The Washington-based global association of financial institutions said the region’s gross financial assets are also on course to rise to $2.8 trillion by year-end as a result of continued large surpluses.However, the IIF warned that the GCC countries’ fiscal stress could surge over the medium term if oil prices drop sharply 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 per cent of the gross domestic product in 2013 to 8.3 per cent in 2014, reflecting slightly lower oil prices and higher expenditures,” it said in its regional overview.
This year, overall growth of the GCC is projected to be around four per cent as oil production remains restrained due to increased global supplies and tepid growth in demand, the IIF said. Growth moderated from 5.5 per cent in 2012 to 4.2 per cent 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 per cent in 2013, driven by higher public spending and stronger private sector activity.
The IIF in its review showed GCC countries to make further progress in economic diversification.“Although hydrocarbon sector’s contribution to GDP has declined steadily, the budget dependence on oil revenues continues to be high,” said George Abed, senior counsellor and director for Africa and the Middle East at the IIF.
GCC private sector growth is projected to rise further to 6.2 per cent in 2014 from 5.9 per cent in 2013, supported by buoyant domestic demand and both private consumption and investment expenditures. Government-sector growth is projected to slow to 3.5 per cent in 2014 from five per cent in 2013 as authorities across the GCC move to begin to rein in expenditure growth, which had been resurgent for nearly a decade.
Economic diversification in the GCC, the IIF noted, continues as signalled by the steady decline in the share of the hydrocarbon sector’s contribution to real GDP from 41 per cent in 2000 to 33 per cent now. “However, GCC countries have not done as well in diversifying their domestic revenue base as the oil and gas sector’s contribution to budget receipts remained high at 84 per cent on average in the last three years,” it said.
Inflation is projected to remain subdued at about three per cent in 2014, reflecting both the absence of global inflationary pressure and the openness of the economies. However, in Qatar and the UAE, some price pressures could emerge, driven by a rapid increase in housing and related costs. The UAE is projected to see a rise in average inflation from 1.1 per cent to 2.8 per cent as the property market recovers and the deflationary impact from rent declines is reversed.
In a recent forecast, the International Monetary Fund had predicted GCC economic growth to be 4.4 per cent in 2014 as oil production rises and the non-oil sector benefits from the large infrastructure projects being implemented. However, because of the volatility inherent in oil prices, the IMF expects downside pressures during 2014, as well as longer-term structural challenges. The IMF has said that most GCC economies continue to have “substantial buffers” to cope with short-lived oil price shocks despite an expected drop in their current account surpluses.
The IMF also had noted that most GCC countries have accumulated large official external assets and would be able to comfortably weather temporary declines in oil income. Total public external assets in the GCC are estimated at nearly $2 trillion, which could be used to make up for any shortfall in oil revenue.
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