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Solid growth seen in 2011 Government spending expands as austerity kicks-in overseasBank lending continues to recover
GCC Economic Outlook
March 2011
GCCGCC Economic OutlookEconomic Outlook March 2011
Contents
GCC outlook 2
Bahrain 4 Macro forecasts: higher oil prices aid growth 4 Money & finance: financial sector gradually recovering 6
Kuwait 8 Macro forecasts: growth to recover further in 2011 8 Money & finance: slow credit growth in 2010 10
Oman 12 Macro forecasts: growth to remain solid in 2011 12 Money & finance: resilient banking sector weathers crisis 14
Qatar 16 Macro forecasts: the region’s best performer 16 Money & finance: recovery well under way 18
Saudi Arabia 20 Macro forecasts: investment plans pay-off 20 Money & finance: government stimulus revives bank credit 22
UAE 24 Macro forecasts: growth to remain below trend in 2011 24 Money & finance: bank credit remains subdued 26
Regional data and forecasts 28
GCC Economic Outlook - March 2011
NBK Economic ResearchAbdullah Al-Ahmed Street, P.O. Box 95, Safat 13001Kuwait City, KuwaitTel: +965 2259 5500 Fax: +965 2224 6973www.nbk.com
GCC Economic Outlook - March 2011
2
GCC outlookEconomic recovery gains traction as government spending rises, financial sector continues to normalize…
• Despite the political convulsions elsewhere
in the MENA region, 2011 should be a year of
continued improvement for the GCC economies, as
high oil prices, expansionary government fiscal and
monetary policies and the continued normalization
of the banking and financial sectors help the region
recover from the mild recession of 2009. Real GDP
is expected to grow by 5.5%, following growth of
5.2% in 2010. (Chart 1.) This is below the average
of 8% per year of 2003-2008, but still represents
a very solid backdrop against which businesses
can continue to expand. Qatar will be the region’s
stellar performer, as it continues with the roll-out of
its LNG expansion plans. (Chart 2.)
• The ability of regional governments to
support growth will be crucial – and in stark
contrast to other parts of the world where outright
cuts in public spending are likely to begin in earnest.
We estimate that GCC government spending could
rise by close to 10% in 2011, underpinned by
ambitious medium-term development programs in
Saudi Arabia, Kuwait, and Qatar. Indeed, one of
the main challenges for 2011 is likely to be in
the timely execution of large government capital
spending projects. Private sector demand – while
comparatively sluggish - should begin to strengthen.
• So long as global economic growth
continues to hold up, oil prices are likely to remain
close to current levels; we base our projections
on an average price of USD 90 per barrel through
GCC forecast summary2010e 2011f
Real GDP % y/y 5.2 5.5- Non-Oil % y/y 4.4 4.5
Inflation (yr avg) % 3.0 4.3Budget balance % GDP 8.4 11.5
2011. This means that OPEC is likely to sanction
further production increases amongst its members,
four of which are in the GCC. (Chart 3.) This in turn
not only underpins growth in oil-related activities,
but should also support countries’ fiscal and trade
positions (in aggregate at least). These remain
comfortable – albeit less so than the spectacular
figures of earlier years. (Charts 5 and 6.)
• Inflation moved back into the headlines
through the second half of 2010, thanks largely
to rising food prices at a global level. Beyond food
prices, inflationary pressures remain fairly mild – at
least for now. In our base case expectation, inflation
accelerates modestly - to an average of 4.3%
in 2011 from 3.0% in 2010 – but does not run
away. (Chart 4.) At these types of rates, it should
not present too much of a policy headache for
the monetary authorities, though high food prices
have scope to generate political tensions.
• Country specific themes likely to appear in
2011 include the response of the UAE economy
to the continued deleveraging process and debt
servicing of Dubai’s government-related institutions;
the implementation of the Kuwait government’s
development plan, which could significantly upgrade
the country’s medium-term economic performance;
a possible recovery in credit growth in Saudi
Arabia, which could signal that the private sector is
gaining momentum on the back of big government
spending increases; and renewed vigor in the Qatari
government’s capital spending program generated
by the hosting of the 2022 World Cup. We suspect
that appetite for further concrete moves towards a
single Gulf currency has ebbed, but steps may be
taken to implement earlier trade agreements.
GCC Economic Outlook - March 2011
3
GCC outlook charts
Chart 1. GCC real GDP Chart 2. Real GDP by country
Chart 3. GCC crude oil output1 Chart 4. GCC consumer price inflation
Chart 5. Budget balance2 Chart 6. Current account balance
Source: Official sources / NBK estimates and forecasts1 Includes condensate output in Oman and estimates for Bahrain2 Includes NBK estimates of off-balance sheet revenues in the UAE and Oman
(% GDP) (% GDP)
(million barrels per day) (% y/y, year average)
(% y/y) (% y/y)
-8-6-4-202468101214
-8-6-4-202468
101214
2002 2004 2006 2008 2010
Oil Non-oil Total
NBKf'cast
4.03.0
5.0
17.0
4.2
2.0
5.24.8 4.5 4.7
13.7
4.23.6
5.5
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
Bhn Kwt Oma Qat KSA UAE GCC
2010 2011
14.0
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.0
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
Jan-09 Jul-09 Jan-10 Jul-10
0
2
4
6
8
10
12
0
2
4
6
8
10
12
2002 2004 2006 2008 2010
NBKf'cast
-5
0
5
10
15
20
25
-5
0
5
10
15
20
25
2002 2004 2006 2008 2010
NBKf'cast
0
5
10
15
20
25
30
0
5
10
15
20
25
30
2002 2004 2006 2008 2010
NBKf'cast
GCC Economic Outlook - March 2011
4
Bahrain: macro forecastsHigher oil prices aid growth and ease budget pressures; inflation to remain low despite higher food prices...
• Real GDP growth slowed to 3.1% in 2009.
While this is well below the average of 7% per
year seen during the preceding six years, it was
still above the regional average. This comparatively
healthy performance seems at odds with Bahrain’s
status as a leading international offshore banking
hub. Given the broader global backdrop, Bahrain’s
economy might have been expected to be one of
the region’s weakest.
• Bahrain’s resilience is partly related to the
rise in oil prices and the robust regional economic
recovery – notably in neighboring Saudi Arabia.
Moreover, as a non-OPEC member, Bahrain avoided
the large cuts in oil output seen in other GCC
countries. Finally, while the financial sector is of
great importance to Bahrain’s economy – accounting
for around one quarter of GDP – only half of it
is wholesale international banking activity, the
sector that was hard hit by the global financial
crisis. Domestic commercial banking, on the other
hand, continued to perform well, growing by an
impressive 7% in real terms in 2009.
• Economic conditions may improve further
this year. After growing by an estimated 4% in
2010, we expect real GDP to rise by 4.8% in
2011 – close to the regional average. (Chart 7.)
Growth in the non-oil sector should pick-up to 5%
from an estimated 4.5% in 2010, as conditions
for wholesale banks continue to normalize and
as the domestic economy gains momentum from
high oil prices and accelerating regional growth.
• The hydrocarbon sector is one of the
smallest in the region, accounting for just 23% of
GDP in 2009. Oil output consists of about 30,000
bpd from a sole oil field and a further 150,000 bpd
of ‘gifted’ output from a field shared with Saudi
Arabia. (Chart 8.) These volumes tend to be fairly
stable. Although there are plans to expand domestic
hydrocarbon production in future, only a slight
increase is seen in 2011. We see real oil sector GDP
edging up by 3% in 2011.
• Over the past few years, inflation has
been much tamer in Bahrain than in other GCC
countries, remaining in the 2-4% range. Inflation
remained relatively stable in 2010 averaging 2%,
with the spike in food price inflation offset by lower
housing costs. (Chart 9). Faster economic growth, in
addition to higher global food prices and a weak US
dollar – through the impact on import prices - could
push inflation to around 3% in 2011 (Chart 10).
• Bahrain’s relatively meager oil resources
mean that it has one of the weakest fiscal positions
in the region. The government recorded a budget
deficit of 6.1% of GDP in 2009. Higher oil prices
and relatively restrained spending could trim the
deficit to 0.7% of GDP in 2010. However, 2011
is likely to see the deficit rising once again to 1.2%
following a 17% increase in planned spending,
about half of which will go to subsidies (Chart
11.) Nevertheless, over the medium-term, steps
may be taken to reduce pressures on the budget.
