Report: Stable growth in GCC through 2015

Economists presented a 2015 outlook for Gulf countries, emerging markets and global growth while taking into account political and economic uncertainties

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Gulf governments will continue to spend on mega projects, development programs, and social welfare initiatives despite the sharp drop in the price of oil in the second half of 2014, said two leading economists at a seminar hosted by Asiya Investments in Kuwait.

The speakers were Emirates NBD’s Head of Research and Chief Economist, Tim Fox and Francisco Quintana, Asiya Investments’ chief economist. Both Fox and Quintana presented a 2015 outlook for Gulf countries, emerging markets and global growth while taking into account political and economic uncertainties that are expected to influence regional and global economies in the coming year. The session was attended by economists, analysts, and investors.

Both economists said that the non-oil economy in the Gulf will not be affected by global and regional events as it continues to be shielded from the impact of instability in other parts of the Arab World, thanks to continued spending by Gulf governments and the high disposable income of their populations.

And in regards to the oil economy, “there is a consensus that crude oil prices will naturally change directions and begin to gradually increase; an increase that will likely be drastic if political instability increases in certain parts of the Middle East,” said Quintana.

He added: “Continued geopolitical tensions, social unrest in Egypt after the coming elections, conflict escalation in Libya and Syria, are all potential oil price drivers.”

However, even with the unfortunate scenario of unrest continuing in the Middle East, it is very unlikely to see the price of crude oil averaging above $80 by year-end, unless one or both of the following two events take place.

The first is negative outcome of negotiations on Iran’s nuclear program that are scheduled for Q2 2015 and the second is OPEC members voting to reduce production to boost the price of oil.

On the other hand, low crude oil price could stimulate growth globally and especially in Europe and emerging economies, which now have access to cheaper raw material and logistics costs. Emerging economies will also attract new capital inflows in Asia and other parts of the world,” said Emirates NBD’s Head of Research and Chief Economist Tim Fox.

In such an economic environment, all eyes should be on Emerging Asia said Quintana. Emerging Asia is still growing twice as fast as the rest of the world’s emerging markets, which themselves are outpacing growth in developed economies by two to one. The GCC is well positioned to benefit from this growth.

Fox added that geopolitical risks govern the region this year and could lead to a contagion to the Gulf countries, affecting tourism in countries such as the UAE and Qatar. Tensions between Qatar and the rest of the Gulf are ongoing within the political front, and political successions in some Gulf countries are also seen as risks that could affect stability. A positive effect of geopolitical risks are further inflows of foreign money into the UAE banking system and ultimately other assets including equities and real estate.

Globally, growth is expected to remain at a 3% rate this year, said Asiya Investment’s chief economist. This growth will be driven by a stronger U.S. economy, Fox believes, with a tighter monetary policy that is expected to be rolled out around the second quarter of 2015. Though a tighter U.S. Federal Reserve policy would mean stronger growth in the U.S., it would also mean tighter financial conditions for emerging economies leading to capital migration and volatility in these markets, said Fox.

“Unlike most emerging markets, Emerging Asia’s growth will remain elevated, in spite of China’s deceleration, because India will compensate for it,” said Quintana.

In terms of risks, Quintana pointed at that, after January, June-July would be the riskiest moment of the year, as a number of elections (Turkey, UK) coincide with the deadline for the nuclear agreement in Iran, and the debt-ceiling issue in the U.S.

Having said that, Quintana highlighted that in spite of these indicators, unforeseeable conflicts usually absent from the political calendar could also truly shake the global and Gulf economy.

Overall, both economists portrayed a rather positive outlook for 2015. Both economists saw the price of crude oil gradually climbing from the low $40 mark reached in January 2015. They did agree that there will be a strain on the budget of Gulf countries but thanks to high cash reserves generated from previous years, spending will continue.

A version of this article was first published in the Saudi Gazette on Feb. 8, 2015.

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