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The outlook for the global economy remains gloomy with some key risks: a looming fiscal crisis in the US, potential for further disruption from Eurozone sovereign debt crises and a potential slowdown in the Chinese economy from previously high growth. However, according to analysis from QNB Group, the GCC is well positioned to sustain a severe and sustained shock to global GDP.

Slower growth in the US, Eurozone and China would have knock-on effects in the GCC, mainly through weaker demand for oil and the impact on oil prices. The IMF estimates that 1% lower real GDP in either the US or Euro Area would lead to 0.4% lower GDP in the GCC a year later, while a 1% fall in China’s growth would lead to a 0.1% fall in the GCC.

Over a fifth of GCC exports are to China, the EU and the US, so a simultaneous demand shock in these countries could have a significant impact on demand for GCC exports.

More importantly, slower growth in these major economies—responsible for 44% of oil and 35% of gas consumption—would be likely to drive down hydrocarbon prices. This in turn would have a stronger impact on GCC export revenue, reducing fiscal and current-account surpluses and potentially leading to weaker economic activity.

 During the global recession in 2009, oil prices fell by 37% and liquefied natural gas (LNG) spot prices by 27%. As well as reducing export revenue, this contributed to a 0.2% contraction in GDP in the GCC as oil production was lowered in response to lower demand and prices. Consequently, some investment plans were scaled back with the deteriorating economic climate.

 The regional macroeconomic environment now is stronger than it was in 2009, which should help insulate the GCC from global economic shocks. International reserves have risen steadily over the last three years, reaching US$694bn (20 months of import cover) in June 2012, up by 47% from US$473bn (18 months of import cover) at the end of 2009. Additionally, the region’s sovereign wealth funds have external assets valued at just under US$1trn, according to the IMF. Therefore, sovereign wealth fund assets and international reserves collectively total over 120% of regional GDP.

 However, in terms of the domestic economy, the buffers have narrowed. While rising government spending, particularly on wages, has supported the non-oil economy, it has also driven up the fiscal breakeven oil price (the price at which government budgets are likely to be balanced). In Qatar and Kuwait the breakeven price rose by just over US$15/b from 2008-12 to around US$40/b and US$50/b respectively. In Oman, Saudi Arabia and the UAE the breakeven price has risen to around US$80/b. Although this remains below oil prices of over US$100/b, a sustained drop in oil prices could prompt some GCC countries to implement fiscal consolidation, which may lead to softer growth in the non-oil economy, according to QNB Group.

The IMF recently analysed the impact on GCC fiscal and external balances of a US$30 drop in the price of a barrel of oil to around US$70/b in 2013 with prices remaining lower and declining to US$60/b in 2017. According to QNB Group, it is important to note that the IMF scenario is extreme. It would probably require a series of crises to unfold, such as sequential sovereign defaults in Europe, combined with a failure to avert the US fiscal cliff and a credit implosion in China. All these events unfolding in the near future could be enough to drive oil demand and prices down to US$60/b for a sustained period. In comparison, QNB Group expects that oil prices will remain broadly stable at US$110/b in 2013.

The IMF estimates that its low oil price scenario would erode the overall GCC current-account surplus (currently around 25% of GDP) by 2017.

However, the IMF analysis assumes that there are no changes in hydrocarbon production and exports as a result of the drop in oil prices. A drop in oil prices tends to lead to lower oil production and exports as OPEC is inclined to lower output targets or enforce them more strictly. GCC oil production fell by 8% in 2009, the last time oil prices fell significantly. This would be partially compensated for by a fall in imports of goods in services owing to slowing economic activity. Nonetheless, it is likely that there would be a higher current-account deficit for the GCC than envisaged in the IMF analysis. Taking this into account, QNB Group estimates that the current-account deficit would be around 10% of GDP by 2017.

Using its low oil price assumptions, the IMF estimates that the GCC fiscal balance would fall from a surplus of just over 10% of GDP to a deficit of around 10% of GDP with all countries’ fiscal balances falling into deficit. This is broadly in line with QNB Group estimates as, although lower oil production would also impact fiscal revenue, the IMF also assumes expenditure plans would remain unaffected. However, it is likely that spending would be reined in, partly compensating for the drop in oil revenue.

There would also be a negative impact on GDP growth, according to QNB Group. Reduced production of hydrocarbons would likely lead to broadly flat growth in the oil and gas sector. The drop in oil prices and restrained government spending and investment would also dampen growth, particularly in the non-oil sector.

 

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However, even in the scenario of extremely low oil prices, the public external assets of the GCC are comfortably sufficient to weather the storm according to both the IMF and QNB Group analysis.


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