The current account, by contrast, should remain in
comfortable surplus. (Chart 12.)
Bahrain forecast summary2010e 2011f
Real GDP % y/y 4.0 4.8- Non-Oil % y/y 4.5 5.0
Inflation (yr avg) % 2.0 3.0Budget balance % GDP -0.7 -1.2
GCC Economic Outlook - March 2011
5
Bahrain: macro forecast charts
Chart 7. Real GDP Chart 8. Crude oil output
Chart 9. Consumer price inflation by sector Chart 10. Consumer price inflation
Chart 11. Budget balance Chart 12. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP)
(% y/y) (% y/y, year average)
(% y/y)
-15
-10
-5
0
5
10
15
-15
-10
-5
0
5
10
15
2002 2004 2006 2008 2010e
Oil Non-oil Total
NBKf'cast
1.0
1.2
1.4
1.6
1.8
2.0
100
120
140
160
180
200
220
2004 2005 2006 2007 2008 2009 1H10
Oil (Bahrain, 000 bpd, LHS)Oil (Abu Safa, 000 bpd, LHS)Gas (bcfd, RHS)
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
Food
Housing
Total CPI
-8
-6
-4
-2
0
2
4
6
8
-8
-6
-4
-2
0
2
4
6
8
2002 2004 2006 2008 2010e
NBKf'cast
-1
0
1
2
3
4
-1
0
1
2
3
4
2002 2004 2006 2008 2010
NBKf'cast
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16
2002 2004 2006 2008 2010e
$ billions
% of GDP
NBKf'cast
GCC Economic Outlook - March 2011
6
Bahrain: money and financeWeaknesses persist, but parts of the financial sector recovering better than expected...
• The past two years have seen the Bahrain
financial sector suffer the consequences of the global
financial crisis. However, the sector is beginning
to recover, with liquidity bouncing back strongly and
bank assets stabilizing. Because of its status as an
offshore banking hub, Bahrain’s financial system is
considered vulnerable to conditions in international
financial markets. These negative effects, however,
have been somewhat mitigated by a fairly strong
regional economic recovery and a quick revival
in oil prices.
• After being weak or even negative through
parts of 2009, annual growth in the money supply
recovered markedly last year, with M1 rising by
almost 19% year-on-year in November and M2 also
recording double digit growth. (Chart 13.) As well
as the improved regional economic scene, earlier
emergency measures taken by the Central Bank
of Bahrain (CBB) - including interest rate cuts and
the introduction of a US dollar FX swap facility
to support liquidity – helped ease earlier financial
system pressures.
• 2008 saw astonishingly fast growth in
bank lending – as high as 50% y/y - giving way to
a sharp deceleration later in the year and through
2009. Bank claims on the private sector even
turned negative in 4Q09 and 1Q10. (Chart 14.) The
growth in claims has begun to pick up recently as
the Bahraini economy recovers, but a more cautious
approach to lending by banks has put a constraint
on credit expansion.
• The decline in bank assets has also abated.
The bulk of bank assets in Bahrain are held by
wholesale banks, whose majority of assets are
foreign, reflecting Bahrain’s status as an offshore
banking center. The global financial crisis saw
wholesale banks hit by their global exposures,
as well as by the downturn in regional markets.
By April 2010, total assets were more than 22%
below their peak of USD270bn in June 2008.
(Chart 15.) Note, however, that this decline is
only representative of wholesale banks; retail bank
assets have remained relatively stable.
• Monetary policy is based upon the exchange
rate peg against the US dollar (since 2001) which
implies domestic interest rates that are closely in
line with those in the US. The CBB’s key policy rate
- the one week deposit rate – was reduced several
times during the crisis, from 5% in 2007 to 0.5% in
September 2009, 0.25% above the US Fed Funds
rate. (Chart 16.) Although this policy change was
largely a response to cuts in US interest rates, it
was also helpful in mitigating the effects of the
financial crisis.
• Because of the exchange rate peg,
fluctuations in the dinar exchange rate versus
the euro generally reflect changes in USD/euro.
In real terms, i.e. adjusting for inflation, the dinar
strengthened by more than 11% against the euro,
relative to January 2008 levels. (Chart 17.)
• Given the relatively decent economic
rebound, the Bahraini stock market’s performance
was disappointing in 2010. The DJ price index fell
0.6%, after a decline of 20% through 2009. (Chart
18.) This is due in part to the weak performance
of the investment companies and wholesale banks,
whose shares were down 17%, but who account
for nearly one-third of total market capitalization.
GCC Economic Outlook - March 2011
7
Bahrain: money and finance charts
Chart 13. Money supply Chart 14. Bank claims on private sector
Chart 15. Commercial bank assets Chart 16. Policy interest rates
Chart 17. Exchange rate Chart 18. Stock market indices
Source: Official sources / NBK estimates
(%)
(% y/y) (% y/y)
-10
0
10
20
30
40
50
-10
0
10
20
30
40
50
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
M1
M2
-10
0
10
20
30
40
50
60
-10
0
10
20
30
40
50
60
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
-20-15-10-505101520253035
180
200
220
240
260
280
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Bank assets (USD bn, LHS)
Bank assets (%y/y, RHS)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
US Fed Funds target
CBB one week deposit rate
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
BHD/USDBHD/USD (real)BHD/EuroBHD/Euro (real)
BHD stronger
100
120
140
160
180
200
220
240
260
100
120
140
160
180
200
220
240
260
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Dow Jones Bahrain Index
N.B. Includes both retail and wholesale banks.
GCC Economic Outlook - March 2011
8
Kuwait: macro forecastsGrowth to recover further in 2011; fiscal and external positions strong; some upside inflation risks...
• The focus and key to economic growth in
2011, 2012, and beyond is the government’s 5-year
development plan, and the government’s ability to
execute and deliver. In our view the plan is taking
off slowly but surely, more so when it comes
to the more traditional types of projects: roads,
bridges, cities, hospitals, airports, etc..
• The KD 31 billion plan (which has 4 years
left to run) calls for the spending of KD 5 billion
on infrastructure in the current fiscal year, rising to
KD 7-8 billion in 2011 and later years (these will
roughly be split 40/60 between on and off-budget).
These numbers should boost the rate of growth
significantly, even if, as we expect, the actual
execution rate will fall well short of 100%. The KD
31 billion is equivalent to the size of 2009 GDP.
• Our forecast for real GDP growth stands
at 4.5% for 2011 as oil output pushes higher, the
recovery from the world recession continues and
Kuwait moves ahead with its mega projects plans.
(Charts 19 and 20.) While the non-hydrocarbon
sector outperformed in 2010 (+3.5%), the two
should be back in balance in 2011. Further out in
time, and especially if the 5-year plan is executed
faithfully in a qualitative sense, the growth of the
non-hydrocarbon sector should overtake growth
in the oil sector. The plan is indeed structured to
diversify the economy and its growth prospects
away from hydrocarbons. In fact, the new projects
are about 25% in the oil sector and 75% in non-oil.
Kuwait forecast summary2010e 2011f
Real GDP % y/y 3.0 4.5- Non-Oil % y/y 3.5 4.7
Inflation (yr avg) % 4.0 4.7Budget balance % GDP 15.0 13.0
• Construction and banks are expected to
be the first sectors to benefit from the new
plan. However, many peripheral sectors - business
services, legal services and logististics - should pick
up as well, while the health and education sectors
are likely to be later beneficiaries of current and
subsequent plans.
• Consumer price inflation stood at an
average of 4.0% in 2009 and had a similar
performance in 2010 before an expected uptick
to 4.7% in 2011. (Charts 21 and 22.) Food prices
have risen in the last part of 2010 and have
pressured inflation, especially in emerging market
economies which are performing better than their
advanced counterparts. The food components and
inflation in general bear watching as they could
potentially become a concern.
• Kuwait remains one of the very few countries
worldwide with an extremely strong fiscal position.
