The economies of the member states of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) are now recovering and growth this year is likely to average 4.4 percent and then rise to 4.7 percent in 2011, following just 0.3 percent growth in 2009, the Institute of International Finance (IIF) forecast. Its semi-annual GCC Regional Economic Overview released on Monday, it noted that prospects vary considerably across the region. Dr. George Abed, IIF senior counselor and director of the Middle East- Africa Department, said, underpinning the robust GCC recovery are higher oil prices, sound macroeconomic policies, and the normalization of global trade and capital flows. On oil “we forecast a rebound in production of around 3 percent in Kuwait, Saudi Arabia, and the UAE. We expect the GCCs revenue from oil and gas to rise from $323 billion in 2009 to $419 billion in 2010 and to $457 billion in 2011. Accordingly, we anticipate that the net foreign assets of GCC countries will rise from $1,049 billion at the end-2009 to $1,340 billion by end-2011, equivalent to 122 percent of the regional GDP.” IIF Managing Director Charles Dallara, noted that despite recent challenges faced by some segments of the financial sector, banks in the GCC remain well capitalized and bank soundness indicators continue to exhibit stability across countries. The average capital adequacy ratio, defined as the ratio of capital and reserves to risk-weighted assets, was above 15 percent for every banking system in the region. “We are seeing notable progress in the modernization of the banking systems in the region, in their engagement with the global financial system and in their contributions to the regions economic development.” The report noted that the GCC region was not spared the fallout from the global financial crisis even if it fared better than other emerging regions. Nominal GDP of the GCC economies declined from $1,064 billion in 2008 to $855 billion in 2009. But the overall impact on real levels of economic activity was contained by larger government spending supported by strong fundamentals and strengthened financial buffers. The nonhydrocarbon sector, where more than 95 percent of the labor force is employed, grew by 2.7 percent in 2009 as compared with 7.0 percent in 2008. At a press conference in Dubai, Dr. Abed said the default of the two family-affiliated conglomerates in Saudi Arabia, and most recently Dubai Worlds debt crisis, have been a wake-up call for policy makers in the region. Dubai's rapid growth in 2002-2008, which depended in part on leverage and debt, will need to change significantly. It is likely that, as a result of the global crisis and the impact on some sectors, the GCC economies may shift to a lower but more sustainable growth path of 4-5 percent over the medium term, as compared to an average of about 7.0 percent in 2003-2008. Progress in structural reforms, including improvements in the legal and regulatory environment, and enhancement of transparency and governance, supported by a benign global market environment, should lift the regions economy to a higher growth path. The need for greater transparency on the balance sheets of major corporate entities has become urgent, he added. Access to further credit is likely to depend on the ability of these corporations to provide the market with greater clarity on the role of the sovereign and improved disclosure and higher financial reporting quality and frequency. There is also an urgent need to strengthen macroeconomic and financial statistics in some of the GCC countries to address the existing weaknesses. Development of local debt markets could reduce reliance on banks in financing large infrastructural projects and help to lower funding costs, which have recently risen as a result of a more difficult liquidity environment. IIF senior economist for the Middle East and Africa Dr. Garbis Iradian noted while overall the banking system in the GCC is relatively healthy, deleveraging pressures and funding concerns suggest that recovery of credit will be slow. Further increases in nonperforming loans and the need for larger provisioning in 2010 suggest that banks balance sheets will remain constrained. He said non-oil real GDP is expected to grow by 3.7 percent in Saudi Arabia and 1.8 percent in the UAE. With a successful resolution of Dubai's debt issues, especially if this sparks an acceleration of reforms, non-oil growth in the UAE could reach 2.7 percent in 2010 and 4.3 percent in 2011. In this case, Dubai would avoid another contraction in its economy. Inflation pressures in the region should generally remain contained: less than 1 percent in Qatar and the UAE, 4 percent in Kuwait, and 5 percent in Saudi Arabia. The IIFs baseline GCC projections assume modest global economic recovery (growth of 3.3 percent) and average oil prices of $75 per barrel in 2010 and $80 per barrel in 2011. It is also assumed that the fallout from Dubai's debt problems will likely have a measurable but limited impact on growth prospects in the UAE, less so for the GCC region. However, investment flows to the region may slow, the cost of funding will be higher, and banks are likely to adopt a more cautious and discriminating approach to lending going forward.
