GCC Economic Performance – An Outlook

The year 2008 began with oil prices continuing to rise and the oil prices breaching the US$100 per barrel mark in early January. In the past three years, oil prices have almost tripled, this most recent rise has been driven by strong global demand as the global economy experiences a period of almost unprecedented sustained growth. Among oil-exporting countries, the Gulf Cooperation Council (GCC), in particular, has gained immensely from the rise in oil prices. This fact is unsurprising: the GCC accounts for 29% of the worlds proven oil reserves, and one-fifth of the world's proven gas reserves.





The GCC nominal aggregate GDP depicted a growth of 17 percent to US$717bn in 2006. Such a tremendous growth was possible because of fivefold rise in oil prices since 2002. In 2006 GCC has accounted 18 percent of global oil production, around 39 percent of exports and a similar proportion of proved reserves. The only key worry for the gulf economies though is the rising inflation which is a result of dollar-pegged exchange rate. GCC oil earnings are denominated in dollars while a majority of their capital goods imports are denominated in Euro and other currencies resulting in hike in prices domestically and thus fuelling inflation. According to National Authorities and IIF Estimates, by the end of year 2007 GCC has maintained Net Foreign Assets of 1,795 US$ billion, which interprets as 1,159 percent of its GDP.

The GCC states' external positions have also benefited from the oil boom, as the majority of their exports are hydrocarbons and related products. Current account surpluses have been extremely strong, particularly in the larger oil-producing countries. These foreign exchange receipts have mainly been channeled toward boosting foreign reserves. The oil revenue windfalls have given GCC states' fiscal performances a significant boost.

GCC countries challenges fall under the categories of diversification, inflation, and geopolitical risk. The hydrocarbons industry, which accounts for around 75% of GCC exports, is capital intensive, rather than labor intensive, and a significant proportion of the manpower required is provided by foreign companies. Inflation has been rising in GCC states for the past two years. The principal causes of inflation are rising food prices, rising labor costs, weak U.S. dollar and strong domestic demand.









Tax Regime

Gulf Cooperation Council are blessed with abundant reserves of oil and gas and have been less reliant on taxes as a source of Government funding; therefore these countries have been slower to introduce aggressive taxing regimes.

Projects in GCC

Projects worth USD 1.86tn have been announced by the GCC countries which catered to construction, industry, oil & gas, petrochemicals, power and water etc. UAE leads in terms of projects announced in their country at USD 848bn followed by USD 460bn by Saudi Arabia and USD 269bn by Kuwait. Projects announced by Qatar, Oman and Bahrain amount to USD 190bn, USD 64bn and USD 33.5bn respectively.



In GCC, The economies of GGC are robust and are on track to further sustainability in 2007 and 2008, against a slowing global economic backdrop. The GCC nominal and real GDP is estimated to reach USD 800bn and USD 466bn respectively. Such sound macro fundamentals are based on the back of huge oil dominated earnings and fiscal surpluses. The surpluses which have amassed are being utilized to diversify the economy and for that reason they have indulged into massive projects. Much of these projects are focused on tourism, through there is also a concerted push to expand the manufacturing base along with basic infrastructure such as housing, roads and ports.

Sovereign Rating of GCC Economies

Of the six GCC sovereigns, Standard and Poor's Ratings Services phas ratings on all but the United Arab Emirates. However, within the UAE, they rate the most prominent of the seven emirates in terms of size and wealth, Abu Dhabi. With a foreign currency rating of 'AA/Stable/A-1+', Abu Dhabi is the highest rated of all GCC sovereigns. Followed by Kingdom of Saudi Arabia at AA-/Stable/A-1+.

Source: S&P
* at 09 Jan 2007

The increased robustness of GCC countries' balance sheet positions has led to a series of ratings upgrades in the past few years. Despite these positive ratings improvements, there are still a number of challenges facing GCC countries. Broadly, these challenges fall under the categories of diversification, inflation, and geopolitical risk. In isolation the effect of such challenges on credit ratings is currently dwarfed by the sheer balance sheet strength of these countries. Taken together, however, they are a potential constraint on further positive ratings actions on these sovereigns.

High oil prices clearly have a positive effect on the economic and fiscal results of the GCC states. Indeed, the current oil boom has strengthened all the key macroeconomic indicators in all six countries. The continuing support from the oil led petrodollars will continue to remain in the limelight and would improve the rating of the country going forward through their diversification strategies.

GCC Equity Market Performance

The quadrupling of oil prices since 2002 and efforts at diversification of income streams have bestowed the GCC region with unprecedented growth. The same trend has been seen in the equity markets of the GCC which staged a full back recovery after a huge correction in 2006. The market correction in 2006 also dropped the corporate profitability of the companies as companies in GCC have a significant portion of their assets invested in bourses.



In 2008 Kuwait and Oman witnessed the highest increase in value traded with Kuwait’s has been increased by 114% forming 14% of the value traded in 2008.

There is a strong volatility in Market Capitalization and GDP of the GCC economies. Except, Oman market capitalization of the equity markets in the GCC is over 100%. In 2007, the GCC witnessed IPO listings of 33 as against 23 launched in 2006. The new listings anchored the market. The listings attracted foreign institutional investors in the GCC markets and as the market sentiment improved in the second half of the year, IPO stocks emerged as the better deals outperforming the other stocks in terms of appreciation

The average IPO size increased by 25% during 2006 and decreased by 2.4% in 2007. In 2006, the average size was US$327mn which shrunk to US$319mn in 2007. While total amount rose from IPOs increased 40% during 2007 compared with 2006. Going forward it is estimated that 116 public offerings are likely to be offered to investors in the next three years. However, to date, only 42 companies have assigned a share issue manager for the float, while others have announced their intention to carry-out studies for an IPO.

Buoyed by elevated oil prices and rising corporate earnings, stock markets in the GCC are moving towards another strong growth year in 2008. The region looks attractive also because of downturn in global capital markets because of the multi-billion dollar losses being assessed by the giant investment firms and many global funds.