1. QNB Economics
economics@qnb.com.qa
17 November 2012
The GCC is insulated from a severe global growth shock
The outlook for the global economy remains gloomy and international reserves collectively total over 120%
with some key risks: a looming fiscal crisis in the US, of regional GDP.
potential for further disruption from Eurozone
sovereign debt crises and a potential slowdown in the However, in terms of the domestic economy, the
Chinese economy from previously high growth. buffers have narrowed. While rising government
However, according to analysis from QNB Group, the spending, particularly on wages, has supported the
GCC is well positioned to sustain a severe and non-oil economy, it has also driven up the fiscal
sustained shock to global GDP. breakeven oil price (the price at which government
budgets are likely to be balanced). In Qatar and
Slower growth in the US, Eurozone and China would Kuwait the breakeven price rose by just over US$15/b
have knock-on effects in the GCC, mainly through from 2008-12 to around US$40/b and US$50/b
weaker demand for oil and the impact on oil prices. respectively. In Oman, Saudi Arabia and the UAE the
The IMF estimates that 1% lower real GDP in either breakeven price has risen to around US$80/b.
the US or Euro Area would lead to 0.4% lower GDP in Although this remains below oil prices of over
the GCC a year later, while a 1% fall in China’s US$100/b, a sustained drop in oil prices could prompt
growth would lead to a 0.1% fall in the GCC. some GCC countries to implement fiscal
consolidation, which may lead to softer growth in the
Over a fifth of GCC exports are to China, the EU and non-oil economy, according to QNB Group.
the US, so a simultaneous demand shock in these
countries could have a significant impact on demand The IMF recently analysed the impact on GCC fiscal
for GCC exports. and external balances of a US$30 drop in the price of a
barrel of oil to around US$70/b in 2013 with prices
More importantly, slower growth in these major remaining lower and declining to US$60/b in 2017.
economies—responsible for 44% of oil and 35% of According to QNB Group, it is important to note that
gas consumption—would be likely to drive down the IMF scenario is extreme. It would probably require
hydrocarbon prices. This in turn would have a stronger a series of crises to unfold, such as sequential
impact on GCC export revenue, reducing fiscal and sovereign defaults in Europe, combined with a failure
current-account surpluses and potentially leading to to avert the US fiscal cliff and a credit implosion in
weaker economic activity. China. All these events unfolding in the near future
could be enough to drive oil demand and prices down
During the global recession in 2009, oil prices fell by to US$60/b for a sustained period. In comparison,
37% and liquefied natural gas (LNG) spot prices by QNB Group expects that oil prices will remain broadly
27%. As well as reducing export revenue, this stable at US$110/b in 2013.
contributed to a 0.2% contraction in GDP in the GCC
as oil production was lowered in response to lower The IMF estimates that its low oil price scenario
demand and prices. Consequently, some investment would erode the overall GCC current-account surplus
plans were scaled back with the deteriorating (currently around 25% of GDP) by 2017.
economic climate.
However, the IMF analysis assumes that there are no
The regional macroeconomic environment now is changes in hydrocarbon production and exports as a
stronger than it was in 2009, which should help result of the drop in oil prices. A drop in oil prices
insulate the GCC from global economic shocks. tends to lead to lower oil production and exports as
International reserves have risen steadily over the last OPEC is inclined to lower output targets or enforce
three years, reaching US$694bn (20 months of import them more strictly. GCC oil production fell by 8% in
cover) in June 2012, up by 47% from US$473bn (18 2009, the last time oil prices fell significantly. This
months of import cover) at the end of 2009. would be partially compensated for by a fall in imports
Additionally, the region’s sovereign wealth funds have of goods in services owing to slowing economic
external assets valued at just under US$1trn, according activity. Nonetheless, it is likely that there would be a
to the IMF. Therefore, sovereign wealth fund assets higher current-account deficit for the GCC than
envisaged in the IMF analysis. Taking this into
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2. QNB Economics
economics@qnb.com.qa
account, QNB Group estimates that the current-
account deficit would be around 10% of GDP by 2017.
Using its low oil price assumptions, the IMF estimates
that the GCC fiscal balance would fall from a surplus
of just over 10% of GDP to a deficit of around 10% of
GDP with all countries’ fiscal balances falling into
deficit. This is broadly in line with QNB Group
estimates as, although lower oil production would also
impact fiscal revenue, the IMF also assumes
expenditure plans would remain unaffected. However,
it is likely that spending would be reined in, partly
compensating for the drop in oil revenue.
There would also be a negative impact on GDP
growth, according to QNB Group. Reduced production
of hydrocarbons would likely lead to broadly flat
growth in the oil and gas sector. The drop in oil prices
and restrained government spending and investment
would also dampen growth, particularly in the non-oil
sector.
GCC International Foreign Exchange Reserves
(US$bn)
694
647
532
505
475
435
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jun-12
Source: National Sources and QNB Group analysis
However, even in the scenario of extremely low oil
prices, the public external assets of the GCC are
comfortably sufficient to weather the storm according
to both the IMF and QNB Group analysis.
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