JEDDAH/DOHA – The outlook for the global economy remains gloomy with some key risks: a looming fiscal crisis in the US, potential for further disruption from eurozone sovereign debt crises and a potential slowdown in the Chinese economy from previously high growth. However, according to analysis from QNB Group, the GCC is well positioned to sustain a severe and sustained shock to global GDP. Slower growth in the US, eurozone and China would have knock-on effects in the GCC, mainly through weaker demand for oil and the impact on oil prices. The IMF estimates that 1 percent lower real GDP in either the US or euro area would lead to 0.4 percent lower GDP in the GCC a year later, while a 1 percent fall in China's growth would lead to a 0.1 percent fall in the GCC. Over a fifth of GCC exports are to China, the EU and the US, so a simultaneous demand shock in these countries could have a significant impact on demand for GCC exports. More importantly, slower growth in these major economies – responsible for 44 percent of oil and 35 percent of gas consumption – would be likely to drive down hydrocarbon prices. This in turn would have a stronger impact on GCC export revenue, reducing fiscal and current-account surpluses and potentially leading to weaker economic activity. During the global recession in 2009, oil prices fell by 37 percent and liquefied natural gas (LNG) spot prices by 27 percent. As well as reducing export revenue, this contributed to a 0.2 percent contraction in GDP in the GCC as oil production was lowered in response to lower demand and prices. Consequently, some investment plans were scaled back with the deteriorating economic climate. The regional macroeconomic environment now is stronger than it was in 2009, which should help insulate the GCC from global economic shocks. International reserves have risen steadily over the last three years, reaching $694 billion (20 months of import cover) in June 2012, up by 47 percent from $473 billion (18 months of import cover) at the end of 2009. Additionally, the region's sovereign wealth funds have external assets valued at just under $1 trilion, according to the IMF. Therefore, sovereign wealth fund assets and international reserves collectively total over 120 percent of regional GDP. However, in terms of the domestic economy, the buffers have narrowed. While rising government spending, particularly on wages, has supported the non-oil economy, it has also driven up the fiscal breakeven oil price (the price at which government budgets are likely to be balanced). In Qatar and Kuwait the breakeven price rose by just over $15/ billion from 2008-12 to around $40/b and US$50/b respectively. In Oman, Saudi Arabia and the UAE the breakeven price has risen to around $80/b. Although this remains below oil prices of over $100/b, a sustained drop in oil prices could prompt some GCC countries to implement fiscal consolidation, which may lead to softer growth in the non-oil economy, according to QNB Group. The IMF recently analyzed the impact on GCC fiscal and external balances of a $30 drop in the price of a barrel of oil to around $70/b in 2013 with prices remaining lower and declining to $60/b in 2017. According to QNB Group, it is important to note that the IMF scenario is extreme. It would probably require a series of crises to unfold, such as sequential sovereign defaults in Europe, combined with a failure to avert the US fiscal cliff and a credit implosion in China. All these events unfolding in the near future could be enough to drive oil demand and prices down to US$60/b for a sustained period. In comparison, QNB Group expects that oil prices will remain broadly stable at $110/b in 2013. The IMF estimates that its low oil price scenario would erode the overall GCC current-account surplus (currently around 25 percent of GDP) by 2017. — SG
