Dubai International Financial Centre: Institute Of International Finance (IIF) Sees Robust Growth And Progress On Diversification In The Gulf Cooperation Council (GCC)

• Banking system is sound and has fully recovered from the spillovers of the global financial crisis
• Gross foreign assets to exceed $2.5 trillion by end-2013, reinforcing economic resilience if oil prices drop
• Sound macroeconomic policy and structural reforms must be sustained for continued strong economic performance

The Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE, registered an average growth of 5.8% in 2012. Growth is projected to moderate to 3.8% in 2013, due to flattening crude oil production. Growth of nonhydrocarbon sector, more representative of economic activity, is forecast to stay robust at around 5% this year, said the Institute of International Finance (IIF). The IIF is the leading global association of financial services firms with more than 470 member institutions, including more than 100 members in the Middle East and North Africa region.

Mr. Jeff Singer, CEO of DIFC Authority welcomed Dr. George Abed noting that this is the third year that the IIF has held its GCC press conference at Dubai International Financial Centre, and said: “Over the last decade, DIFC has supported a range of knowledge sharing initiatives, including the IIF GCC Outlook report, focused on the UAE and the wider region.  The IIF's 2013 report indicates greater diversification in the region’s economies and gives a positive forecast for the year ahead. DIFC is committed to enhancing economic development by providing a platform for businesses to contribute to the key growth areas of trade and finance.

Dr. George T. Abed, IIF Senior Counselor and IIF Director for Africa and the Middle East, thanked the DIFC, with whom the IIF has had a close and constructive relationship over the years, for hosting the press conference today on the release of the IIF’s GCC report.

Dr. Abed noted that “the GCC countries have pressed ahead with economic diversification as the share of the hydrocarbon ratio has continued to decline, from 41 percent in 2000 to 27 percent most recently.  Growth has been driven by rising public sector spending, especially on physical and social infrastructure, and buoyant private sector activity. However, to sustain this momentum as the share of the hydrocarbon sector continues to decline, structural reforms need to be deepened and sustained. Among the priorities is a continued review of public spending with the aim of tempering its growth while reducing inefficiencies (e.g. energy subsidies), and diversifying sources of revenues. Furthermore, especially for the more populated countries, ongoing efforts to reorient work incentives and promote private sector employment of nationals must be reinforced and expanded.”

Dr. Garbis Iradian, IIF Deputy Director, Africa and Middle East Department, and principal author of the report, stated, “We expect average oil prices to be $108 per barrel this year. The GCC’s crude oil production is projected to decrease slightly. As a result, the consolidated external current account surplus for the GCC is likely to decline from a peak of $389 billion in 2012 to $334 billion in 2013, but still leading to sizeable accumulation of foreign assets, which could rise to around $2.5 trillion by year-end.”

Dr. Iradian, added, “In the UAE, we expect growth to moderate to 3.6% in 2013 from 4.8% in 2012, due to much smaller increase in crude oil production. Nonhydrocarbon growth, however, is forecast to accelerate slightly to 4.5% in 2013, driven by higher government capital spending in Abu Dhabi and continued robust growth in trade, tourism, and transportation in Dubai. He noted that the adverse impact of a drop in oil price on the UAE will be limited, given its diversified economy and lower breakeven oil prices. However, Dr. Iradian cautioned that the Dubai debt episode has left markets with some concerns that the lessons of the past may not have been fully absorbed, and that efforts should continue to focus on strengthening the balance sheets of government related entities.

Dr. Abed added, “Since the onset of the global financial crisis and, subsequently, the Dubai debt difficulties, financial institutions that were affected by the crisis have steadily strengthened their balance sheets, thanks to public sector support, supervisory vigilance, and timely recovery in asset prices, core economic activity and earnings. Banks in the GCC, especially the large, well established institutions, which account for the bulk of bank assets in the region, have generally maintained strong capital and liquidity positions. The rise in provisions is tapering off and NPLs have begun to trend downwards. All six jurisdictions are in various stages of implementing Basel III.”

The IIF report signals that the main downside risk to the GCC outlook stems from the possibility of much lower oil prices for a sustained period of time. To the extent that some of the expenditure increases have become irreversible, such a possibility could limit GCC countries’ fiscal policy space. The report presents forecasts of key macroeconomic indicators based on two oil scenarios: (i) a baseline scenario with oil prices stable at $108/b through 2020; and (ii) an alternative scenario which assumes a drop in oil prices to $85/b starting in 2014 and lasting through 2020.  Under the alternative scenario the consolidated fiscal surplus (projected at 10% of GDP in 2013) will shift to a deficit of 1% of GDP by 2016 and 5% by 2020. Foreign assets could be drawn down by $1 trillion by 2020. While the risk of a drop in the oil price to $85/b appears unlikely at present, robust global oil supply growth and weak demand could conceivably push prices down close to that level in the coming few years.