Future looks bright for economies in region

Credit Suisse says the Gulf region's performance is still heavily contingent on oil. However, the 'recovery dynamics' of each country is likely to be different.

The Middle East is expected to rebound sharply from last year's doldrums as rising commodity prices and increased demand for exports fuel the region's economic growth. In addition, increased public spending and greater availability of cross-border credit are expected to support growth. Rupert Wright spoke to Berna Bayazitoglu, a managing director of Credit Suisse in the investment banking division, based in London, for her perspective on the economic outlook. She is the head of macroeconomic research for emerging markets in eastern Europe, the Middle East and Africa.

The downturn in the four countries that we follow in the region - Kuwait, Saudi Arabia, Qatar and the United Arab Emirates - was not as dramatic as that seen in other emerging markets such as Russia and Turkey in 2009. Nevertheless, these four countries fared quite differently from each other: in 2009, the UAE contracted the most at an estimated 3 per cent and Kuwait by 1.3 per cent - worse than our global contraction forecast of 0.8 per cent. On the other hand, Saudi Arabia probably averted the recession and grew 0.5 per cent, while Qatar stood out with an impressive [projected] growth rate of 7.3 per cent. In 2010, these countries should benefit from the rebound in global demand and the increase in oil prices. But the recovery dynamics will be somewhat different across these four countries just as their experiences during the downturn were different from each other. We forecast growth rates in Saudi Arabia, the UAE and Kuwait to range between 2.1 per cent and 2.6 per cent this year, below Credit Suisse's expected global growth rate of 4.3 per cent. On the other hand, we expect Qatar to nearly double its growth rate to 14.2 per cent in 2010, remaining one of the world's fastest-growing economies. Qatar's economy is buoyed by the expansion of its natural gas sector.

The region's economic performance is still heavily contingent on oil prices and oil production. Since the onset of the global crisis the oil output quotas of the OPEC members have been reduced in an effort by the cartel to stabilise the global oil market. So now, rising oil prices and stabilising, increasing oil production should have a positive impact on the region's 2010 growth. We think non-oil GDP growth will also pick up in 2010. Governments in these oil-exporting countries, notably Saudi Arabia and the UAE, were able to increase public spending in order to support non-oil GDP growth in 2009. We expect the government's stimulus measures to support the rebound in non-oil GDP growth in 2010, but non-oil GDP growth will likely remain below the average observed during the boom years of 2003-2008.

Not really. We expect Qatar to remain one of the fastest-growing economies in the world, but it is also one of the smallest economies in the region. Saudi Arabia is a member of the G20 [Group of 20 developed and emerging economies], but its forecast growth rates in the next couple of years are either lower or in line with the regional average we forecast.

In our macro forecasts, our average global oil price assumption for both 2010 and 2011 is $80 per barrel. The OPEC in late 2009 gave a strong indication that it wants to maintain oil prices between $70 to $80 per barrel.

Yes it is. This is why there has been an increased focus on the non-oil GDP growth during the boom years of 2003-2008. The governments of the four oil-exporting countries have made efforts to diversify their economies, and we expect this focus to continue. We have recently studied the longer-term growth potential of the six GCC countries. In this study, we assumed that the GCC countries will continue to invest a large proportion of their oil revenues into non-oil sectors such as education, health care or infrastructure in the coming years. Only under this scenario, we think the GCC countries will be able to maintain respectable overall GDP growth rates of 4 per cent to 6 per cent in the next decade.

We think the emirate is too small to matter for the broader regional economic prospects. Its economy accounts for about 8 per cent of the GCC's overall GDP and about 2 per cent of the overall GDP of the region. Nevertheless, the announcement by Dubai World on November 25 that it would request a debt standstill from its creditors was a reminder that the global economy is still working its way out of the credit crisis of 2008 and the Great Recession of 2009.

The moderation in cross-border funding and the decline in domestic asset prices have exerted pressure on the balance sheets of those banks that have borrowed externally and were exposed to the property and equity markets in the region. However, the authorities responded appropriately to the deterioration in the banking sector through liquidity and capital injections, and the banks seem to have absorbed the shock. But regulators will have to remain vigilant. Recent developments have highlighted growing interlinkages between the region's various state conglomerates and the region's banking sector. There is an overall need for increased co-operation between the regulators of the region to maintain and even enhance the credibility of the region's banking system.

We expect some progress in 2010 towards a common currency, but it is probably still many years away. The central bank governors of these four countries will be meeting up shortly to start preparations for the GCC monetary authority. Once the monetary authority is established, it will be mandated to establish a fully fledged central bank which will start the preparations for the currency union. But there is no official time frame.