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MENAFN - Khaleej Times - 26/01/2013

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(MENAFN - Khaleej Times) With oil prices projected to average at 100 per barrel in 2013 - a level that allows most GCC governments to finance higher spending without draining their financial reserves - business conditions are expected to remain solid in the six-nation region, economic analysts said.

However, with the three-year surge in regional oil production coming to an end, GCC economic growth is set to slow to 3.6 per cent in 2013 from 5.4 per cent in 2012, National Bank of Kuwait, or NBK, said in its latest GCC Brief.

GCC oil production is projected to fall by 1-2 per cent per year over the next two years as Gulf Opec producers move to reverse some of the big output increases seen since 2010, the bank said.

But there are risks to this forecast, the report said. "A major global economic downturn could see global oil market fundamentals loosen by more than expected in 2013, pushing oil prices below 100 per barrel for a prolonged period.

This would put government fiscal balances under pressure and cause cuts in spending or delays in project execution, weakening economic growth." However, despite this dismal scenario, on the ground, business conditions are expected to remain solid as governments maintain elevated levels of investment and social spending, which will ultimately support confidence and private sector activity, the bank said.

Echoing NBK's forecast, rating agency Fitch said high oil prices would provide a supportive backdrop for another year of solid non-oil economic growth in the GCC although a moderation in oil production increase will slow the pace of expansion.

"Many governments in the region will continue to use high oil revenues to stimulate their economies while Qatar will remain the fastest growing of all GCC sovereigns in 2013, driven by the government's huge capital investment programme," Fitch said.

The International Monetary Fund, or IMF, in its forecast said the GCC growth is expected to slow from 7.5 per cent in 2011 to 5.5 per cent in 2012 and to 3.73 per cent in 2013, mostly due to a tapering off of oil production.

Chirag Shah, Head of Strategy and Corporate Planning at DIFC Authority, said at a recent conference that the GCC has created one trillion US dollars in current account surplus in the past three years. "This is a vast amount of money that will be going into government spending, infrastructure creation, or getting managed through financial assets. It is a extremely large surplus that has been created in a very small geographic space and for a very small population as well."

Chirag said the non-oil economic growth in the region, at around five to six per cent, is almost as strong as that of the Indian economy.

"The GCC nominal GDP is 1.5 trillion; India's nominal GDP is 1.8 trillion, which means that as a very small economic block, the GCC has an economy size that is almost equal to India or Russia for that matter. This is going to be a very powerful driver and engine not only for the region but also for a lot of assets to find their play through this infrastructure."

The NBK brief said over the medium-term, major economic reforms in areas such as the labor market, education, and competition policy are needed to enable the private sector to grow more independently of state support. The banker noted that despite healthy rates of economic growth, GCC inflation remains low.

Weighted consumer price inflation had fallen from 2.7 per cent mid-year to 2.0 per cent by October and is expected to have averaged 2.4 per cent in 2012. The decline has been driven by a deceleration in food price inflation in some countries, soft figures for housing rents and the lagged impact of earlier US dollar strength on import prices.

"A slight pick-up in inflation to three per cent is seen in 2013, as some of these factors go in to reverse while domestic economic growth remains strong. However, at these levels, inflation is unlikely to register as a major policy concern," the bank said.

"Fiscal and monetary policies will remain expansionary. Aggregate GCC government spending is seen rising by 6-8 per cent per year over the next two years and by 2014, spending could be nearly 50 per cent higher than in 2010.

"Lower oil production and prices will hit oil revenues, however, and the region's budget surplus will more than halve from 12 per cent of GDP in 2012 to 5 per cent by 2014," the NBK brief added.


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