GCC Economic Forecasts 4.1


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Presents forecasts for GCC Economies, dated May 2009

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GCC Economic Forecasts 4.1

  1. 1. GCC Economics Subsequent to the Onset of the Global Credit Crisis Usman Rauf May 2009 y Confidential
  2. 2. Growth Momentum to be Sustained for GCC Economies GCC Economic Outlook 2007 2008e 2009e Real GDP Growth 2007 2008e 2009e Oil Price - USD /barrel 72 99 55 Saudi Arabia 3.4% 4.1% 2.3% Nominal GDP - USD Billion 821 1,065 906 UAE 6.1% 5.8% 3.1% Real GDP growth - % 5.5 5.7 3.6 - Hydrocarbon 1.1 4.2 1.3 Kuwait K it 4.8% 4 8% 4.5% 4 5% 2.4% 2 4% - Non-hydrocarbon 7.9 6.1 4.4 Qatar 12.5% 13.5% 10.2% Inflation - % 7.0 12.0 7.6 Oman 6.9% 6.9% 5.5% Current Account - % GDP 25.1 29.3 4.6 Fiscal balance - % GDP 19.2 21.9 4.7 Bahrain 6.6% 5.3% 4.7% The GCC region is expected to cross the USD1 trillion milestone for nominal GDP in the year 2008e, primarily as a result of substantial increases in oil prices from USD72 /barrel in 2007 to USD99 /barrel in 2008 Owing to a 45% reduction in oil prices to USD55 /barrel – based on average futures prices for 2009, GCC real economic growth is expected to decline to 3.6% in 2009e versus 5.7% in 2008e; the principal driver of the real growth in the economies will be the non-hydrocarbon economy Qatar is expected to grow at a rapid 10.2% in real terms in 2009e, possibly topping world economic expansion for the year 2 Source: The Institute of International Finance Confidential
  3. 3. Growth Momentum to be Sustained for GCC Economies 2008e Share of GDP for GCC Countries Nominal GDP - USD Billion 2007 2008e 2009e Saudi Arabia 382 496 418 UAE 201 258 216 Saudi Arabia   UAE 47% 24% Kuwait K it 112 153 129 Qatar 68 85 75 Oman 40 51 47 Kuwait   14% Bahrain 18 22 21 Qatar  8% Bahrain   2% Oman  5% Saudi Arabia and the UAE remain the principal drivers of economic growth in the GCC, despite their lower expected growth in nominal GDPs during 2009e In terms of nominal GDP, all GCC economies are expected to register declines in 2009e due to the , p g aforementioned reversal in trend for increase in oil prices Qatar is an exception though, as it enhances its LNG production capacity, which is expected to p positively impact its economic performance in the coming years y p p gy 3 Source: The Institute of International Finance Confidential
  4. 4. Fiscal and Current Account Balances Remain Manageable Breakeven Oil Prices for Fiscal Balances Fiscal Balance - % of GDP 2007 2008e 2009e 80 Saudi Arabia 12.3% 22.1% 2.8% 70 UAE 26.7% 26 7% 28.1% 28 1% 11.7% 11 7% Kuwait 39.3% 21.9% 4.1% 60 Qatar 11.2% 15.3% 4.0% 50 Oman 8.4% 15.3% -6.1% Bahrain 3.2% 7.8% -6.7% 40 Current Account Balance - % 30 2007 2008e 2009e of GDP Saudi Arabia 25.1% 31.3% 0.5% 20 UAE 18.1% 20.4% 6.2% 10 K it Kuwait 2 % 42.4% 3 % 43.4% 2 6% 21.6% Qatar 32.2% 42.9% 12.0% 0 Bahrain  Kuwait  Oman  Qatar  Saudi Arabia  UAE  Oman 4.8% 12.2% -12.1% Breakeven Prices ‐ USD per Barrel Bahrain 16.1% 20.5% 7.1% Based on the break even oil prices for individual countries, the 4 largest GCC economies are expected to run fiscal surpluses during 2009 under our base case crude oil price estimate of USD55/barrel UAE, Qatar and Kuwait are expected to exhibit greater resilience should crude oil register a lower USD50/barrel average, with Saudi Arabia breaking even The above numbers, are estimated assuming that the fiscal expenditure to non-oil GDP ratios for all , g p countries are maintained at 2008 levels 4 Source: The Institute of International Finance Confidential
  5. 5. Sensitivity to Oil Prices Current Market Situation 2008 average crude oil price of USD99 /barrel Average GCC country budget price of USD40-USD50 /barrel 2008e GCC fiscal surplus of 21.9% of GDP 2008e GCC current account surplus at 29.3% of GDP Expectations for 2009 Bull Scenario Bear Scenario Crude oil price of USD60 /barrel Crude oil price of USD50 /barrel GCC fiscal surplus down to 6.9% of GDP GCC fiscal surplus down to 2% of GDP 2009e current account surplus at 6.9% of GDP 2009e current account surplus at 0.5% of GDP Substantial increases in oil prices during the majority of the current decade led to substantial 2008e fiscal & current account surpluses at 21.9% & 29.3%, respectively GCC government p g policies are likely to remain fiscal expansionary with primary focus on y p y p y expenditures related to infrastructure with a view on long term development plans Our price band of USD50-USD60 /barrel for crude oil suggests that fiscal and current account balances for the GCC countries are expected to drop significantly, but are unlikely to turn into p p g y, y deficits 5 Source: The Institute of International Finance; My Estimates Confidential
