Lower oil production levels last year reflected negatively on the economic performance of the Gulf countries, as oil continues to account for 35 percent of the region’s GDP, 75 percent of governments’ revenues and 85 percent of total exports. Events of Sept. 11 priced in an extra element of political risk to some project finance deals. Nevertheless, the region’s non-oil sectors performed well and have more than made up for the negative growth recorded by the oil sector. Government budgets were generally expansionary last year and there appears to have been sufficient activity in the private sectors supported by lower interest rates and reform and liberalization moves.
Modest growth in real GDP is projected for 2002, even though nominal GDP in the major Gulf countries is likely to fall in line with the reduction in oil prices and production levels.
Markets are now discounting weaker demand for oil associated with a much slower global economic growth. It is estimated that every 1 percent loss in global GDP growth would reduce world oil demand by 400,000 bpd. Furthermore, oil demand will also be dampened by the drop in airline flights which make up around 10 percent of the world oil consumption. It is therefore unlikely to see any meaningful increase in world demand for oil in 2002, while non-OPEC supply is forecast to rise by 600,000 bpd.
High oil prices last year gave non-OPEC exporters, most notably Russia, the cash to repair oil wells, drill new ones and raise output. This will put pressure on OPEC to cut production by more than the 6.5 percent or the 1.5 million bpd introduced recently. Oil prices are likely to drop to an average of $18 a barrel for the basket of OPEC crude, compared to an estimated average of $22 a barrel last year. The projected 18 percent decline in oil prices and the 4 percent drop in oil production levels would bring negative real GDP growth for the region’s oil sectors.
GCC oil revenues peaked in 1980 and reached their lowest level in 1998 at $58.3 billion. Oil revenues dropped by around 15 percent in 2001 to $107.6 billion, down from $126.2 billion in 2000, and are forecast to fall a further 21 percent to $85.1 billion in 2002. While Saudi Arabia’s oil revenue is estimated to have declined by 18 percent in 2001 to $58.2 billion, followed by UAE and Kuwait at $18 billion and $14.9 billion respectively. Accordingly, the budgetary positions of the GCC countries are likely to deteriorate further this year, with Saudi Arabia recording the highest budget deficit of SR45 billion ( $12 billion), up from SR25 billion ($6.7 billion) in 2001. Saudi Arabia recorded a budget surplus of SR23 billion ($6.1 billion) in 2000, accounting for 7 percent of GDP. Real GDP growth in Saudi Arabia is put at 2.2 percent in 2001, significantly, lower than the 4.5 percent growth achieved in 2000.
Nominal GDP in 2001 is estimated to have fallen by 1.8 percent to SR668 billion ($178 billion) due to the decline in oil prices. The real GDP was driven by the private sector, which recorded a rise of 5.9 percent.
The non-oil industrial sector rose by 9.3 percent, the telecommunications and transport sector by 9.1 percent and the construction sector by 3.3 percent. In May last year, the government reduced most tariffs on imports to 5 percent from 12 percent, while some protected goods had tariffs reduced to 12 percent from 20 percent. Growth prospects this year are less encouraging. Fiscal restraint with budgetary expenditures at SR202 billion ($54 billion) down by 20 percent from actual 2001 spending, and forecast lower oil price and production levels should bring forth lower oil and public sector growth rates. The ongoing strength of the private sector, supported by lower interest rates and possible partial repatriation of Saudi capital from abroad should bring forth 4 percent real GDP growth in those sectors. The economy as a whole is forecast to grow at the real rate of 1.8 percent in 2002.
Kuwait which grew by 4 percent in 2000, saw its real GDP growth rise by an estimated 1.7 percent in 2001 due mainly to the negative growth in the oil sector. Growth in the non-oil sectors rose last year, reflecting a gradual return of confidence to the private sector and were supported by lower interest rates and an expansionary fiscal policy. Growth this year is projected to be lower at 1.5 percent, dampened by lower government expenditure and a further drop in oil production.
The UAE which recorded a solid 6.5 percent real GDP growth in 2000, saw its economy growing by around half that level in 2001. UAE’s oil production was reduced last year by an estimated 4.7 percent, however continued heavy spending on infrastructural projects and strong growth in such non-oil activities as tourism, trade, transport, telecommunication and finance made up for the negative growth in the oil sector.
Because the UAE strictly adheres to OPEC’S quota reduction agreements, the projected decline in this year’s oil production would dampen overall real GDP growth to 2.5 percent. The leading non-oil sectors will continue to do well, albeit recording slower growth rates than those of the previous two years.
Qatar was the star performer among the GCC countries in the past two years, recording the highest real GDP growth among the Gulf and the other Arab countries at 7 percent and 5 percent in 2000 and 2001 respectively. Qatar did not decrease its oil production in 2001 operating close to its full productive capacity. Production of liquefied natural gas (LNG) was significantly increased and heavy expenditure on infrastructure and industrial projects helped to promote the non-oil and gas sectors as well. The expansion of these sectors would continue this year, allowing Qatar to record the highest real GDP growth rate among the GCC countries of 4 percent.
The economies of Bahrain and Oman are more diversified than those of the other GCC states. The two countries are not OPEC members, and therefore do not necessarily have to abide by an oil production quota.
Estimates show that real GDP in Bahrain and Oman grew by 4.2 percent and 3.5 percent respectively in 2001. The construction and tourism sectors performed particularly well in Bahrain, while Oman benefited from the production and export of liquefied natural gas from its new plant that commenced production in late 2000.
The two countries will be less affected by the developments in the oil market this year, and will continue to benefit from budgetary assistance provided to them from the other GCC states. Real GDP growth rates are forecast at 3.2 percent and 3 percent respectively for Bahrain and Oman in 2002.
(The author is chief executive officer of Jordan Investment Trust (Jordinvest).