Forecasts brighten for Gulf GDPs

Gulf economies will fare better than expected this year if oil sustains its rally for the rest of the year, creating an extra $114bn windfall.

Shoppers at Al Wahda Mall in the capital. The demand for oil shows that emerging markets and the Gulf economies are recovering.

Gulf economies will fare better than expected this year if oil sustains its rally for the rest of the year, creating an extra US$114 billion (Dh418.64bn) windfall for the region. Some regional economists are considering upgrading their GDP forecasts if oil maintains its gains and budget surpluses are bigger than expected.

"I have upgraded my forecast because oil at $60 a barrel will allow Saudi Arabia to cross the $400bn mark in terms of the size of its economy, which will grow rather than contract to the extent we expected initially," said Dr John Sfakianakis, the chief economist at SABB, the bank based in Riyadh. "The same goes for other GCC countries that export oil, including the UAE." The IMF predicts growth in the Middle East will halve this year and expects the UAE economy to contract 0.6 per cent. That still beats an expected 1.3 per cent contraction in the global economy, the worst anticipated economic performance since the Second World War.

But recent gains in the price of oil and positive indicators starting to emerge from regional stock markets has led to a rethink on growth estimates made earlier in the year. "Given that we have such an expected increase in terms of revenue, the size of the economy is due to increase," said Dr Sfakianakis. "Oil prices will correct down at least once this year but I don't think it will go back to the $33 scenario we witnessed earlier this year."

Standard Chartered Bank said this week it expected oil to reach $75 a barrel by the end of the year. The bank estimated an average budget "break-even" price of about $42 a barrel for Gulf states. "We see about $114bn of 'extra' revenues in 2009 if oil prices continue on their current trend," Standard Chartered said in a report on Tuesday. Dr Sfakianakis revised his estimate for nominal GDP for Saudi Arabia this year to $379bn from $334bn earlier this year. Nominal GDP measures the value of all goods and services produced expressed in current prices, while real GDP takes into account other factors such as inflation.

Dr Sfakianakis's projections for real GDP growth for Saudi Arabia remain flat. Most economists are predicting negative growth in the UAE this year but indications of stability returning to the property sector and a stock market rally could lead to a more upbeat appraisal. Stocks closed at their highest since November at the Dubai Financial Market yesterday, while the Abu Dhabi Securities Exchange (ADX) also climbed 1.8 per cent after Standard Chartered said the property market was starting to stabilise as mortgages became easier to obtain.

The bank estimated 0.5 per cent growth for the UAE, while EFG-Hermes and Samba Financial Group predicted growth of minus 1.7 per cent and minus 0.5 per cent respectively. "While I'm personally maintaining my own GDP forecasts, I wouldn't be surprised if Gulf economists start revising their forecasts upwards based on higher oil prices and a general trend of recovery in regional economies," said Nasser Saidi, the chief economist at the Dubai International Financial Centre.

"Earlier recovery in emerging markets including the Gulf means that the demand for commodities, and particularly oil, will start rising, which is positive." Higher oil prices have also encouraged foreign investors in recent weeks, resulting in rallies in regional markets. Trading on the ADX went from aggregate selling in the first few months of the year to year highs last month. Analysts say the improved performance of regional markets has been triggered by the strengthening price of oil, although they warn a correction may be imminent.

"The market rallies are linked to oil prices and improved sentiment, and moreover are coming from a low base, given that regional markets were oversold and are now recovering," said Dr Mahdi Mattar, the chief economist at Shuaa Capital. "Though there has been capital flow of funds coming to the region we haven't seen capital flow like we saw last year." Not all economists are convinced the strengthening price of crude will translate into stronger growth.

"Oil prices have increased but this is not due to a fundamental increase in demand for the commodity globally," Dr Mattar said. "Inventory levels in the US are at an all-time high, and technically oil prices shouldn't be at these levels. I'm not upgrading my forecast for now." The IMF, which published its latest economic growth projections for the region in April, says it has no plans to revise estimates in the coming quarter.

"There have not been any developments that have led us to revise our published GDP growth projections for [Gulf] countries for 2009," said Masood Ahmed, an economist at the IMF. The IMF's next official update of GDP forecast figures is due in October. [e-mail]