It posted its 11th consecutive surplus last year,
with another one expected this year. (Chart 23.)
Thanks to both recent and earlier surpluses, we
estimate that the state has at its disposal well over
KD 90 billion in reserves (including the sovereign
wealth funds), or the equivalent of three times
2009 GDP.
• This strong fiscal position implies, of course,
that financing new government projects and public
spending will not be an issue, at least not in the
medium term. Oil revenues, which account for over
90% of total revenues, are expected to be a steady
source of income as the world economy recovers
and Kuwait expands its capacity (and production).
GCC Economic Outlook - March 2011
9
Kuwait: macro forecast charts
Chart 19. Real GDP Chart 20. Crude oil output
Chart 21. Consumer price inflation by sector Chart 22. Consumer price inflation
Chart 23. Budget balance Chart 24. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP, fiscal year)
(% y/y) (% y/y, year average)
(% y/y) (million barrels per day)
-15
-10
-5
0
5
10
15
20
25
-15
-10
-5
0
5
10
15
20
25
2002 2005 2008 2011F
Oil Non-oil Total
NBKf'casts
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Food (18%)
Housing (27%)
Total CPI
0
2
4
6
8
10
12
0
2
4
6
8
10
12
2002 2005 2008 2011F
NBKf'casts
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
2002 2004 2006 2008 2010F
NBKf'casts
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
2002 2004 2006 2008 2010F
$ billions% of GDP
NBKf'casts
GCC Economic Outlook - March 2011
10
Kuwait: money and financeVirtually no credit growth in 2010 except for the household/consumer sector; recent signs of revival in business credit bode well for 2011...
• The M1 money supply measure (shorter-term
liquidity) grew 16.3% in 2010 (Dec/Dec, chart 25.)
Liquidity has been plentiful in the system as the
authorities have made sure that large government
and semi-government deposits were adequate. Also,
the very soft state of credit demand has not put a
strain on the available liquidity. Weak loan demand
has also translated into soft deposit creation, which
explains the much slower growth in the broader
aggregate M2. M2 was up only 2.4% (y/y) last
year.
• 2010 was a year of very slow credit growth.
We closed the year with bank credit growth of
only 0.4% (chart 26.) The household/consumer
sector led credit growth and closes the year at
3.6% growth. Business credit underperformed,
held back by declines in real estate and stock-
related lending. Also, this past summer, the sale
of Zain’s African assets and the subsequent
distribution of a large amount of cash to investors
led to some significant debt pay downs.
• Later in the year, as business confidence
built after the passage of the government’s 5-year
development plan, we witnessed firmer demand for
industrial, trade and construction loans. Those do,
however, have more to go to post a solid recovery
next year. Those also happen to be the sectors
where loans are 50% guaranteed by the government
under the financial stability law of 2009. We think,
however, that the impact of the law in spurring
demand was marginal in most cases. The recent
and upcoming tendering and awarding of large 5-
year plan projects, begun in 2009, is expected to
shore up credit demand into 2011.
• The slow growth in bank credit was in
part due to the aftermath of the financial crisis:
stricter regulation and cautious businesses. From
a sentiment perspective, it is only recently that
the government’s 5-year plan is starting to gain
credibility and to affect perhaps credit demand.
In that light, the banks were awash in liquidity in
2010. They added 2.6% to their assets or a little
over KD 1 billion, up to KD 41.4 billion. Most of
that addition was in the form of liquid assets,
deposits with the central bank (CBK), and CBK
bonds (Chart 27.)
• In February of 2010 the CBK cut its leading
rate, the discount rate, to a record low 2.50%.
(Chart 28.) That brought down commercial lending
rates. In other moves, the CBK appeared to be
less aggressive in its demands on banks to take
additional provisions, as the situation was well
improved in 2010. Back in 2009, the CBK started
requiring regular stress tests.
• The Kuwaiti dinar, which is tied to a basket
of currencies, appreciated slightly on average in
2010. It was up 1.6% against the USD, 12.3%
versus the EUR in 2010. The small change masks
the (moderate) volatility seen in 2010 when the
USD and the Euro traded places exhibiting strength.
The dinar averaged USD 3.56 in December (USD
3.48 for the whole year, Chart 29.)
• Equities closed 2010 with a strong
performance, with both emerging and GCC markets
doing well. Though the KSE price index was off for
the year, down 0.7%, however the more important
and reliable value-weighted-index was up 25.8%.
(Chart 30.)
GCC Economic Outlook - March 2011
11
Kuwait: money and finance charts
Chart 25. Money supply Chart 26. Total bank credit
Chart 27. Commercial bank assets Chart 28. Policy interest rates
Chart 29. Exchange rate Chart 30. Stock market indices
Source: Official sources / NBK estimates
(%)
(% y/y) (% y/y)
-10
-5
0
5
10
15
20
25
30
-10
-5
0
5
10
15
20
25
30
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11
M1
M2
0
5
10
15
20
25
30
35
40
25
30
35
40
45
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Bank assets (KD bn, LHS)
Bank assets (% y/y, RHS)
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
US fed funds target
KD repo
KD discount
0.20
0.25
0.30
0.35
0.40
0.45
0.20
0.25
0.30
0.35
0.40
0.45
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
KD/USD KD/USD (real)KD/Euro KD/Euro (real)
200
300
400
500
600
700
800
900
4000
6000
8000
10000
12000
14000
16000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
KSE General Index (LHS)
Value Weighted Index (RHS)
N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Kwt/US/Euro area CPIs.
-5
0
5
10
15
20
25
30
35
40
-5
0
5
10
15
20
25
30
35
40
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
GCC Economic Outlook - March 2011
12
Oman: macro forecastsGrowth to remain solid and broad-based in 2011; hydrocarbon output continues to rise...
• The Omani economy is expected to grow
by around 5% per year in both 2010 and 2011,
slightly above the rate expected in most other
GCC economies (Qatar is the exception). (Chart
31.) Growth in 2011 will be fairly broad-based,
benefiting from higher government spending – both
in the oil sector and the non-oil sector under
the first year of the 8th five-year development
plan – as well as private sector investment in
the infrastructure, industry and tourism sectors.
Financing conditions should be comfortable in light
of Oman’s fairly resilient banking sector.
• Hydrocarbon production has been in
expansion mode since 2008, reversing a multi-year
decline. Real hydrocarbon output is expected to
have risen some 6% in 2010, reflecting significant
increases in oil output as a result of a heavy
investment program and enhanced oil recovery
techniques at Oman’s aging oil fields. (Chart 32.)
Moreover, gas output is expected to have risen as
majority state-owned Petroleum Development Oman
seeks to fast-track production in order to alleviate
local shortages. 2011 should see further, albeit
more modest, increases in output. Real hydrocarbon
sector output is forecast to rise 4%.
• Real non-oil GDP is forecast to grow by 5%
in 2011, similar to the 4.5% expected in 2010.
Rising oil prices, recovering bank lending conditions,
increased public spending on infrastructure and
Oman forecast summary2010e 2011f
Real GDP % y/y 5.0 4.7- Non-Oil % y/y 4.5 5.0
Inflation (yr avg) % 3.3 5.0Budget balance % GDP 6.0 8.0
improved access to gas feedstock for industry are
all benefiting the growth outlook. The government’s
8th 5-year plan (2011-15) targets improvements
in the manufacturing sector, SMEs, non-oil exports
and ‘balanced’ real GDP growth of not less than 3%
per year. Barring a recession, this target should be
comfortably achieved.
• Consumer price inflation is expected to
have averaged 3.3% through 2010. However, it
accelerated through the year from 1.7% in January
to 4.2% by October. (Chart 33.) The increase in
inflationary pressures stemmed mainly from rising
food prices, driven by the rise in global commodity
prices. The food component has a weight of some
30% in the Omani CPI – the highest in the region –
and so has a marked impact on the overall inflation
rate. In most other areas, inflationary pressures
have been fairly mild. But rising food prices are still
likely to see inflation accelerate through the first
half of 2011, and average 5% for the year as a
whole. (Chart 34.)
