Dubai, United Arab Emirates, May 5, 2014 - Macroeconomic prospects remain favorable for the Gulf Cooperation Council (GCC) countries the Institute of International Finance said in its latest forecast for the region. The IIF estimates the GCC will grow at 4.2 percent in 2014.
Growth moderated from 5.5 percent in 2012 to 4.2 percent in 2013, largely due to a slower rise in crude oil production. Non-hydrocarbon real GDP growth, a more representative measure of economic activity, remained robust at 5.4 percent in 2013, driven by higher public spending and stronger private sector activity.
Overall growth is projected to remain around 4 percent this year due to continued restrained oil production to accommodate increased oil supply from the United States and Iraq, and tepid global oil demand.
"GCC countries will need to make further progress in economic diversification through structural reforms to reduce dependence on hydrocarbons," said George Abed, senior counselor and director for Africa and the Middle East at the IIF. "GCC countries have made notable progress, undertaking massive investment in physical and social infrastructure, but much more remains to be done. As a result, the hydrocarbon sector's contribution to GDP has declined steadily, but the budget dependence on oil revenues continues to be high. Potential fiscal stress could arise over the medium term if oil prices soften markedly while government spending continues to rise."
Assuming an average Brent oil price of $105 per barrel in 2014 (as compared to $108 per barrel in 2013), the GCC's external current account surplus, while declining, is expected to remain large at $287 billion in 2014. The consolidated fiscal surplus will also narrow from 10.6 percent of GDP in 2013 to 8.3 percent in 2014, reflecting slightly lower oil prices and higher expenditures.
As a result of the continued large surpluses, the IIF expects to see gross financial assets rise to $2.8 trillion by year-end. With relatively little external debt, the region's net foreign assets would rise to $2.3 trillion (137 percent of GDP) by end-2014.
The IIF did not change its growth estimate for the United Arab Emirates (UAE) of 4.7 percent for 2013.
"Leading economic and financial indicators for the UAE in the first quarter of this year point to a further acceleration of non-hydrocarbon growth to 5.2 percent in 2014," said Garbis Iradian, deputy director for Africa and the Middle East at the IIF. "However, a slowdown in oil production will reduce overall real GDP growth to 4.2 percent for the year. We see Dubai growing at 5.6 percent in 2014, driven by tourism, transportation, and trade."
The IIF also expected inflation to rise for the UAE from 2.0 percent in March 2014 to 3.6 percent in December 2014, on the back of a significant increase in housing and related costs."
The IIF's analysis also suggested that the probability of a correction large enough to generate major macroeconomic and financial consequences for the UAE seems fairly low in the near term. If house prices continue to rise at a rapid pace, the UAE's central bank will need to further tighten macroprudential policies.
Net Foreign Assets = Foreign Assets - Foreign Liabilities.
Foreign Assets = Official Reserves +Foreign Assets of Banks + Sovereign Wealth Funds.
Source: IIF
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The Institute of International Finance is the global association for the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. Within its membership IIF counts leading global banks, insurers, pension funds, asset managers and sovereign wealth funds, as well as leading law firms and consultancies. For more information visit www.iif.com.