, and then continue rising, but at a slower pace, to $102 per barrel by 2015," said Dr. Garbis Iradian, IIF deputy director, Middle East and Africa Department. "The Arab world as a group remains the world's largest producer of crude oil (accounting for 30 percent of global exports). Over the medium term, most of the increase in the global production of crude oil is expected to come from the region, mainly from Saudi Arabia and Iraq. With its current production of 8.9 million barrel a day (mbd) and production capacity of 12.5 mbd, Saudi Arabia accounts for more than half of the world's spare production capacity. Unconfirmed reports indicate that its production capacity will increase further to around 15 mbd by end-2015." The one exception to the robust GCC growth picture is Bahrain. The IIF said that Bahrain's economic recovery has been interrupted and growth could slow to about 3 percent in 2011 from 4.5 percent in 2010, with considerable downside risk if the current political situation goes unresolved for an extended period. With regard to Dubai, the IIF said Dubai World has successfully restructured its debt, but worries persist about the country's debt overhang. Other Government Related Entities (GREs) are also undergoing debt restructuring, including Dubai Holding. Dubai has regained market access, but the cost of borrowing remains high, reflecting the rollover needs of the total of $31 billion falling due in 2011 and 2012, and the continuing challenges related to the depressed property sector. Further, progress is needed in Dubai on structural reforms, especially the enhancement of transparency and governance in the corporate sector, which if implemented could accelerate the pace of economic growth going forward to over 4 percent in the medium term.