• Although government spending could rise
by 7-10% in both 2010 and 2011, higher oil
production and prices mean that the government’s
fiscal position is likely to be more buoyant than
previously expected. We project a budget surplus of
6% of GDP in 2010 and 8% of GDP in 2011. (See
chart 35.) This comfortable position may be masked
in the official numbers, however, by transfers to
the state sovereign reserve funds, which can vary
in size from year to year. Meanwhile, the current
account balance should also see decent surpluses in
2010 and 2011, as the impact of high oil prices on
export revenues offsets strong growth in imports.
(Chart 36.)
GCC Economic Outlook - March 2011
13
Oman: macro forecast charts
Chart 31. Real GDP Chart 32. Crude oil output
Chart 33. Consumer price inflation by sector Chart 34. Consumer price inflation
Chart 35. Budget balance Chart 36. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP)
(% y/y) (% y/y, year average)
(% y/y) (million barrels per day)
0.660.680.700.720.740.760.780.800.820.840.860.880.90
0.660.680.700.720.740.760.780.800.820.840.860.880.90
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10
-10
-5
0
5
10
15
20
25
-10
-5
0
5
10
15
20
25
Jan-07 Jan-08 Jan-09 Jan-10
Food (30%)
Housing (21%)
Total CPI
-2
0
2
4
6
8
10
12
14
-2
0
2
4
6
8
10
12
14
2002 2004 2006 2008 2010
NBKf'cast
-2024681012141618
-202468
1012141618
2002 2004 2006 2008 2010
$ billions
% of GDPNBKf'cast
N.B. Headline figure is not forecast, since it includes discretionary government transfers to the state reserve funds
-10
-5
0
5
10
15
20
-10
-5
0
5
10
15
20
2002 2004 2006 2008 2010
Oil Non-oil Total
NBKf'cast
N.B. Includes condensate production
-2024681012141618
0
2
4
6
8
10
12
14
16
18
2002 2004 2006 2008 2010e
Headline figure
Before transfers to state reserve funds
NBKf'cast
N/A
N/A
GCC Economic Outlook - March 2011
14
Oman: money and financeBank lending begins to revive, helped by government spending; stock market edged higher in 2010...
• Oman’s financial system weathered the
global financial crisis as well as any in the Gulf
region. Key to this was its relatively straightforward
banking system, which is dominated by traditional
banks (focused on customer and government
deposit taking, corporate and retail lending) with
relatively small investment portfolios and modest
utilization of volatile wholesale and foreign funding.
These structural features helped limit investment
losses, stem liquidity issues, and prevent any major
rise in non-performing loans (NPLs).
• Monetary growth did, however, decelerate
sharply during 2008 and early 2009, as economic
performance dipped and liquidity conditions
tightened. (Chart 37.) In fact, the decline in
the growth of M1 was as marked as any other
country in the Gulf. Annual growth in broader
money, however, held up fairly well and has been
consistently in the 5-10% range for the past year or
so. Note that as a share of GDP, the total stock of
money in Oman is the lowest in the Gulf, so there
may be a tendency for it to grow relatively quickly
in the future.
• Despite the reasonable financial position of
many banks and decent rates of economic growth,
growth in bank lending slowed dramatically through
2009, and was in fact non-existent through much
of the year. (Chart 38.) It rose through 2010,
however, and accelerated to an annualized rate of
15% in the three months to October. In addition,
lending to public enterprises surged by 68% in
the year to October, providing evidence of support
to the banking sector from higher government
spending.
• Growth in commercial bank assets has
recovered even more strongly than lending, and
was up 12% in the year to October. (Chart 39.)
One component of balance sheet growth in 2010
was an increase in bank holdings of securities
(particularly domestic securities), including holdings
of certificates of deposit (CDs) issued by the
Central Bank of Oman (CBO).
• Because of the exchange rate peg to the
US dollar, Omani monetary policy is typically driven
by corresponding policy changes in US. The CBO
uses a repurchase rate to inject funds into the
money market and this rate has been at 2% since
the beginning of 2009. (Chart 40.) To absorb
liquidity, the CBO issues CDs. The rates on CDs
have remained very low – close to zero - despite the
increase in issuance this year.
• The Omani rial has been pegged at a fixed
rate of OR 0.345 per US dollar since 1986. Despite
opting to remain outside of the proposed Gulf single
currency bloc, there is no sign that the authorities
want to move to a more independent monetary or
exchange rate policy. Along with other pegged GCC
currencies, the rial strengthened versus the euro
in the first half of 2010, but has given up all of
this ground since, as the US dollar has weakened.
(Chart 41.) Note that despite being stable in
nominal terms, the rial has appreciated by 9% in
real terms against the dollar over the past 3 years.
• The Omani stock market has performed
quite strongly over the past 2 years compared to
some of its neighbors. The main price index is up
50% from its low of March 2009, and rose by 6%
in 2010. (Chart 42.)
GCC Economic Outlook - March 2011
15
Oman: money and finance charts
Chart 37. Money supply Chart 38. Bank credit to private sector
Chart 39. Commercial bank assets Chart 40. Policy interest rates
Chart 41. Exchange rate Chart 42. Stock market indices
Source: Official sources / NBK estimates
(MSM 30 index)
(%)
(% y/y) (% y/y)
-10
0
10
20
30
40
50
60
70
-10
0
10
20
30
40
50
60
70
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
M1
M2
0
10
20
30
40
50
60
0
10
20
30
40
50
60
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
051015202530354045505560
6
8
10
12
14
16
18
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Bank assets (OMR bn, LHS)
Bank assets (%y/y, RHS)
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
US fed funds target
Oman repo
Oman CDs
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
OMR/USDOMR/USD (real)OMR/EuroOMR/Euro (real) OMR stronger
4000
5000
6000
7000
8000
9000
10000
11000
12000
4000
5000
6000
7000
8000
9000
10000
11000
12000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Oman/US/Euro area CPIs.
GCC Economic Outlook - March 2011
16
Qatar: macro forecastsFastest growth in GCC; healthy fiscal and external positions; moving out of deflation...
• Fast growth in Qatar is still underpinned
by significant government investment in the gas
sector and infrastructure. The government also
remains committed to diversifying the economy
away from hydrocarbons, and increasing the role
of the private sector. This should help support
Qatar’s medium term growth prospects, and offset
some of the slowdown that could result from the
coming end to LNG-related expansion. The bulk
of LNG projects are due to be completed in 2011
and the moratorium on new gas projects is due to
last until at least 2014. The onus will fall upon the
government to persist in its expansionary measures,
and undoubtedly, hosting the 2022 World Cup will
help drive spending during this period.
• We expect real GDP to expand by 17%
this year and by a further 14% in 2011, following
8.6% growth in 2009. (Chart 43.) Growth will be
led by the gas sector, which will see the final of
the planned LNG trains (QatarGas train 7) come
online in 2011, bringing total LNG production to
the targeted 77 million tonnes per year. This is
approximately 1.9 million barrels of oil equivalent
per day, more than double Qatar’s crude oil output.
(Chart 44.) We assume that real hydrocarbon sector
output rises by 23% this year and 17% in 2011.
• Growth in the non-oil sector is likely to
benefit from the government’s efforts to boost the
private sector and diversify the economy. Over
Qatar forecast summary2010e 2011f
Real GDP % y/y 17.0 13.7- Non-Oil % y/y 11.0 10.0
Inflation (yr avg) % -2.8 4.0Budget balance % GDP 12.7 10.0
the medium term, the economy will benefit from
the government’s plan to spend $100 bn over
several years to upgrade and expand the country’s
infrastructure, including on preparations to host the
World Cup. The education, health, financial, housing,
and transportation sectors are set to be among the
main beneficiaries of government spending. We
expect real non-oil GDP growth of 11% in 2010 and
10% in 2011, compared to an average of 13% per
year between 2001 and 2008.
• Qatar saw a heavy bout of deflation in
2009, driven mostly by falling housing rents
(notwithstanding doubts over data accuracy). The
trend has continued in 2010: in the nine months
to October, inflation averaged -2.9%. (Charts 45
and 46.) There are, however, signs that rents are
stabilizing. Moreover, broader conditions - strong
economic growth, improving monetary conditions,
rising food prices and a weak US dollar - look
conducive to a return to inflation next year. We
expect inflation to average 4.0% in 2011.
