Gulf States: Key Themes For 2014
We retain a generally positive view of the Gulf Cooperation Council (GCC) states' prospects, as we head into 2014. While headline economic growth should slow, mainly because of smaller gains in oil production, the expansion of the non-oil private sector will remain robust. We highlight several themes that will define the region over the coming year, including declining fiscal surpluses; rising rental inflation; continuing diversification; limited increases to private sector employment; and political risks linked to succession issues and sectarianism.
- Headline growth is likely to slow for the GCC as a whole in 2014, on the back of smaller gains in oil production and a mild cyclical deceleration in the non-oil sector following three years of above-average economic expansion. We forecast overall real GDP growth for the GCC to fall to 3.7% next year, from an estimated 4.1% in 2013 and 5.2% in 2012.
- We expect only low single-digit increases in GCC oil production next year, with Saudi Arabia maintaining its traditional role of swing producer, thanks to its large spare capacity. The tight outlook for gas is set to endure.
- Although we project only a relatively soft decline in oil prices over the coming quarters, the subsequent impact on hydrocarbon revenues will complicate the outlook for the most fiscally vulnerable GCC states. We forecast the region's average budget surplus falling to 6.1% of GDP in 2014, from an estimated 7.8% in 2013 and 10.3% in 2012. The issue of fiscal sustainability will become ever more urgent over the medium term.
- We expect a continuing divergence between food and housing prices, which have traditionally acted as the two main drivers of inflation in the region. While GCC food inflation is likely to trend lower over the coming quarters, tight housing stocks and high demand are placing a heavy burden on the residential market and will fuel housing inflation.
- All GCC countries will continue to pursue the ultimate goal of economic diversification, with varying degrees of success. However, despite long-standing efforts by GCC governments to promote private sector employment amongst their nationals, progress will stay limited throughout 2014 and beyond. Instead, workforce nationalisation policies will complicate efforts to progress with infrastructure programmes, cause disruptions to economic activity, and have regional ramifications through remittances.
- In the political sphere, succession risks will remain key. Only the UAE and Qatar appear immune from this problem for now, but elsewhere complications could flare up at any stage over 2014. We flag Saudi Arabia (King aged 90); Oman (Sultan aged 72, with no children); Kuwait (Emir aged 84, with no obvious successor); and Bahrain (prime minister aged 77, in power since 1971) as the most problematic.
- Sectarianism in the GCC is likely to intensify throughout 2014, particularly given our view that the Syrian civil war will continue indefinitely. This presents a particular problem for Bahrain and Saudi Arabia.
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