GCC fiscal surplus forecasts at 13.8% of GDP

Emirates NBD Headquarters
Emirates NBD in its GCC quarterly economic overview revised its average GCC fiscal surplus forecast at 13.8% of GDP in 2012, up from 9% of GDP at the start of the year.

NBD said its forecast for the average current account surplus has risen to 24.9% of GDP from 20.1% of GDP at the start of the year.

Regional inflation has surprised on the downside in 1H 12. Easing food inflation has been the main driver, although low or declining housing costs are helping to keep CPI contained in many of the GCC states.

Our house view is for the USD to continue to benefit from global risk aversion and eurozone worries, and as the GCC currencies are pegged to the USD (except Kuwait, which still has the USD as the main component of its managed peg) imported inflation is likely to remain contained in 2H 12. Recent declines in other commodity prices should also help to keep input costs from rising further.

Both the UAE and Saudi Arabian PMIs have consistently shown that producers are not able or willing to pass on rising input costs to consumers, and are instead seeing their margins squeezed. This suggests there is still excess capacity in the economies, and this too should help to keep headline inflation contained.

As a result, NBD revised our average 2012 inflation forecasts down in all the GCC states, except in Bahrain where we have left our forecast unchanged. Average GCC inflation is now likely to ease to 3% this year from 3.4% in 2011, compared with our previous forecast of 3.5%.

The four largest GCC economies have experienced slowing money supply growth so far in 2012, to varying degrees. The UAE and Kuwait have seen broad money growth (excluding government deposits) slow relatively quickly in recent months, and in the UAE M2 growth turned negative on an annual basis in May for the first time on record. Qatar and Saudi Arabia have also seen money growth slow this year, but to a lesser extent, while broad money growth has accelerated in Oman and Bahrain.

Total domestic credit growth has accelerated this year in all the GCC states, except Saudi Arabia and the UAE. Qatar has shown the fastest growth in credit, driven largely by the public sector. Bahrain and Oman have also seen both private and public sector credit growth accelerate this year.

In Saudi Arabia, private sector credit growth has continued to increase steadily. However, declining central government borrowing has more than offset still strong credit growth in public sector entities, so that total public sector credit levels have declined on an annual basis in April and May.

In the UAE, total bank lending growth is been relatively slow year-to-date. Loans and advances growth has averaged 2.2% in Jan-May, down from 3% average in 2011.

At the start of this year, Emirates NDB expected GCC oil production to decline in 2012 in response to weaker global growth and increased supply from Libya and Iraq. “We had not anticipated the sharp increase in oil prices in Q1, partly due to geopolitical concerns, that prompted most of the GCC to increase production to record high levels,” it added.

“While we anticipated that high oil prices in Q1 would reverse as economic fundamentals re-asserted themselves and the geopolitical risk premium subsided, we did not expect GCC oil producers to maintain their record high oil output levels despite the falling prices. Average oil output for the 4 OPEC Gulf exporters in 1H 12 was 5.5% higher than average 2011 production.”

“Looking ahead, we still expect oil production in GCC states to ease in 2H 12 as data continues to suggest weakness in the global economy. However, with strong output in 1H 12, average oil production in the GCC will likely contribute positively to GDP growth this year.

“We have revised up our 2012 growth forecasts for Saudi Arabia, UAE, Kuwait and Oman largely on the back of higher oil production. We have revised our real GDP growth forecast for Qatar down, as oil production has declined in 1H 12 and after taking into account the Qatari authorities’ own growth forecasts for this year. We have left our forecast for Bahrain’s real GDP growth unchanged. Consequently, our forecast for average GCC growth this year is now 5% up from 3.9% previously,” it said.

“OPEC’s daily reference price averaged $112 per barrel in 1H 12, despite the decline in oil prices in Q2. Consensus forecasts for the rest of this year imply an average oil price for 2012 of $108 per barrel. This is slightly higher than the $104.5 per barrel consensus forecast at the beginning of the year. Our upgraded oil production estimates have also had a positive knock-on effect on regional budget forecasts for this year, as well as on regional current account surpluses.”

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