Oil Income Drives Major Economic Expansion

 Asharq Al Awsat, August 16 – High global oil prices are driving rapid economic growth in the countries of the Gulf Cooperation Council (Saudi Arabia, UAE, Kuwait, Oman, Qatar and Bahrain), yielding substantial external surpluses and stimulating an investment boom, according to a report released today by the Institute of International Finance (IIF).

The IIF, the global association of financial institutions with more than 355 member institutions operating across the world, forecast GCC 2006 nominal GDP growth of almost 19 percent, which will lift the combined GDP of the GCC economies to around $725 billion. This follows a cumulative expansion in nominal GDP of 74 percent over the last three years. For the GCC as a whole, GDP per capita has risen over the last three years to over $17,000 from below $11,000. A moderation in growth to 9.4 percent is projected for 2007. Given current high oil prices, the IIF estimated that the GCC will record a current account surplus of almost $230 billion this year and in excess of $220 billion next year, following surpluses of $ 167 billion in 2005 and $90 billion in 2004.

In 2005, the GCC accounted for 22 percent of global oil production, around 40 percent of exports and a similar proportion of proved reserves. IIF Managing Director Charles Dallara stated, "The oil windfall has supported increased government spending, and lifted domestic confidence, resulting in an investment boom. Projects worth over $1 trillion, mostly in infrastructure, are either under way or planned which aim to diversify the economic base and generate greater value added from hydrocarbons."

Mr. Dallara pointed out, "Although GCC domestic investment programs will require large imports of goods and services, based on our oil price assumption for Brent crude ($68/b in 2006 and $70/b in 2007), the current account surplus is forecast to average 30 percent of GDP this year and next year and, as a result, we continue to project that the GCC states will remain a huge net capital exporter."

The IIFs Managing Director added, "Rising current account surpluses have allowed these countries to substantially increase their already large holdings of private and official foreign assets. Capital account data is opaque, but using the current account surplus as a proxy, the implication is that GCC countries accumulated foreign assets worth $167 billion in 2005, lifting the total for the last six years to more than $400 billion. On the same basis we anticipate now that foreign investment flows from the GCC will amount to at least $450 billion during 2006 and 2007."