The GDP growth in GCC countries is expected to be at 5.5 percent in 2012 benefiting from high oil revenues, led by higher oil production in Saudi Arabia and Kuwait to compensate for the low supply from Iran. GCC economies are anticipated to expand by 3.7 percent in 2013. The oil sector growth in GCC countries is anticipated to increase 4.8 percent in 2012, according to a review of the GCC economy by Global Investment House.
Meanwhile, the nonoil sector is expected to increase 5.9 percent for the same year. The growth in nonoil 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 nonoil sector is expected to continue supporting economic growth, as GCC countries register 5.5 percent growth in the nonoil sector vis-a-vis no growth in the oil sector in 2013.
GCC countries are expected to record a fiscal surplus of 14.6 percent (highest in the last three years). Fiscal revenues are expected to rise to 49.3 percent of the GDP in 2012 as compared to 48.4 percent 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 percent of the GDP in 2012, down from 35.7 percent 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 percent 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 percent in 2012 and to 11.4 percent in 2013, from 12.1 percent in 2011. International reserves held by the GCC countries are expected to increase 29.2 percent to $ 815.1 billion in 2012; it is anticipated to grow 19.5 percent to $ 974.2 billion in 2013.
Exports by GCC countries increased by 39.2 percent in 2011, while imports rose 17.8 percent. Consequently, current account surplus rose to 24.1 percent of GDP in 2011, up from 14.4 percent in 2010. Total exports by GCC countries are expected to remain high in 2012, as exports increase 6.8 percent and imports rise at 8.5 percent in 2012. Meanwhile, current account surplus is expected to stabilize at 23.6 percent of GDP in 2012, and further declining to 21.1 percent 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, the 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.
GCC countries have largely remained immune to rising prices as inflation is expected to decline slightly to 3.5 percent in 2012 from 3.6 percent 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 percent) in 2013. GCC countries reined in money supply in an effort to keep inflation under control.
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 percent YoY to $ 55.4 billion in 2012. The UAE continued its strong performance from 2011, rising 28.8 percent 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 percent YoY and 14.3 percent YoY, respectively.
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.
Optimistic outlook continues to be maintained 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 nonoil 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 United States and slow pace of recovery in Europe could put pressure on oil prices and dampen investor sentiments in the short term.