GCC economies seen strong, gov't spending to fall

The GCC countries are in a strong position to face the current economic challenges but growth in government spending could fall should the oil price stabilize at current levels, investment bank EFG Hermes said on Sunday.

Given the fall in the oil price and the likelihood of OPEC cutting production further, there will be a substantial deterioration in headline economic figures, the regional investment bank said in a note to investors.

"Even if we assume that the oil price will remain at around $60, this would result in an average oil price of $100 [in 2008]," economist Monica Malik said.

As a result, nominal GDP growth is expected to fall for oil dependant countries such as Saudi Arabia, Oman and Kuwait.

Growth in the relatively more diversified economies of Bahrain and the UAE will rise only marginally, driven by the non-oil sector.

Qatar is expected to buck the trend, as an increase in gas production will counterbalance any oil price and production cuts.

"If the oil price stabilizes at current levels and averages around $60 to $65, we believe that [GCC] government spending growth will decline, thereby providing a much smaller fiscal stimulus to the economy," Malik said.

EFG Hermes has reduced its real GDP growth estimates across the region as a result of the oil production cuts.

The bank now sees Saudi Arabia posting real GDP growth of 2.4 percent next year, compared to a previous estimate of 3.3 percent.

In the UAE, real GDP growth is expected to reach 4.8 percent in 2009, 0.2 percent lower than previously predicted.

"The economic reality on the ground will not be as stark as figures indicate. If the oil price averages $85, we expect government spending plans will not change markedly and will remain expansionary," Malik said.

"This is especially the case given the record budget surplus that will be realized in 2008.

"The amount of oil revenue injected into the economy will continue to increase, supporting the non-oil sector."

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