A report released by Bahrain-based Gulf Finance House, entitled “GCC Economic Outlook for 2008”, suggests that while the outlook for the regional economy continues to be positive, increased risks to the global economy mean that policy makers in the GCC [Gulf Cooperation Council] have to remain vigilant, especially with regards to monetary policy.
The Chief Economist, Dr. Alaa al-Yousuf, pointed out key forecasts and risks for the coming year while keeping the US economic slowdown in mind. He remarked: “Although conditions in the global credit markets have improved in recent months, we forecast a slower growth rate of the global economy. Indeed, the global financial markets are assuming a recession in the US and significant contagion to the rest of the world. We think that this is too pessimistic. The US faces a prolonged period of lower growth rate than its potential as the macroeconomic imbalances and financial conditions gradually adjust toward sustainable levels. Nonetheless, other major economies, such as the euro-zone and Japan, have not seen the same excesses, and should hold up reasonably well. The rapidly developing economies of Asia in particular, led by China and India, should be able to de-couple at least partially from the US, as they have done before.”
Yet the GCC faces a unique risk in the prospect of spillover of slower growth in the US to global demand for crude oil, and hence lower crude oil prices. Oil prices are expected to drift lower towards $75 per barrel by midyear, as increased supply catches up with weakening demand and the dollar stabilizes, but then should pick up again in the second half of the year. Based on these conservative assumptions for the global economy, GCC-wide oil and gas export receipts are forecasted to top $450 billion in 2008, which works out to almost $12,000 per capita. The external current account surplus is also forecasted to hover around $200 billion and the fiscal surplus to be in the range $150-170 billion. These surpluses are expected to boost (1) government expenditure-smoothing capabilities over the medium-term and (2) finance the spree of cross-border acquisitions by sovereign wealth funds (SWFs).
Another key risk facing the region is stubbornly high inflation, a problem that is compounded given the very limited scope for the use of monetary policy. Inflationary pressures, however, are expected to moderate this year. Firstly, though inflation rates will hover above the 5% mark across most GCC states, driven by hikes in housing rents, food prices, rising construction costs, rising inflow of expatriates, growth in mortgage finance and delays in real estate project delivery, supply-side responses may partially subdue price hikes in selected sectors. Global inflation fears are now overdone, and will not prevent major central banks from responding to the downside risks to growth by cutting interest rates. In the baseline scenario, the US Federal Reserve will slash the Target Fed Funds rate to 2.5% by mid 2008. GCC states have already slashed policy interest rates in response to the sudden Fed rate cuts on January 22 and January 31 and more cuts are expected to follow. Accordingly, GCC governments are most likely to step up the use of sterilization operations via issuing central bank bonds/CDs as well as direct credit/price controls, such as caps on loan-to-deposit ratios, higher reserve requirements, subsidies, and caps on rental increases.
Arab News, February 13, 2008. Excerpts from the original article written by Mahmood Rafique. Slight changes were made in keeping with the editorial policy of www.memrieconomicblog.org.