Most GCC states should see large budget surpluses in 2013

Most GCC countries should see large budget surpluses this year, and governments will maintain spending on social and infrastructure projects. Meanwhile, macroeconomic vulnerabilities are lower than in pre-crisis years, a report said on Monday. In many ways, growth in the region's economy now looks more durable than before. This is partly because growth now is more subdued than in the pre-crisis days; a shock to the system would be less severe. Other vulnerabilities such as elevated asset prices, extraordinary growth in credit, and heightened real estate speculation have also been purged, the report by National Bank of Kuwait (NBK) said. And in the current post-Arab Spring environment, governments with financial resources are likely to remain committed to spending measures that support living standards for nationals, as well as medium-term development projects. Over the long-term, GCC countries undoubtedly face some tough challenges, particularly on job creation and fiscal reform. However, economic growth over the next couple of years is still likely to outperform that in many other parts of the world (and indeed the rest of MENA), some of which will remain bogged down by financial austerity and structural issues. We continue to look for growth in the GCC non-oil sector of a solid-looking 5pct in both 2013 and 2014. Of course, despite large financial resources, GCC countries would not be immune from a serious global economic downturn should one occur. Indeed, large reserves did not prevent the global crisis of 2008 having a major impact on the region. GCC non-oil GDP growth slowed to just 3pct per year in 2009 and 2010 (on average) from 10pct in the previous three years, as oil prices, asset markets, trade levels and business confidence all weakened sharply. The fall in oil prices to below USD100 per barrel over the past few weeks has triggered some concerns over the potential impact on the Gulf region's economy. Brent crude prices fell by some 19pct from their peak of USD119 in February to a low of USD96 in mid-April - the first spell below USD100 since last July. Prices have since bounced back slightly from these lows, reaching USD104 in early May partly in reaction to the cut in interest rates from the European Central Bank. But they remain well off their highs. Future market prices have also fallen, pricing in a more pessimistic medium-term view than before. The Brent December 2013 contract recently traded at USD103 compared to USD111 in mid-February. In our view however, the latest fall does not alter the main narrative of a region set for solid economic growth over the next couple of years. We had long expected oil prices to weaken in 2013 from last year's average of USD112, as the soft outlook for global oil demand combines with rising supplies (including from the US, Iraq and Libya) to loosen market fundamentals. The recent fall merely moves prices more or less into line with our expectations for this year.