• Despite a drop in oil prices in 2009, Qatar
was able to pull off a sizeable budget surplus
of 13% of GDP, buoyed by rising investment
revenues. (Chart 47.) Improving hydrocarbon prices
in 2010 and 2011 will support fiscal surpluses to
the tune of 13% and 10% of GDP, respectively,
and in spite of big planned increases in spending.
The budget for FY2010/11 earmarked a 25%
increase in spending. Rising public expenditures
have prompted rising issuance of sovereign bonds,
but Qatar’s overall sovereign debt remains low
at 14% of GDP. Meanwhile, the current account
surplus is expected to improve this year and next
as export prices and volumes pick up. (Chart 48.)
GCC Economic Outlook - March 2011
17
Qatar: macro forecast charts
Chart 43. Real GDP Chart 44. Crude oil output
Chart 45. Consumer price inflation by sector Chart 46. Consumer price inflation
Chart 47. Budget balance Chart 48. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP)
(% y/y) (% y/y, year average)
(% y/y) (million barrels per day)
0.74
0.76
0.78
0.80
0.82
0.84
0.86
0.88
0.74
0.76
0.78
0.80
0.82
0.84
0.86
0.88
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10
-30
-20
-10
0
10
20
30
40
-30
-20
-10
0
10
20
30
40
Q106 Q406 Q307 Q208 Q109 Q409 Q310
Food (13%)
Housing and energy (32%)
Total CPI
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
2002 2004 2006 2008 2010
Oil
Non-oil
Total NBKf'cast
-6-4-20246810121416
-6-4-202468
10121416
2002 2004 2006 2008 2010
NBKf'cast
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
2002 2004 2006 2008 2010
$ billions
% of GDP
NBKf'cast
0
5
10
15
20
25
30
0
5
10
15
20
25
30
2002 2004 2006 2008 2010
$ billions
% of GDP
NBKf'cast
GCC Economic Outlook - March 2011
18
Qatar: money and financeGovernment borrowing drives growth in credit; stock market remains off its highs….
• Despite a temporary slowdown, the
crisis experienced in other GCC countries never
really materialized in Qatar, thanks largely to the
strong and decisive measures taken by the Qatari
government. Measures included, among others,
direct capital injections in banks, the purchase of
banks’ investment portfolios, and big increases in
government spending. As a result, the slowdown
in activity was only short-lived and recovery is well
on its way.
• Broad money growth dived to -6% in
mid-2009 from record highs of 60% at the onset
of the crisis, driven by a slowdown in credit.
Growth has recovered since, and is now well
above 20%. (Chart 49.) In any case, growth was
expected to slow to more sustainable levels from its
exceptionally fast pre-crisis pace. The growth in M1
has largely mimicked that of broader money despite
experiencing sharper movements. M1 growth fell
to -23% in mid-2009, but rebounded to 20% by
November 2010. Strong money growth is now
being driven by recovering credit.
• Through government intervention, the Qatari
banking sector was spared the large build-up in
provisions seen in other GCC countries, and thus
avoided a deterioration in bottom lines; profits were
up 21% y/y in the first 9 months of 2010. Growth
in bank lending slowed in the first half of 2009, but
has steadily gained pace since and stood at a very
strong 21% by November 2010. It is important to
note, however, that nearly all of the acceleration
in lending growth has come from loans to the
public sector. Those have nearly doubled in size
over the past year. (Chart 50.) By contrast, banks
remain reluctant to lend to the private sector partly
because of a perceived increase in risk. Meanwhile,
bank assets continued to post strong growth,
averaging around 21% y/y for the past 12 months
and financed largely from deposits of local private
companies and institutions. (Chart 51.)
• One of the Qatar Central Bank’s (QCB)
key policy rates – the QMR deposit rate – has
trailed closely the US federal funds rate through
September 2008, and is set mainly to maintain the
exchange rate peg against the US dollar. (Chart
52.) Since then, the QCB has allowed the spread to
widen. The overnight deposit facility rate was kept
at 2% for 27 months, driving a surge in the value of
local bank deposits with the QCB through the QMR
window. In August, the QCB cut its deposit by 50
bps to 1.5%, fearing a wider spread could drive
large speculative inflows. Meanwhile, the main
lending rate has remained unchanged at 5.5%.
• With the Qatari rial pegged to the dollar,
changes in the exchange rate represent mostly
fluctuations in the dollar versus other currencies.
(Chart 53.) After strengthening against the euro in
the first half of the year, the rial weakened some
12% between June and November. Note that unlike
in most other GCC countries, however, deflationary
conditions in Qatar have implied a depreciating real
exchange rate versus other currencies over the
past two years, effectively improving Qatar’s price
competitiveness compared to its level before.
• 2010 was a relatively good year for Qatari
equities. Despite some fluctuations, the Doha
general index gained 24% over the year. (Chart 54.)
The rally in the Doha market was largely led by the
insurance and banking sectors.
GCC Economic Outlook - March 2011
19
Qatar: money and finance charts
Chart 49. Money supply Chart 50. Bank credit
Chart 51. Commercial bank assets Chart 52. Policy interest rates
Chart 53. Exchange rate Chart 54. Stock market
Source: Official sources / NBK estimates
(%)
(% y/y)
-30
-15
0
15
30
45
60
75
90
-30
-15
0
15
30
45
60
75
90
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
M1
M2
0
10
20
30
40
50
60
70
80
50
100
150
200
250
300
350
Jan-07 Jan-08 Jan-09 Jan-10
Public sector (QAR bn, LHS)
Private sector (QAR bn, LHS)
Total credit (%y/y, RHS)
0
10
20
30
40
50
60
70
80
90
150
200
250
300
350
400
450
500
550
600
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Bank assets (QAR bn, LHS)
Bank assets (%y/y, RHS)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jan-07 Dec-07 Nov-08 Oct-09 Sep-10
US fed funds target
QMR deposit rate
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jan-07 Dec-07 Nov-08 Oct-09 Sep-10
QAR/USDQAR/USD (real)QAR/EuroQAR/Euro (real)
QAR stronger
300040005000600070008000900010000110001200013000
150
200
250
300
350
400
450
500
550
Jan-07 Dec-07 Nov-08 Oct-09 Sep-10
Market cap. (QAR bn, LHS)
Qatar exchange index (RHS)
N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Qatar/US/Euro area CPIs.
GCC Economic Outlook - March 2011
20
Saudi Arabia: macro forecastsNon-oil sector set to grow at a steady pace; high oil prices generate budget surpluses in 2010 and 2011...
• A combination of timely government support
and a swift rebound in oil prices helped the Saudi
economy recover quickly from the global financial
crisis. Real GDP rose 0.6% in 2009, a respectable
performance in light of falling output elsewhere in
the Gulf. (See chart 55.) And this came despite
a hefty 8% decline in hydrocarbon sector output,
linked to OPEC-driven cuts in crude oil production.
(See chart 56.) Real growth is likely to have
rebounded to a solid 4.2% in 2010 and may see a
similar increase this year.
• The key to the non-oil economy’s strong
performance is the government’s USD 386 billion
public sector investment program, which focuses on
the housing, transportation and education sectors.
The plan runs from 2010 to 2014, with the
total spending package equivalent to the country’s
entire GDP in 2009. This, in combination with the
government’s ongoing economic reform package
aimed at lifting competitiveness, provides a helpful
short and medium-term impetus for the Saudi
economy. Government stimulus will also buy the
private sector more time to regain its footing.
• The hydrocarbon sector remains key to the
economy’s long-term wealth-generating potential.
The government completed a multi-billion dollar
round of upgrades to the sector in 2009, which
saw crude production capacity rise by 1.5 mbpd
to 12.5 mbpd. Since output is currently at 8.2
KSA forecast summary2010e 2011f
Real GDP % y/y 4.2 4.2- Non-Oil % y/y 4.5 4.0
Inflation (yr avg) % 5.4 5.5Budget balance % GDP 6.4 12.0
mbpd, there is plenty of spare capacity, providing
scope for fast growth in this sector over the next
couple of years if global oil demand dictates it. But
we assume that real hydrocarbon sector output
(excluding refining and gas processing) rises by 5%
in 2011, as high oil prices trigger OPEC production
increases.
