Gulf Arab economies to slow in 2012, analysts say

Economic growth is likely to slow in most of the Gulf's wealthy oil exporters next year but governments will remain able to spend to counter the impact of any global slump, a Reuters poll of analysts showed on Wednesday.

Gross domestic product in Saudi Arabia, the biggest Arab economy and the world's top oil exporter, is expected to expand 4.0 percent in 2012, down from an estimated 6.7 percent this year, according to the median forecast in a global poll of 18 analysts.

Next year's growth forecasts were cut for all six members of the Gulf Cooperation Council compared with the last Reuters poll, which was conducted in September. The 2012 estimate for Saudi Arabia was reduced from 4.5 percent.

The euro zone debt crisis and signs of slowing growth in China have darkened the outlook for the Gulf, making it harder for companies to raise funds from bank lending and bond issuance, and keeping real estate and equity prices under downward pressure in many countries.

In contrast to much of the rest of the world, however, the Gulf states still have ample fiscal reserves which they can use to stimulate their economies. They ramped up government spending early this year to protect social stability during the Arab Spring uprisings in the Middle East and North Africa, and are now expected to keep spending high to maintain growth.

"Increased government spending should insulate these economies from the negative impact of the global slowdown on oil demand and prices," wrote Said Hirsh, Middle East economist at London-based consultancy Capital Economics.

In the UAE, the second largest Arab economy, GDP growth is expected to slow to 3.1 percent next year from 3.9 percent in 2011, according to the latest poll, conducted in the past two weeks. Three months ago, analysts predicted 3.8 percent growth next year.

Growth is slowest in the tiny kingdom of Bahrain, the only GCC state to suffer major social unrest this year. But its economy has been recovering gradually since the second quarter of 2011 and is projected to accelerate to 3.0 percent next year.

Gulf economies were hit hard by the 75 percent plunge in the global oil price during 2008 and remain vulnerable to any repeat if the Western world falls back into recession. But analysts, noting oil held up well this year despite the worsening euro zone crisis, think a similar dive is very unlikely.

Fitch Ratings predicted this week that oil would average $100 per barrel in 2012, down only moderately from $110 in 2011. Brent crude was trading at $107 on Wednesday.

"The oil market remains tight and rising political risk centred on Syria and Iran is another factor keeping prices high, notwithstanding likely slower demand growth. Global financial linkages remain limited for most countries in the region," the credit rating agency said.

A moderate drop in the oil price this year would still leave most Gulf states with comfortable budget surpluses. Saudi Arabia's surplus is expected to drop to 4.8 percent of GDP next year from 12.3 percent in 2011, with the UAE edging down to 6.0 percent from 8.0 percent, the poll found. Kuwait is projected to have a giant surplus of 19 percent of GDP next year.

The rise in state spending is pushing up the minimum oil prices which some GCC countries need to balance their budgets; Saudi Arabia's break-even oil price, expressed in terms of Brent crude, is forecast to climb to a median $84.50 next year from $73 this year, the poll showed.

Any fall of the oil price below break-even prices would not spell disaster, however, because countries have plenty of reserves to finance their budgets - Saudi Arabia's estimated fiscal reserves of $280 billion are equivalent to over a year of government spending. Governments could also issue bonds to their cash-rich banks.

The exception to the healthy fiscal picture in the Gulf is Bahrain, which has a high break-even price estimated at $107.50, and which is projected in the poll to run a budget deficit of 5.0 percent of GDP in 2012, after a 2.8 percent deficit in 2011.

But many investors expect Saudi Arabia to step in with budget aid for Bahrain if necessary next year, since Bahrain is geopolitically important for Riyadh. Bahrain had no trouble issuing a $750 million Islamic bond last month to international investors, many of them from the Gulf.

Forecasts for inflation in GCC countries fell in the previous two Reuters polls and continued to drop for many countries in the latest poll. Despite strong fiscal spending, slowing global economic growth and a firm US dollar, to which most of the GCC currencies are pegged, are limiting upward pressure on prices and wages.

Analysts now expect average inflation of 2.4 percent in the UAE next year after 1.6 percent this year. Previously, the median forecast was for 2012 inflation of 3.0 percent.

Inflationary pressure is believed to be highest in Saudi Arabia because of massive housing and social welfare programmes launched in the kingdom this year. Saudi inflation next year is forecast at 5.0 percent, unchanged from the last poll.