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Tue 27 Mar 2012 06:19 PM

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Gulf states' growth prospects improve, says poll

Analysts say high oil prices likely to shield Gulf exporters from any global slump

Gulf states' growth prospects improve, says poll

The economic outlook for most Gulf oil exporters has improved, although this year's expansion will lag 2011, and high oil prices should provide a big enough shield against any global slump, a Reuters poll showed on Tuesday.

Gross domestic product in Saudi Arabia, the biggest Arab economy and the world's top oil exporter, is expected to expand 4.5 percent in 2012, down from 6.8 percent last year, according to the median forecast in a poll of 17 analysts.

The 2012 growth forecasts were raised from December's survey for four out of six members of the Gulf Cooperation Council. Qatar remained the top projected performer with a 6.6 percent annual clip.

Growth in the region will be slower than in 2011 in part because last year's jump in oil production after the civil war in Libya is unlikely to be repeated. The 2012 prediction for the Saudi kingdom was increased from 4.0 percent.

"I am not sure people's views have changed that much on the non-oil economy," said Daniel Kaye, senior economist at National Bank of Kuwait. "I suspect what is going on is more to do with the oil sector and that oil prices are very high, rates of production among key Gulf producers are also very high."

The euro zone debt crisis and signs of weakness in China, the world's No. 2 economy and the Gulf's key trade partner, have clouded the outlook for the region as banks are more cautious to provide loans, making financing harder to access for firms.

Oil prices are floating at nearly one-year highs above $125 per barrel, partly due to tensions around Iran's nuclear programme.

That will give the Gulf monarchies plenty of firepower to support their crude-reliant welfare states - even if the wider global economy toils under such high prices.

Last year many governments across the world's top oil exporting region boosted budget spending on pensions and wages to soothe social tensions such as those that hit Bahrain and Oman.

In the UAE, the No. 2 Arab economy, GDP growth is forecast to slow to 3.1 percent this year from the IMF estimated 4.9 percent in 2011, the poll showed. The forecast is unchanged from three months ago.

The UAE is facing headwinds from Dubai's 2009-2010 debt crisis as the property sector stays weak and lending slow. Banks face a substantial rise in bad loans and risk of further debt restructuring at state-owned firms, the IMF said this week.

Analysts estimated Dubai's and its state-linked firms' debt at $118bn, or 144 percent of its 2010 GDP.

Sanctions against Iran may also bite unlike in other Gulf countries, whose trade links with Tehran are insignificant.

"Iranian trade can be anything up to 7 percent of Dubai's GDP, so if you see a 50 percent drop of trade with Iran that could potentially be a 3 to 4 percent fall in Dubai's GDP," said Farouk Soussa, Citi's Middle East chief economist.

"The main impact of sanctions has been in terms of financing trade, and that'll have an immediate impact but in the longer term there are ways of getting around financing issues. So we're not too worried that the full effect of sanctions will be seen but it could be a drag on growth," he said.

Growth should accelerate to 3.0 percent from 2.2 percent in 2011 in the non-OPEC kingdom of Bahrain, which faced its worst social unrest since the 1990s last year, but the tension keeps analysts' forecast unchanged from December.

"The key drivers of economic growth in Bahrain, which were real estate, tourism and offshore banking have all taken a real hit because of the violence and what we've been seeing over the past year," Soussa said. "That hasn't gone away ... and will continue to be a drag on those sectors."

A 75 percent dive in crude prices during 2008 hit Gulf budgets hard and an ongoing spending spree, expected to continue this year, has made Gulf states vulnerable to shock if the United States and Europe slide into another recession.

A separate Reuters poll in March saw Brent crude averaging $115 per barrel this year, a decline from current levels, with some analysts expecting prices as low as $95, though no meltdown similar to 2008 is seen.

Such a drop in the oil price would still leave most Gulf states with comfortable budget surpluses. Saudi Arabia is expected to book a surplus of 12.4 percent of GDP in 2012, well up from 4.8 percent seen in December's poll, with the UAE slightly down at 5.9 percent.

Kuwait is projected to post a huge surplus of 20.4 percent of GDP this year.

"For now, they (Gulf countries) can carry out their spending plans but ... given the increasing break-even prices they are more vulnerable to any kind of downward oil price shock," Nancy Fahim, economist at Standard Chartered in Dubai, said.

Saudi Arabia's budget break-even oil price, expressed in terms of Brent crude, is forecast at between $70 and $93 per barrel, the poll showed. It is seen at between $100 and $117 for Bahrain, which is fiscally the weakest Gulf country.

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