• Inflation remained high in 2010 - having
climbed to 6.1% in August – and could now be back
on policy makers’ radar screens. (Chart 57.) Rising
food prices – linked to rising global commodity
prices – are taking over from housing costs as a key
source of inflationary pressure. Further increases in
food prices and relatively strong economic growth
rates could push inflation slightly higher through
2011. (Chart 58.) But monetary conditions do
not yet look consistent with the types of higher
inflation rates seen in 2007.
• Falling oil revenues and higher government
spending pushed the budget into a deficit of 6.1%
of GDP in 2009. But provisional figures show that
it bounced back to +7% of GDP in 2010, buoyed
by a big increase in oil revenues and a smaller than
expected increase in spending of around 5%. (Chart
59.) A 7% budget-on-budget spending increase
has been announced for this year as part of the
government’s medium-term investment plans. But if
oil prices average around USD 90 pb in 2011, the
government could see an even bigger surplus than
last year.
• The current account position also remains
strong, having been in surplus for eleven successive
years. 2010 and 2011 are both likely to see
moderate-sized surpluses. (Chart 60.)
GCC Economic Outlook - March 2011
21
Saudi Arabia: macro forecast charts
Chart 55. Real GDP Chart 56. Crude oil output
Chart 57. Consumer price inflation by sector Chart 58. Consumer price inflation
Chart 59. Budget balance Chart 60. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP)
(% y/y) (% y/y, year average)
(% y/y) (million barrels per day)
-10
-5
0
5
10
15
20
-10
-5
0
5
10
15
20
2002 2004 2006 2008 2010
Oil Non-oil Total
NBKf'cast
7.67.88.08.28.48.68.89.09.29.49.69.8
7.67.88.08.28.48.68.89.09.29.49.69.8
Jan-07 Jan-08 Jan-09 Jan-10
-202468101214161820
-202468
101214161820
Jan-07 Jan-08 Jan-09 Jan-10
Food (26%)Housing (18%)Total CPI
012345678910
0123456789
10
2002 2004 2006 2008 2010
NBKf'cast
-10
-5
0
5
10
15
20
25
30
35
-10
-5
0
5
10
15
20
25
30
35
2002 2004 2006 2008 2010
NBKf'cast
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
2002 2004 2006 2008 2010
$ billions
% of GDP
NBKf'cast
GCC Economic Outlook - March 2011
22
Saudi Arabia: money and financeBank credit beginning to revive on the back of government stimulus, improved confidence...
• Despite sustaining relatively strong rates of
economic growth, annual growth in broad money
has slowed considerably over the past year and
now stands at around 4%. (Chart 61.) This is
weaker than some estimates of non-oil GDP growth
in the Saudi economy. In part, the slowdown is a
natural readjustment from the very rapid increases
seen in previous years, and a reflection of a now
much weaker credit environment. Yet it is also
noticeable that growth in the narrower definition of
money – M1 – remains elevated. This may reflect
a compositional change in the structure of money
holdings: a rising preference for liquid funds over
longer-term deposits (with current low returns).
• There are signs that the cycle in bank
lending is turning the corner. Having more or less
stagnated through 2009, private sector credit rose
by 5% in the first 11 months of 2010. (Chart
62.) This turnaround likely reflects the effects of
government fiscal policy in supporting demand,
combined with ample liquidity within the banking
system and improved confidence amongst banks.
Loan growth is likely to recover at a gradual pace,
however, given continued caution in extending
credit to the corporate sector. Moreover, there is
scope for project-related spending to be financed
through direct government loans, thereby reducing
the amount of financing required from banks.
• Commercial banks’ total assets edged higher
for most of 2010, save the usual summer-related
slowdown. (Chart 63.) But growth remains very
subdued, mostly a function of the weak loan
growth described above. Over the past year, banks
have generally cut their holdings of reserves at the
central bank, which could be a sign of declining
risk aversion (though some of this may simply
have been diverted into government treasury bills).
On the other side, despite progress in cleaning up
banks’ balance sheets, elevated levels of loan loss
provisions have continued to affect both earnings
and the near-term appetite for faster lending
growth.
• The Saudi Arabian Monetary Agency’s
(SAMA) main policy lending rate – the repo rate
– was cut sharply over time from 5.5% to 2% during
the financial crisis, albeit long after the US Federal
funds rate had been cut to those levels. (Chart 64.)
With the economy growing steadily, bank lending
conditions improving and inflationary pressures on
the rise, pressures for monetary tightening could at
some stage re-emerge. Other interest rates within
the system – such as interbank rates and t-bills
– remain very low at under 1%.
• In maintaining the exchange rate peg against
the US dollar, the riyal softened around 17%
against the euro in 2H 2010. (Chart 65.) This
may be contributing to inflation, with the weaker
exchange rate driving up the price of imported
goods. Over the past three years, however, the
rial has strengthened by some 18% versus the
euro in real terms, thanks largely to higher relative
domestic prices. The impact of this on the Saudi
economy’s competitiveness may nevertheless have
been offset by economic reforms and improvements
in productivity.
• The Saudi Tadawul All Share Index enjoyed
a rise of 28% through 2009. (Chart 66.) In 2010,
the index climbed 8%, despite some volatility during
the year.
GCC Economic Outlook - March 2011
23
Saudi Arabia: money and finance charts
Chart 61. Money supply Chart 62. Bank credit to the private sector
Chart 63. Commercial bank assets Chart 64. Policy interest rates
Chart 65. Exchange rate Chart 66. Stock market indices
Source: Official sources / NBK estimates
(All share index)
(%)
(% y/y) (% y/y)
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Jan-07 Jan-08 Jan-09 Jan-10
M1
M3
-5
0
5
10
15
20
25
30
35
40
-5
0
5
10
15
20
25
30
35
40
Jan-07 Jan-08 Jan-09 Jan-10
0
5
10
15
20
25
30
35
40
800
900
1000
1100
1200
1300
1400
1500
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10
Bank assets (SAR bn, LHS)
Bank assets (%y/y, RHS)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
KSA repo
US fed funds target
3.0
3.5
4.0
4.5
5.0
5.5
6.0
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
SAR/USDSAR/USD (real)SAR/EuroSAR/Euro (real)
SAR stronger
4000
5000
6000
7000
8000
9000
10000
11000
12000
4000
5000
6000
7000
8000
9000
10000
11000
12000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon KSA/US/Euro area CPIs.
GCC Economic Outlook - March 2011
24
UAE: macro forecastsGrowth to remain below trend in 2011; fiscal and external positions are comfortable; inflation to remain low...
• Weaknesses in the finance, real estate, and
construction sectors are likely to linger, providing
a continued drag on economic growth over the
next couple of years. This will limit any momentum
gained from stronger growth in the world economy
in areas such as trade, tourism and business
services. Meanwhile, we remain cautious about the
prospect of fiscal policy in Abu Dhabi providing a
major boost to growth in the UAE overall given the
lack of any concrete published spending plans, the
possibly high import content of additional spending
and contractionary fiscal policy in Dubai.
• Growth is likely to remain somewhat below
trend. We expect real GDP to expand by 3.6%
in 2011 after rising by 2% in 2010. (Chart 67.)
Growth will be led by the hydrocarbon sector,
which will revive as some of the exceptional OPEC-
driven cuts in crude output of the past two years
are reversed. (Chart 68.) We assume that real
hydrocarbon sector output (excluding refining and
gas processing) rises by 5% this year following
growth of 2% in 2010. The sector accounts for
around one-third of real GDP (at 2000 prices).
• Growth in the non-oil sector is likely to
remain well below par for the reasons described
above. We expect real non-oil GDP growth of
2.0% in 2010 and 3.0% in 2011, compared to the
average of 13% per year seen between 2001 and
UAE forecast summary2010e 2011f
Real GDP % y/y 2.0 3.6- Non-Oil % y/y 2.0 3.0
Inflation (yr avg) % 0.9 3.0Budget balance % GDP 8.0 12.0
2008. Within the overall total, it seems possible
that Abu Dhabi will expand at a fairly robust rate of
4-5% per year. But growth in Dubai – still burdened
with high debt servicing costs and weak asset
prices - could expand only modestly.
