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GCC: After The Boom
Consolidation is going to be the key word describing economic performance of the GCC countries over this year and 2008, according to a report “Gulf Economic Forecast” which was recently released by HSBC Bank Middle East Ltd. While the economies of the GCC countries peaked in 2006 after four years of booming growth, the bank remains bullish of the long-term economic prospects of the region.
The HSBC report notes that, at around US$720bn (AED 2.64 trillion), the GCC region’s gross domestic product (GDP) at the end of 2006 was about double the GDP value for 2002 and three times that of 1998. After growing at double-digit rates for the past four years, the nominal GDP of the Gulf region is likely to slip back to around 5% for this year and 2008, the bank predicts, primarily due to the declining value of international oil prices while both public and private sector spending is expected to remain strong thus exerting upward pressure on weakened-dollar price-based imports. “We estimate that real growth for GCC will stand at over 5% in 2007 and 2008. These years will see consolidation of gains that have already been made. The short-term future will see the GCC solidify the progress that has been made towards building economies that remain largely energy-based, but which have become far more diverse. The region has built a platform for growth that will continue for the remainder of the decade,” says Simon Williams, HSBC Middle East’s economist.
The bank notes that there remain many positive fundamentals driving economic growth and wealth creation in the GCC region. The report observes that annual per capita GDP in the region is now close to US$19,000 (AED 69,730), reflecting an 80% increase on per capita output of five years ago. As such, the GCC represents the fourth largest per capita GDP of the global emerging markets. “This year [2006], only Korea will come close to matching the GCC’s economic scale and wealth,” the report says.
While the GCC’s oil-based revenues are expected to decline, HSBC points out that the regional countries used the 2002-2006 economic boom to diversify their economies and began introducing business reforms. As such, non-oil economic output will play a greater role in the immediate years ahead. The report notes that, despite the steeply rising oil prices of recent years, the non-oil component of the region’s economy managed to maintain its share of overall GDP. “Across the GCC as a whole, non-oil compound annual growth rates have averaged around 15% over the last four years,” the report says.
A significant portion of this non-oil output relates to the “vast infrastructure projects” being undertaken across the region, the report says. These projects – which include the new economic cities in Saudi Arabia and Dubai’s ambition to construct the world’s tallest building – will remain key growth drivers over the coming two years and ensuring that investment spending remains high, the report notes. “The projects are also labour intensive, and as such will continue to draw in many thousands of new workers who will fuel further growth in consumption.”
Another positive factor influencing future economic growth in the GCC region is the relatively modest rise in inflation. Consumer price inflation – excluding the UAE and Qatar – remains below 5% with little signs of rising despite the weakness of the US dollar, the report observes. Inflation in the UAE and Qatar is also expected by HSBC to lessen by late this year and into 2008 as “supply side bottlenecks” – primarily related to the real estate sector – should begin to loosen. “...policy makers will take comfort from the fact that the [inflation] trend will have turned from sharply upward to downward. Price growth in 2008 should have returned to the mid-single-digit range – close to the regional average.”
UAE prospects good
Although economic growth in the UAE is expected to fall by 33% this year to 6.2% from 2006’s estimated GDP growth rate of 9.3%, HSBC says it “remains bullish on the outlook for the UAE economy for the coming two years”. Although HSBC predicts that overall real growth will remain high over this period, the bank also sees 2008’s growth rate slipping back to 5.8%. “While the country’s overall rate of economic growth will slow slightly in the next two years as oil prices ease and production falls, the non-oil sector will continue to expand strongly. The outlook for the UAE, and for UAE companies, remains good,” says Williams.
Government and private sector spending is expected to remain robust over this year and into 2008, which will add momentum to the economy. Credit growth in the private sector will also be strong, encouraged by falling nominal interest rates, the report says. And, with the continued inflow of foreign workers, which HSBC expects the UAE population to rise by 7-8% over 2007 and 2008, this domestic demand will fuel further growth.
HSBC singles out the rise in inflation as the biggest concern for the UAE economy, with the bank forecasting a consumer price rate of 7% for this year which is expected to fall to 6.5% in 2008.
Inflationary costs are particularly pronounced in Dubai, the report notes, with the residential and commercial property sector being the prime culprits. However, HSBC believes that, as a greater number of property developments currently in the pipeline come onto the market in the second half of this year, asset prices and rental yields should decline or at least stabilize. “Although rising costs for these items [property] have been the key drivers of inflation in the UAE, it will take time for new real estate supply to feed into rental costs, and more time still for this to feed through into other aspects of the economy,” the report notes.
The heady pace of real estate development in Dubai has raised general concerns over a possible property market crash, the report notes. “The correction in the past year in what had been inflated equity markets is also a reminder that asset prices can come down rapidly in the region,” the report observes.
However, HSBC believes that a property market crash is unlikely, dependant on its growth forecasts for the region holding true. The bank points out that there remains substantial pent-up demand across all of Dubai’s property sectors. In addition to which, Dubai’s population is expected to grow further over 2007/8.
Furthermore, HSBC notes that, from a supply perspective, property development is dominated by a relatively small number of players enabling them to “stagger” the supply of new capacity in the event market pricing began to drop sharply. But, HSBC does expect that current market conditions will a moderate weakening in rental pricing by the end of 2007. “We do anticipate that the residential market will soften, however, with asset prices and rental yields likely to fall by 10% over the coming two years,” the report says.
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