Uneven growth seen for PGCC in 2011

April 17, 2011 - 0:0

A surge in oil prices due to regional tensions will benefit Persian Gulf economies but the turmoil could lead to uneven growth because of slow bank credit and dampened investor confidence, Saudi Arabia’s largest bank. Dubai could be the one odd out as it stands to benefit from an expected period of stagnation in real estate investment in Bahrain due to the recent unrest, National Commercial Bank (NCB) said in a study sent to 'Emirates 24|7'. It said the turbulence sweeping many parts of the Middle East and North Africa (Mena) would smother prospects for a full post-crisis recovery in the region in 2011 following last year’s economic rebound that was fueled by stronger oil prices and high public spending, mainly in the Persian Gulf Cooperation Council. “The recent period of political instability in parts of Mena may now have called this into question by further reinforcing the leading drivers of last year’s recovery. While the oil price rebound will likely support confidence, investor mood has been tested by the political instability as well as recurrent concerns about global growth,” said the 25-page study on the PGCC economies. “The

[Persian] Gulf will have to face at least a period of uncertainty and investor caution… the effects of the turmoil have not been uniformly negative, nor have they equally affected the regional economies. In particular, Dubai has been presented with a significant opportunity to capitalise on its enhanced cost competitiveness in real estate as investors reassess their views about Bahrain. More generally, higher oil prices, potentially for an extended period, represent a major windfall for the regional producers.” The study said that while it is early to assess the ultimate economic costs of the crisis in Bahrain, it is obvious that the Gulf Kingdom has been hard hit in ways that may have lasting consequences. It noted that the rapidly rising investments in real estate and financial services in recent years constitute points of vulnerability. More generally, these developments have fuelled anxiety, especially among foreign portfolio investors, and the regional bourses have been sharply hit. This has created an unwelcome prospect of more of the same after a string of lackluster years in the equity markets, it said. Turning to oil, it said the PGCC nations are globally best positioned to respond to any shortfall in crude production which means that any efforts to contain the oil price appreciation should still benefit them through greater revenues. “This oil windfall will in turn enable the PGCC governments to continue with their spending plans through a period of uncertainty,” it said. “In an environment where risks still abound, the result of the current combination of investor caution and government activism may once again be a year of uneven growth, quite possibly a replay of the patterns observed over the past year or so. The mounting global inflationary pressures in conjunction with the regional political turmoil are likely to test and may well contain the recovery in business and consumer confidence, at least in parts of the region and for some time, something that is likely to slow down the normalization in the private sector.” The study said such a situation could also risk curbing the resumption in bank lending, which is a key precondition for full normalisation in the private sector. “Nonetheless, with oil prices strong and government spending on the way up, the region – and especially Saudi Arabia – is looking at a significant acceleration in its headline GDP growth over last year,” it said. NCB noted that while the price pressures are to a degree linked to the elevated uncertainty in the Middle East, as well as the concern over the aftereffects of the Japanese earthquake, they are fundamentally underpinned by structural factors at a time when demand is once again significantly strengthening. It cited data by the U.S. Energy Information Agency (EIA) showing the global demand for crude oil and liquid fuels grew by 2.4 million barrels per day to a total of around 86.7 mbd through 2010. This was the second-largest annual increase in 30 years and more than offset the reductions in demand during the prior two years, thereby surpassing the 2007 figure of 86.3 mbd, the study said. “Even though any meaningful resolution of the tension in MENA and the restoration of relative stability may have a short-term adverse effect on oil prices, there is little in the current environment to suggest that the PGCC producers will not continue to benefit from comfortable prices and increased production levels.” (Source: emirates247.com)