• Consumer price inflation stood at an average
of 0.9% in 2010 – its lowest for at least a decade.
It did, however, pick-up modestly through the year
as a result of rising food prices. (Chart 69.) Given
subpar economic growth and subdued monetary
conditions, broad inflationary pressures are likely
to remain contained through 2011. Although rising
food prices are a continued source of concern,
their impact on inflation is likely to be offset by
weak housing rental costs, which are of much
greater importance for the overall CPI. We expect
inflation to average 3.0% in 2011. A further
weakening of the US dollar – to which the dirham
is pegged – provides one risk to this outlook.
• The fiscal position of the UAE remains fairly
comfortable. At face value, 2009 and 2010 may
have seen the UAE record its first budget deficits
since 2003, at 8% and 1% of GDP, respectively.
(See chart 71.) But these figures exclude both the
income received on the government’s vast overseas
assets and profits from the Abu Dhabi government-
owned oil company, ADNOC. Including these, the
budget may not have seen deficits at all. Higher
oil prices and relatively unchanged spending could
generate a budget surplus of 12% of GDP this year,
at least when off-balance sheet items are included.
The current account position – which has been
consistently strong – should see a similar sized
surplus. (Chart 72.)
GCC Economic Outlook - March 2011
25
UAE: macro forecast charts
Chart 67. Real GDP Chart 68. Crude oil output
Chart 69. Consumer price inflation by sector Chart 70. Consumer price inflation
Chart 71. Budget balance Chart 72. Current account balance
Source: Official sources / NBK estimates and forecasts
(% GDP)
(% y/y) (% y/y, year average)
(% y/y) (million barrels per day)
-10
-5
0
5
10
15
20
-10
-5
0
5
10
15
20
2002 2004 2006 2008 2010
Oil Non-oil Total
NBKf'cast
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Jan-07 Jan-08 Jan-09 Jan-10
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Food (14%)
Housing (39%)
Total CPI
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
2002 2004 2006 2008 2010
NBKf'cast
-15
-10
-5
0
5
10
15
20
25
30
-15
-10
-5
0
5
10
15
20
25
30
2002 2004 2006 2008 2010
Headline figure
Incl inv inc & ADNOC profits
NBKestimates/forecast
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
40
45
2002 2004 2006 2008 2010
$ billions
% of GDP
NBKf'cast
GCC Economic Outlook - March 2011
26
UAE: money and financeGrowth in bank credit still subdued but may soon turn the corner; stock market levels off after 1Q10 gains...
• Although no longer in crisis mode,
conditions in the UAE financial sector remain
somewhat strained. The USD 14 billion debt
rescheduling agreement between Dubai World and
its creditors in 2010 provided some much needed
clarity for the financial sector. But uncertainty still
surrounds ‘Dubai Inc’s’ ability to repay as well as
the need for other corporate restructurings.
• Annual growth in broad money slowed to
around 5% from the middle of 2010 after averaging
9% through 2009. (Chart 73.) The slowdown
reflects a continued adjustment to a weaker loan
growth environment as well as stagnant foreign
capital inflows. The growth in M1 – a measure of
shorter-term liquidity – dropped to as low as 2%
after accelerating to 10% early last year. Indeed,
M1 fell by 2% in 3Q10 compared to the previous
quarter.
• This latest fall could just reflect seasonal
factors: activity measures often dip sharply during
the summer months. But there had also been a
concern that liquidity at banks was tightening again,
with banks chasing deposits more aggressively.
Interbank rates in the UAE remain well above
those in Saudi Arabia, for example. Nevertheless,
market liquidity is expected to gradually improve
over coming months, partly reflecting increased
confidence following the Dubai World debt
restructuring agreement.
• Bank loan growth has slowed dramatically
over the past two years and even turned negative in
mid-2010. (Chart 74.) The reasons are both on the
demand side – population outflows, cancellation of
capital spending, no or slow income growth – and
on the supply side – stricter lending criteria, high
loan-to-deposit ratios and more difficult funding
conditions. Banks are also still in the process of
rebuilding their balance sheets, with provisions
(general and specific combined) rising 33% in the
year to November. A notable part of the 5% growth
in bank assets seen over the past year has come
from an increase in overseas assets. (Chart 75.)
• The Central Bank of the UAE’s main policy
lending rate – the repo rate – remains at 1%, just
above the 0.25% US Federal funds rate that it has
tended to track in the past. (Chart 76.) It is unlikely
that further cuts in the repo rate would do much
to stimulate loan growth given the constraints
described above, and in any case, interest rates are
set to maintain the exchange rate peg against the
US dollar, not to directly control credit growth.
• Despite weakening versus the euro through
2H 2010, the dirham remains close to its level of
the beginning of 2010 and to its average level of
the past three years (with fluctuations in between).
(Chart 77.) These movements reflect changes in
USD/EUR. However, the dirham is below its average
level of EUR 1=AED 3.8 of the first half of the
past decade, reflecting the dollar’s general decline.
Note that in real terms (i.e. adjusting for inflation
in different countries) the dirham is 2-3% stronger
than in nominal terms, relative to January 2008
levels. This reflects faster rises in domestic prices
than prices abroad over the period.
• 2010 was a disappointing year for UAE
equities, with the main Dubai index dropping 10%.
(Chart 78.) Weak real estate markets and high debt
levels continue to weigh on the market.
GCC Economic Outlook - March 2011
27
UAE: money and finance charts
Chart 73. Money supply Chart 74. Bank claims on private sector
Chart 75. Commercial bank assets Chart 76. Policy interest rates
Chart 77. Exchange rate Chart 78. Stock market indices
Source: Official sources / NBK estimates
(%)
(% y/y) (% y/y)
-20
-10
0
10
20
30
40
50
60
70
-20
-10
0
10
20
30
40
50
60
70
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
M1
M2
-10
0
10
20
30
40
50
60
70
-10
0
10
20
30
40
50
60
70
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
0510152025303540455055
800900
100011001200130014001500160017001800
Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10
Bank assets (AED bn, LHS)
Bank assets (%y/y, RHS)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
US fed funds target
UAE repo
3.0
3.5
4.0
4.5
5.0
5.5
6.0
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11
AED/USDAED/USD (real)AED/EuroAED/Euro (real)
AED stronger
0
1000
2000
3000
4000
5000
6000
0
1000
2000
3000
4000
5000
6000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Abu Dhabi Securities Market
Dubai Financial Market
N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon UAE/US/Euro area CPIs. Not available before 2008.
N.B. Excludes official entities and non-bank financial institutions. Private sector accounts for around 75% of all domestic claims.