  6. 6. GCC Inflation Edging Downwards 2008e Inflation of 12% 2009e Inflation at 7.6% Reuters Commodity Index, CRB-Reuters, peaked CRB-Reuters declined to 314.7 at the end of at 481 in July 2008 2008 Excessive leverage in the foreign and domestic Deleveraging process expected to reduce markets velocity of money Speculative inflows driven by expectations for Withdrawal of hot money out of the banking revaluations of GCC currency pegs system has tightened regional liquidity Credit driven growth in real estate and other Reduced lending capacity of domestic banks due asset markets to a drying up of foreign credit markets Credit Growth and Inflation High commodity prices and excessive rents 60  complemented by speculative inflows, in anticipation of FCY revaluations, and 50  aggressive domestic credit induced growth perpetuated inflation to levels as high as 40  12% 30  Lower rental yields a reversal in CRB yields, CRB- 20  Reuters, foreign direct withdrawals, tighter regional liquidity and central bank 10  directives to reign in lending as concerns grow over asset quality is expected to 0  0 reduce inflation to 7.6% in 2009e Saudi Arabia UAE Kuwait Qatar Oman Bahrain Jun‐08 Credit Growth ‐ % Change YOY Jun‐08 Inflation  ‐ % Change  YOY 6 Confidential
  7. 7. Currency Exchange Rate Peg Fuelled Real Estate Asset Price Bubble? 2007 Price appreciations continued Demand strong from both local and international markets Limited scope for supply exceeding demand Property prices increased through local & international investor demand which was fuelled by global economic growth First Three Quarters of 2008 Price appreciations gathered pace Currency revaluation speculation as dollar declined and GCC countries faced increased inflation levels due to a relaxed monetary policy stance, encouraged by declines in US interest rates Speculative investments in property also encouraged by depreciating US Dollar, in addition to high loan-to-value ratios, and declining global prospects for investments Asset price inflation was further fuelled through currency pegs, which resulted in importing inflation Last Quarter of 2008 Reuters conducted an analyst poll suggesting that supply could exceed demand by 2H FY09 Banking and financial sector liquidity issues surfaced, which are attributed to mismatches in assets and liabilities financed through foreign long term debt that was available at exorbitant rates Mortgage providers presented greater risk since mortgages represent long term assets which were not financed through domestic long-term liabilities, since the long term bond market does not exist Decreasing liquidity for mortgage providers necessitated tighter loan-to-value ratios, initially amongst mortgage providers and later on, the banking sector also lowered loan-to-value ratios Investor demand in property nosedived, starting from international investor demand, due to lack of liquidity and erosion in wealth, followed by local investors who faced lower loan-to-value ratios, and later on declining values on investments in stock markets 7 Confidential
  8. 8. Reliance on Long Term Foreign Debt Led to the Infusion of the Global Credit Crunch? Debt Contribution to GDP - 2006 133.9% Global 142.3% 39.8% Emerging 90.7% 5.4% Middle East 76.6% 49.2% 49 2% Asia 134.8% Debt Securities to GDP - % Bank Assets to GDP - % Middle East has historically been averse to the development of the debt capital markets in the region, primarily due to the non-Shariah nature of interest based debt securities Of late however, sukuk – asset backed securitization – structures have injected g , j growth in local debt securities markets, and we expect a continuation of these growth trends in the coming years as the local banking sector reduces its reliance on long term foreign lending Asset liability mismatches in the balance sheets for banking and non-banking institutions in the y g g financial sector, which were financed through long term foreign funding, was the principal contributor to liquidity issues that surfaced in GCC countries 8 Source: International Monetary Fund Confidential
