Gulf states expect economic rebound in 2010

The economies of the six states of the Gulf Co-operation Council (GCC) will recover quickly in 2010 after contracting in nominal and real terms this year due to the decline in oil prices and the effects of the global economic slowdown, according to a new report published this week by MEED Insight.

"Some GCCG economies and sectors will be seriously affected by the global economic downturn in 2009 and businesses lacking stable sources of timely finance may struggle to survive," the report said. "But the GCC will remain solvent during the year despite the elimination of the record current account and budget surpluses that the region has enjoyed for more than five years," noted the report.

"GCC governments are expected to use their savings to maintain capital spending on infrastructure and vital services despite sharp falls in oil revenue. This will help sustain the private sector and encourage further non-oil economic growth," the report added.

The forecasts in the report, titled "A Short, Sharp Shock," are based on the assumption that the average price of West Texas Intermediate (WTI) blend of crude oil will be about $60 a barrel in 2009 compared with $96 a barrel in 2008.

The report expects OPEC's decision to cut total oil production by almost 3 million barrels a day (b/d) in the year to come, from 32.6 million b/d in July 2008, will be effective in reversing the drastic decline in prices experienced since the summer. It forecasts WTI will average $75 a barrel in 2010 with global demand growing by almost 1 million b/d as the world economy, led by the US, starts to recover. World oil demand is forecast to fall marginally in 2009.

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The report forecasts that the dollar value of GCC gross domestic product (GDP) at current prices will contract by more than 20 per cent to $835 billion in 2009 compared with $1.1 trillion in 2008. "It should be noted, however, that this setback will only shrink the GCC economy back to the size it was in 2007," the report said. There will also be a contraction in GCC GDP at constant prices.

GCC governments in total will report a budget deficit of about $5 billion in 2009 compared with a surplus of about $225 billion in 2008. The region's current account surplus will effectively fall to zero from more than $350 billion in 2008, a record level.

The MEED Insight report said that the single positive development for the GCC in 2009 will be a significant decline in inflation. This reflects the impact on import prices of the rebound in the value of the dollar against some international currencies and lower global commodity prices.

The outlook for 2010, due to the oil price recovery, will be much more positive. A Short, Sharp Shock forecasts that aggregate GCC GDP will grow by about 20 per cent to more than $1 trillion in that year. GCC governments will record a combined budget surplus of about $50 billion and the GCC current account will be in surplus by about $90 billion.

"The longer-term outlook for the GCC remains positive due to globalization and secular, global oil market trends," the report saids. "The year to come, consequently, is forecast to constitute a short and, potentially, sharp shock to GCC private businesses which will be mitigated by GCC government action and conditioned by the extent to which the region's abundant private liquidity can be mobilized by the banking and finance system.