Global Investment House
GCC Economy

The GDP growth in GCC countries is expected to be at 5.5% in 2012 benefitting from high oil revenues, led by higher oil production in Kuwait and Saudi Arabia to compensate for the low supply from Iran. GCC economies are anticipated to expand by 3.7% in 2013. The oil sector growth in GCC countries is anticipated to increase 4.8% in 2012.

Meanwhile, the non-oil sector is expected to increase 5.9% for the same year. The growth in non-oil sectors came in stronger than the oil sector, following increased public expenditure and private sector growth as a result of an accommodative monetary policy. Going forward, the non-oil sector is expected to continue supporting economic growth, as GCC countries register 5.5% growth in the non-oil sector vis-à-vis no growth in the oil sector in 2013.

Public debt to GDP ratio to decline to 11.4% in 2013 compared to 11.8% in 2012

GCC countries are expected to record fiscal surplus of 14.6% (highest in the last three years). Fiscal revenues are expected to rise to 49.3% of the GDP in 2012 as compared to 48.4% in 2011 for GCC countries. In response to the increase in fiscal revenues, GCC countries have stepped up fiscal spending through measures such as public sector wage increase, social expenditures on affordable housing, public transportation, direct subsidies to nationals to combat the rising food prices, and unemployment benefits. Despite the high level of fiscal spending, it is expected to be 34.8% of the GDP in 2012, down from 35.7% in 2011. Continued fiscal spending by GCC countries, to support various planned social expenditures under long-term development plans of the respective countries is expected to cause fiscal surplus to moderate to 11.2% of GDP in 2013.

GCC economies are expected to marginally lower their public debt, as they continue to direct their surplus oil payouts to meet social expenditures. GCC countries’ public debt–to-GDP ratio is expected to decline to 11.8% in 2012 and to 11.4% in 2013, from 12.1% in 2011. International reserves held by the GCC countries are expected to increase 29.2% to USD815.1bn in 2012; it is anticipated to grow 19.5% to USD974.2bn in 2013.

GCC exports rose by 6.8% and imports by 8.5% in 2012

Exports by GCC countries increased by 39.2% in 2011, while imports rose 17.8%. Consequently, current account surplus rose to 24.1% of GDP in 2011, up from 14.4% in 2010. Total exports by GCC countries are expected to remain high in 2012, as exports increase 6.8% and imports rise at 8.5% in 2012. Meanwhile, current account surplus is expected to stabilize at 23.6% of GDP in 2012, and further declining to 21.1% as oil exports increase at a reasonable rate.

However, the current account surplus is likely to remain highly sensitive to oil price. Hence, GCC countries will need to develop better resilience to oil price shocks and diversify their export base. Countries like Kuwait and Qatar remain the least reliant on oil price decline, given their CAB, while Saudi Arabia, UAE, and Bahrain have witnessed the biggest change in breakeven oil price in the last four years, highlighting their increased sensitivity to oil price declines.

 Inflation stays in control despite healthy growth in money supply

GCC countries have largely remained immune to rising prices as inflation is expected to decline slightly to 3.5% in 2012 from 3.6% in 2011. Monetary growth has been slower than reserve accumulation in the GCC countries, which has kept inflation in check, despite public sector wage increases and direct food subsidies. Hence, inflation in the GCC countries is expected to remain low (3.6%) in 2013. GCC countries reined in money supply in an effort to keep inflation under control.

GCC corporate earnings grew 4.5%YoY in 2012         

Corporate earnings in the GCC region continued to rise in 2012, albeit at a slower pace when compared to 2011. Overall corporate earnings grew 4.5%YoY to USD55.4bn in 2012. UAE continued its strong performance from 2011, rising 28.8%YoY in 2012 driven primarily on account of recovery in Real Estate sector. Saudi Arabia’s earnings on the other hand remained at similar levels to 2011 impacted by weak performance of the petrochemical sector. Among other gainers were Kuwait and Oman which grew 12.0%YoY and 14.3%YoY, respectively.

GCC market valuation remains fairly attractive

GCC equity markets had a good start to 2013 largely due to an uptick in earnings across key cyclical sectors such as Banking and Real Estate. Despite the recent surge, GCC markets continue to remain fairly attractive. In terms of one-year forward PE, the six GCC markets trade in the range of 9.4x–11.3x. This is fairly below the three- and five-year historic average of 13.5x and 13.4x, respectively, for the region as a whole. Valuation is also lower compared to similar frontier markets and key emerging markets. Within GCC, we are in favor of Saudi Arabia given its current compelling valuations coupled with a robust earnings outlook for 2013.

Development on the global macroeconomic front to be a key factor in the short term

We continue to maintain optimistic outlook for the GCC equity market in 2013, largely due to the presence of region-specific triggers such as continued momentum on reforms, healthy economic growth, investment in non-oil sectors, and stabilization in oil prices and recovery in the real estate sector. However, the market remains exposed to spells volatility that could potentially emanate from lack of institutional participation. In the short-term, developments on the global macroeconomic front would play a key role in deciding the course of GCC markets due to lack of region-specific triggers in the post-earnings season. Recent spending cuts in the US and slow pace of recovery in Europe could put pressure on oil prices and dampen investor sentiments in short-term.

Released by Global Investment House.