  9. 9. Underdeveloped Debt Capital Markets Poised to Grow Substantially in the GCC Economies Phase I Phase II Phase III` III Saudi Arabia & United Pakistan, United Arab Japan, Malaysia & South Countries Arab Emirates Emirates & Qatar Korea Regulatory Lack of Legal Identification of Enforcement of Laws Framework Framework Loopholes & Revisions Limited Foreign Bond Growing Number of Transactions by Cross Issuances by Cross Border Domestic & Foreign Border Government Transactions Investors are Active Benchmark Yield Curve High Yield Bonds & Secondary Limited Transaction with Active Transactions Structured Products Market Volume of Government Bonds Actively Traded Common Corporate Primary Government & Limited Structured Products Bonds & Price Market Corporate Transactions Actively Issued Information Available Phase (Increasing Maturity) 9 Source: Nomura Research Institute Ltd. Confidential
  10. 10. Fallout of the Global Credit Crunch on GCC Economies GCC Gross External Debt GCC Foreign Assets 400 90.0% 1,600 35.0% 350 80.0% 1,400 30.0% 70.0% 300 1,200 25.0% 60.0% 250 1,000 50.0% 20.0% 200 800 40.0% 15.0% 150 600 30.0% 10.0% 100 400 20.0% 50 200 5.0% 10.0% 0 0.0% 0 0.0% 2005 2006 2007 Jun‐08 2005 2006 2007 Jun‐08 Gross External Debt ‐ USD Billion Growth ‐ % Foreign Assets ‐ USD Billion Growth ‐ % GCC economies have been increasingly forced to resort to external sources of funding in order to effect growth in their local economies in an environment where cash rich GCC investors and governments have been actively investing abroad GCC gross external debt increased more than 3-folds from USD110 billion in 2005 to USD358 billion as of June 2008 with the share of banking institutions increasing relative to non-banking financial institutions from 50% in 2005 to 58% in June 2008 Concurrently, the GCC economies have also accumulated substantial foreign assets which have doubled from USD740 billion in 2005 to USD1,468 billion in June 2008 10 Confidential
  11. 11. Magnitude of the External Debt for GCC Economies Composition of 2008e Foreign Assets 2008e External Debt Relative to Foreign Assets 100% 120% 9% 90% 36% 100% 80% 47% 70% 65% 80% 71% 60% 78% 82% 18% 50% 60% 16% 91% 40% 40% 30% 15% 23% 45% 20% 37% 20% 17% 10% 18% 15% 12% 5% 0% 0% GCC   Saudi Arabia   UAE Kuwait   Qatar  Oman  Bahrain   GCC   Saudi Arabia   UAE Kuwait   Qatar  Oman  Bahrain   Official Reserves Bank and Nonbank  Financial  Institutions Sovereign Wealth  Funds Excluding Sovereign Wealth  Funds Including Sovereign Wealth Funds Benefiting from the commodity oil price boom, state wealth funds – SWF – have become substantial contributors to foreign assets in most GCC countries at 47%, with UAEs Abu Dhabi Investment Authority the largest in the region – estimated at USD500 billion The rapid increase in GCC country external debt has coincided with substantial increases in official reserve and banking & non-banking foreign assets, which alone can provide for the total debt requirement for GCC countries, as evidenced by debt to asset contribution of c100% or less for all GCC countries Accounting for SWFs in debt to asset ratios, it becomes evident that all GCC countries have 11 sufficient capacity to service their debt obligations despite the onset of the global credit crunch Confidential
  12. 12. Thoughts on Prospects for the United Arab Emirates Currently, the global Purchasing Manager’s Index, based on data from Coutts, is 41.8 which is consistent with negative growth since levels more than 50 have historically been achieved in periods when the US and global economies have registered positive growth The UAE economy, specifically the trade and tourism sectors, however, relies more on the performance of the European economy which traditionally lags the US economic recovery Slow economic performance in Europe, combined with the spillover effect of the threat of an Sl i f i E bi d i h h ill ff f h h f oversupply in the property on other, affiliate sectors could drive growth down below the 3.1% real GDP growth estimate for UAE Revaluation of currency pegs could possibly have d l R l ti f ld ibl h delayed th onset of the bursting of the asset d the t f th b ti f th t price bubble but it was the reliance on external long term funding that proved to be the nemesis for the Dubai market Risk f d fl ti Ri k of deflation through rentals which were the primary driver for inflation in the past could prove th h t l hi h th i d i f i fl ti i th t ld to be important since rents have also followed prices and are coming down substantially as oversupply in the property markets remains a key concern The Th current possible b tt t ibl bottoming out of commodity prices is an important positive development. i t f dit i i i t t iti d l t However, the threat of inflation in general is less likely for infrastructure based developing economies as opposed to developed economies Though, with an enormous appetite f i Th h ith tit for increasing government expenditures, enhanced spending by i t dit h d di b governments is likely to avert risks associated with deflation 12 Confidential