A recent research report from Crédit Agricole Private Banking, titled ‘Macro Comment – Eastern Promises: MENA Update’, says that there is a promising growth outlook for the GCC countries, who are increasingly supported by budget surpluses resulting from high oil prices.
“2013 proved to be an encouraging year for a number of countries in the MENA region. The hydrocarbon-based GCC economies displayed rates of GDP increases high enough to define these countries as a pocket of above average growth. On the other hand, some improvement were spotted in countries where the activity had been deeply disturbed by the Arab Spring-like uprising”, said Dr. Paul Wetterwald, Chief Economist, CréditAgricole Private Banking.
Dr. Paul Wetterwald continued, “With respect to the oil rich GCC countries, one has to recall that after the growth revival ignited by the oil price increase of 2010-2011, public spending added to the growth momentum. This government support has to rely on firm oil prices if one does not want to endanger the fiscal and/or external equilibriums.”
As a reminder, the recent oil price evolution is shown in the following graph. According to the IMF, Bahrain, Iran, Algeria and Iraq will not arrive at fiscal surpluses if the oil price remains at the current level, while, Kuwait, Saudi Arabia, and the UAE are on the safe side.
The growth dynamic experienced by Kuwait, Saudi Arabia and the UAE is still vivid as shown by the January Purchasing Managers Indices (PMI). In Saudi Arabia the headline PMI rose to 59.7 (from 58.7 in December), and in the UAE index remained comfortably above the 50 no-change mark despite its slightly weaker reading (57.1 vs. 57.4 in December).
“There is a link between growth and inflation, but the answer is not yet affirmative whether countries with the highest growth are the most prone to inflation. Despite the difficulties and uncertainty surrounding the data collection, one can obtain a rough country ranking according to the inflation rate, from the highest to the lowest. Iran tops the inflation league, followed by Egypt, Yemen, Turkey, Syria, Bahrain, Libya, Lebanon, Jordan, Saudi Arabia, Kuwait, Qatar, Iraq, Morocco, UAE, Oman, and finally Algeria. This suggests that inflation tends to go hand in hand with social instability. One is tempted to assume that consumer prices increases ignite protests and uprising, generating a vicious circle where logistic issues stemming from large scale protests add to inflation,” commented Dr. Paul Wetterwald.
In the UAE, indications derived from the Purchasing Managers Index signals cost increase in January. Purchase price inflation gained pace as raw materials prices rose, but wage inflation eased. In Saudi Arabia, companies stressed that competitive conditions weighed on pricing power, whereas input prices increased notably during January. Purchasing costs added more to overall inflation than salaries did.
Dr. Paul Wetterwald concluded, “Investors should retain that the positive growth momentum in the GCC countries set the stage for improving credit metrics as far as bonds/sukuk issuers in hard currencies (USD,EUR) are concerned.”