20121112 efar gcc spillovers_vsfinal


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20121112 efar gcc spillovers_vsfinal

  1. 1. QNB Economics economics@qnb.com.qa 17 November 2012The GCC is insulated from a severe global growth shockThe outlook for the global economy remains gloomy and international reserves collectively total over 120%with some key risks: a looming fiscal crisis in the US, of regional GDP.potential for further disruption from Eurozonesovereign debt crises and a potential slowdown in the However, in terms of the domestic economy, theChinese economy from previously high growth. buffers have narrowed. While rising governmentHowever, according to analysis from QNB Group, the spending, particularly on wages, has supported theGCC is well positioned to sustain a severe and non-oil economy, it has also driven up the fiscalsustained shock to global GDP. breakeven oil price (the price at which government budgets are likely to be balanced). In Qatar andSlower growth in the US, Eurozone and China would Kuwait the breakeven price rose by just over US$15/bhave knock-on effects in the GCC, mainly through from 2008-12 to around US$40/b and US$50/bweaker demand for oil and the impact on oil prices. respectively. In Oman, Saudi Arabia and the UAE theThe IMF estimates that 1% lower real GDP in either breakeven price has risen to around US$80/b.the US or Euro Area would lead to 0.4% lower GDP in Although this remains below oil prices of overthe GCC a year later, while a 1% fall in China’s US$100/b, a sustained drop in oil prices could promptgrowth would lead to a 0.1% fall in the GCC. some GCC countries to implement fiscal consolidation, which may lead to softer growth in theOver a fifth of GCC exports are to China, the EU and non-oil economy, according to QNB Group.the US, so a simultaneous demand shock in thesecountries could have a significant impact on demand The IMF recently analysed the impact on GCC fiscalfor GCC exports. and external balances of a US$30 drop in the price of a barrel of oil to around US$70/b in 2013 with pricesMore importantly, slower growth in these major remaining lower and declining to US$60/b in 2017.economies—responsible for 44% of oil and 35% of According to QNB Group, it is important to note thatgas consumption—would be likely to drive down the IMF scenario is extreme. It would probably requirehydrocarbon prices. This in turn would have a stronger a series of crises to unfold, such as sequentialimpact on GCC export revenue, reducing fiscal and sovereign defaults in Europe, combined with a failurecurrent-account surpluses and potentially leading to to avert the US fiscal cliff and a credit implosion inweaker economic activity. China. All these events unfolding in the near future could be enough to drive oil demand and prices downDuring the global recession in 2009, oil prices fell by to US$60/b for a sustained period. In comparison,37% and liquefied natural gas (LNG) spot prices by QNB Group expects that oil prices will remain broadly27%. As well as reducing export revenue, this stable at US$110/b in 2013.contributed to a 0.2% contraction in GDP in the GCCas oil production was lowered in response to lower The IMF estimates that its low oil price scenariodemand and prices. Consequently, some investment would erode the overall GCC current-account surplusplans were scaled back with the deteriorating (currently around 25% of GDP) by 2017.economic climate. However, the IMF analysis assumes that there are noThe regional macroeconomic environment now is changes in hydrocarbon production and exports as astronger than it was in 2009, which should help result of the drop in oil prices. A drop in oil pricesinsulate the GCC from global economic shocks. tends to lead to lower oil production and exports asInternational reserves have risen steadily over the last OPEC is inclined to lower output targets or enforcethree years, reaching US$694bn (20 months of import them more strictly. GCC oil production fell by 8% incover) in June 2012, up by 47% from US$473bn (18 2009, the last time oil prices fell significantly. Thismonths of import cover) at the end of 2009. would be partially compensated for by a fall in importsAdditionally, the region’s sovereign wealth funds have of goods in services owing to slowing economicexternal assets valued at just under US$1trn, according activity. Nonetheless, it is likely that there would be ato the IMF. Therefore, sovereign wealth fund assets higher current-account deficit for the GCC than envisaged in the IMF analysis. Taking this into 1
  2. 2. QNB Economics economics@qnb.com.qaaccount, QNB Group estimates that the current-account deficit would be around 10% of GDP by 2017.Using its low oil price assumptions, the IMF estimatesthat the GCC fiscal balance would fall from a surplusof just over 10% of GDP to a deficit of around 10% ofGDP with all countries’ fiscal balances falling intodeficit. This is broadly in line with QNB Groupestimates as, although lower oil production would alsoimpact fiscal revenue, the IMF also assumesexpenditure plans would remain unaffected. However,it is likely that spending would be reined in, partlycompensating for the drop in oil revenue.There would also be a negative impact on GDPgrowth, according to QNB Group. Reduced productionof hydrocarbons would likely lead to broadly flatgrowth in the oil and gas sector. The drop in oil pricesand restrained government spending and investmentwould also dampen growth, particularly in the non-oilsector. GCC International Foreign Exchange Reserves (US$bn) 694 647 532 505 475 435 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jun-12Source: National Sources and QNB Group analysisHowever, even in the scenario of extremely low oilprices, the public external assets of the GCC arecomfortably sufficient to weather the storm accordingto both the IMF and QNB Group analysis. 2