Frontier Markets Economic Outlook H1 2012

The Gulf Economies

The Gulf Cooperation Council: Strong Fiscal Position to Cushion Region's Economies

In 2012, there is expected to be a significant divergence, in terms of economic performance, between the hydrocarbon-rich member states of the six-country Gulf Cooperation Council (GCC) and the non-GCC countries of the Middle East and North Africa (MENA) region. MENA oil-importing countries are likely to feel much more acutely the effects of recent substantial gains in crude oil prices and any deterioration in the global economic outlook, while the energy-exporting GCC countries will be significant beneficiaries of oil-price strength.

Aside from the Bahraini economy, which suffered the effects of regional political unrest last year, as the Arab spring spread to some of the smaller Gulf states, and is expected to rebound this year, the other GCC economies are forecast to experience slower growth in 2012, compared to 2011. This would imply that intra-regional investment flows, an increasingly important source of financing for oil-importing countries in the MENA region, would weaken in the coming quarters.

Last year, the region's strong balance-sheet characteristics – low debt to gross domestic product (GDP) ratios and some scope for expansionary fiscal policies – are expected to have mitigated weaker growth, underpinned by bilateral transfers, providing a temporary cushion for those countries located on the periphery of the MENA region. For now, at least, strong support for crude prices, which are benefiting from the escalation in tensions between the West and the hard-line Islamic regime in Iran, which continues to press ahead with its plans for nuclear capability, will ensure the GCC states enjoy another year of windfall gains. But if global growth should slow later this year, and oil prices fall toward the break-even point for national budgets, GDP growth could slow further for MENA region oil importers.

In that event, intra-regional sources of financing could decline steeply, and the formalisation of new mechanisms of intra-regional multilateral financial assistance would then become increasingly important to mitigate such an outcome. At the same time, any further escalation of the Arab spring and the risks that would entail to incumbent Arab autocracies across much of the region, would likely result in costly and unsustainable fiscal populism in some countries. With the Arab revolutions still considered 'unfinished business', despite talk of the onset of winter, the political transition under way in the region appears set to continue for many years, given that economic and democratic aspirations remain largely unfulfilled, keeping oil prices well supported.

United Arab Emirates: Wage, Pension Increases to Boost Spending, Support Growth

While the United Arab Emirates (UAE) has managed to successfully escape the popular uprisings seen elsewhere in the MENA region, economic prospects for the UAE are more mixed, with the outlook clouded by continuing high debt levels and greater-than-normal uncertainty about the global economic outlook. A key forward-looking indicator of business sentiment – the HSBC UAE Purchasing Managers Index – is declining, suggesting that the upturn was already beginning to lose momentum by the end of 2011.

Dubai is at risk of renewed weakness, given the emirate's huge debt, estimated at some $110bn compared with GDP of $80bn, which will continue to weigh on any economic upturn, while the emirate's open economy leaves it particularly exposed to external economic trends. Cargo volumes passing through the airport are declining, pointing to weaker trade performance in last year's final quarter, following a 23% increase in non-oil trade at the end of the third quarter of 2011. But while some key economic sectors, such as transport and logistics, have shown signs of a pick-up, others, such as property, remain severely depressed, with no realistic prospect of an early, sustainable recovery.

Economic activity should be supported, however, by several spending measures announced at the end of last year and in January including wage and pension increases and an AED10bn ($2.7bn) fund to help pay the debt costs of low-income households, in particular wage rises of between 35% and 100% of basic salary, effective from January. Up to 91,000 UAE nationals are set to benefit from the wage and pension increases and the low-income fund, according to official sources.

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