GCC Economic Outlook - March 2011
28
Regional macroeconomic data and forecasts
Unit 2006 2007 2008 2009 2010e 2011fBahrainNominal GDPNominal GDP $ bn$ bn 15.815.8 18.418.4 22.122.1 19.319.3 21.521.5 23.723.7Nominal GDPNominal GDP %y/y%y/y 17.817.8 16.516.5 19.919.9 -12.8-12.8 11.811.8 9.89.8Real GDPReal GDP %y/y%y/y 6.76.7 8.48.4 6.36.3 3.13.1 4.04.0 4.84.8- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -1.0-1.0 1.11.1 0.40.4 -0.3-0.3 0.00.0 3.03.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 8.18.1 9.69.6 7.27.2 3.63.6 4.54.5 5.05.0Budget balanceBudget balance % GDP% GDP 4.74.7 3.13.1 6.66.6 -6.1-6.1 -0.7-0.7 -1.2-1.2Current account balanceCurrent account balance % GDP% GDP 13.813.8 15.715.7 10.210.2 2.92.9 5.05.0 5.55.5Consumer pricesConsumer prices % y/y% y/y 2.12.1 3.33.3 3.53.5 2.82.8 2.02.0 3.03.0BHD/USD (end year)BHD/USD (end year) -- 0.3770.377 0.3760.376 0.3770.377 0.3770.377 0.3770.377 --Repo rate (end year)Repo rate (end year) %% N/AN/A 5.255.25 2.752.75 2.252.25 2.252.25 --KuwaitNominal GDPNominal GDP $ bn$ bn 101.6101.6 114.6114.6 148.8148.8 109.5109.5 129.3129.3 142.8142.8Nominal GDPNominal GDP %y/y%y/y 24.924.9 10.610.6 22.722.7 -21.2-21.2 18.118.1 10.510.5Real GDPReal GDP %y/y%y/y 5.25.2 4.44.4 3.13.1 -2.9-2.9 3.03.0 4.54.5- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 2.72.7 -2.7-2.7 1.71.7 -10.0-10.0 2.22.2 4.14.1- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 7.07.0 9.29.2 4.04.0 1.41.4 3.53.5 4.74.7Budget balanceBudget balance % GDP% GDP 17.717.7 28.628.6 6.96.9 20.420.4 15.015.0 13.013.0Current account balanceCurrent account balance % GDP% GDP 44.644.6 36.836.8 40.540.5 25.625.6 34.834.8 40.640.6Consumer pricesConsumer prices % y/y% y/y 3.03.0 5.55.5 10.610.6 4.04.0 4.04.0 4.74.7KWD/USD (end year)KWD/USD (end year) -- 0.2890.289 0.2730.273 0.2760.276 0.2870.287 0.2870.287 --Repo rate (end year)Repo rate (end year) %% 6.256.25 6.256.25 3.753.75 3.003.00 2.502.50 --OmanNominal GDPNominal GDP $ bn$ bn 36.836.8 41.941.9 60.260.2 46.846.8 56.256.2 64.364.3Nominal GDPNominal GDP %y/y%y/y 19.119.1 13.913.9 43.943.9 -22.3-22.3 20.020.0 14.614.6Real GDPReal GDP %y/y%y/y 5.55.5 6.76.7 12.812.8 1.11.1 5.05.0 4.74.7- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -4.4-4.4 -5.0-5.0 7.67.6 6.26.2 6.06.0 4.04.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 11.311.3 12.612.6 15.115.1 -0.9-0.9 4.54.5 5.05.0Budget balanceBudget balance % GDP% GDP 13.513.5 8.18.1 13.013.0 0.60.6 6.06.0 8.08.0Current account balanceCurrent account balance % GDP% GDP 15.415.4 5.95.9 8.38.3 -0.6-0.6 5.05.0 7.07.0Consumer pricesConsumer prices % y/y% y/y 3.23.2 5.95.9 12.512.5 3.53.5 3.33.3 5.05.0OMR/USD (end year)OMR/USD (end year) -- 0.3850.385 0.3850.385 0.3850.385 0.3850.385 0.3850.385 --Repo rate (end year)Repo rate (end year) %% 6.346.34 6.026.02 1.971.97 2.002.00 2.002.00 --QatarNominal GDPNominal GDP $ bn$ bn 60.560.5 80.880.8 110.8110.8 98.398.3 114.5114.5 133.6133.6Nominal GDPNominal GDP %y/y%y/y 40.640.6 33.533.5 37.137.1 -11.2-11.2 16.416.4 16.816.8Real GDPReal GDP %y/y%y/y 18.618.6 26.826.8 25.425.4 8.68.6 17.017.0 13.713.7- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 14.314.3 23.323.3 23.123.1 7.77.7 23.023.0 17.017.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 23.723.7 30.630.6 27.827.8 9.69.6 11.011.0 10.010.0Budget balanceBudget balance % GDP% GDP 8.68.6 11.311.3 10.410.4 13.013.0 12.712.7 10.010.0Current account balanceCurrent account balance % GDP% GDP 15.615.6 12.912.9 12.812.8 8.58.5 10.810.8 11.311.3Consumer pricesConsumer prices % y/y% y/y 11.811.8 13.613.6 15.215.2 -4.8-4.8 -2.8-2.8 4.04.0QAR/USD (end year)QAR/USD (end year) -- 3.6403.640 3.6393.639 3.6413.641 3.6393.639 3.6393.639 --Deposit rate (end year)Deposit rate (end year) %% 5.155.15 4.004.00 2.002.00 2.002.00 1.501.50 --Saudi ArabiaNominal GDPNominal GDP $ bn$ bn 356.2356.2 385.1385.1 476.3476.3 375.8375.8 453.9453.9 526.5526.5Nominal GDPNominal GDP %y/y%y/y 12.912.9 8.08.0 23.823.8 -21.1-21.1 20.820.8 16.016.0Real GDPReal GDP %y/y%y/y 3.23.2 2.02.0 4.24.2 0.60.6 4.24.2 4.24.2- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -1.1-1.1 -4.1-4.1 4.34.3 -8.0-8.0 3.03.0 5.05.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 4.94.9 4.34.3 4.24.2 3.63.6 4.54.5 4.04.0Budget balanceBudget balance % GDP% GDP 21.021.0 12.212.2 32.532.5 -6.1-6.1 6.46.4 12.012.0Current account balanceCurrent account balance % GDP% GDP 27.827.8 24.324.3 27.827.8 6.16.1 6.06.0 10.010.0Consumer pricesConsumer prices % y/y% y/y 2.22.2 4.14.1 9.99.9 5.15.1 5.45.4 5.55.5SAR/USD (end year)SAR/USD (end year) -- 3.7503.750 3.7493.749 3.7523.752 3.7513.751 3.7503.750 --Repo rate (end year)Repo rate (end year) %% 5.205.20 5.505.50 2.502.50 2.002.00 2.002.00 --UAENominal GDPNominal GDP $ bn$ bn 175.2175.2 206.4206.4 254.4254.4 216.8216.8 237.5237.5 261.5261.5Nominal GDPNominal GDP %y/y%y/y 27.027.0 17.817.8 23.223.2 -14.7-14.7 9.69.6 10.110.1Real GDPReal GDP %y/y%y/y 13.013.0 6.26.2 7.47.4 -2.7-2.7 2.02.0 3.63.6- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 13.913.9 7.97.9 9.79.7 -8.0-8.0 2.02.0 5.05.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 12.612.6 5.45.4 6.36.3 0.00.0 2.02.0 3.03.0Budget balanceBudget balance % GDP% GDP 25.125.1 23.023.0 22.922.9 0.00.0 8.08.0 12.012.0Current account balanceCurrent account balance % GDP% GDP 20.620.6 9.59.5 8.88.8 3.63.6 12.012.0 15.015.0Consumer pricesConsumer prices % y/y% y/y 9.39.3 11.111.1 12.312.3 1.51.5 0.90.9 3.03.0AED/USD (end year)AED/USD (end year) -- 3.6733.673 3.6723.672 3.6733.673 3.6733.673 3.6733.673 --Repo rate (end year)Repo rate (end year) %% N/AN/A 4.254.25 1.501.50 1.001.00 1.001.00 --
International data (end year unless otherwise stated)International data (end year unless otherwise stated)Unit 2006 2007 2008 2009 2010e 2011f
Brent crude oil spot priceBrent crude oil spot price US $ p/bUS $ p/b 60.860.8 95.995.9 44.644.6 79.479.4 91.491.4 90.090.0CRB commodity price indexCRB commodity price index IndexIndex 368.2368.2 427.5427.5 314.7314.7 421.1421.1 519.2519.2 --Eur/USDEur/USD 1$ = 1$ = €€ 0.7580.758 0.6850.685 0.7150.715 0.6990.699 0.7480.748 --US Fed Fund RateUS Fed Fund Rate %% 5.255.25 4.254.25 0.250.25 0.250.25 0.250.25 --World MSCI stock market indexWorld MSCI stock market index IndexIndex 1,1011,101 1,1321,132 678678 833833 898898 --MENA real GDP (IMF)MENA real GDP (IMF) %y/y%y/y 5.85.8 6.06.0 5.05.0 1.81.8 3.93.9 4.64.6World real GDP (IMF)World real GDP (IMF) %y/y%y/y 5.25.2 5.35.3 2.82.8 -0.6-0.6 5.05.0 4.44.4
Souce: ThomsonReuters Ecowin, official sources, and NBK Economic Research. Includes some NBK estimates.Souce: ThomsonReuters Ecowin, official sources, and NBK Economic Research. Includes some NBK estimates.
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