AMMAN, 12 January 2004 — Average oil prices rose last year to their highest level in the past two decades. Price per barrel of Brent crude closed the year at $30.17, while the average price for 2003 as a whole was $28.5 a barrel, slightly higher than the average attained in 2000 of $28.2 a barrel. The average price for OPEC basket was $28 a barrel, up 14 percent on its 2002 level. The war in Iraq and the instability that followed, combined with OPEC’s focus on maintaining oil prices closer to the upper end of the oil price range generated ample support for oil prices last year. The loss of OPEC’s purchasing power due to the weaker dollar provided an added incentive for oil producers to keep prices high.
We are forecasting crude oil price to average $26 a barrel for Brent crude or $25.5 a barrel for OPEC basket in 2004. The view that the oil market may be slightly softer this year is based on fairly solid supply and demand assumptions. On the supply side, there is a significantly larger amount of oil coming from non-OPEC countries than in 2003. Within OPEC, incremental production should be expected from Iraq this year, as well as from a number of OPEC members where international oil companies have been investing, e.g. Algeria, Libya and Nigeria. Virtually all the incremental world oil demand estimated at 1.3mbpd (300,000 bpd from the US) will be satisfied by the increase in non-OPEC production. Output from Russia is expected to rise by 600,000 bpd, while Africa is expected to produce 400,000 bpd more than in 2003.
Real GDP growth in Saudi Arabia is put at 6.4 percent in 2003, considerably higher than the 0.7 percent growth recorded in 2002, and the 1.1 percent growth of 2001. Nominal GDP is estimated to have grown by 12 percent in 2003 to reach $211 billion, mainly due to the 22.9 percent growth in the oil sector and with actual government expenditures coming 19.6 percent above budget. The higher nominal growth rate was due to the surge in global oil prices and did not reflect any significant rise in domestic inflation which stayed subdued at 0.5 percent. The slight pick up in inflation is considered healthy following five consecutive years of price declines averaging -0.7 percent annually. Real GDP of the private sector is estimated to have grown at 3.4 percent in 2003, below the average of 4 percent recorded in the previous four years due mainly to the slowdown that occurred in the first quarter in anticipation of the war on Iraq. The non-oil industrial sector grew by 3.9 percent, construction by 2.8 percent, electricity, gas and water by 6.2 percent, transport and communication by 4.3 percent and wholesale, retail, restaurants and hotels by 4.4 percent.
The robust growth in the private sector has been accompanied by a number of factors that have enhanced confidence in the national economy and should continue to have a positive impact on private sector growth this year. Among these factors are the low levels of domestic interest rates, the sovereign credit rating by Standard & Poor’s to the Kingdom (with A+ long-term local currency and A long-term foreign currency grades), the custom union among the GCC countries, private sector involvement in the natural gas, power and water projects, and the IPO of part of the Saudi Telecommunication Company’s (STC) shares. Excess liquidity in the system fueled by credit expansion and repatriation of Saudi Capital from abroad seeking domestic investments added to the emporia in the Saudi stock market which ended the year up 76.2 percent.
Saudi Arabia’s 2004 budget puts government expenditures at SR230 billion ($61.3 billion), a 10 percent increase over the 2003 budget, but 8 percent below actual 2003 spending. Actual expenditures are likely to exceed the budget as well this year, which implies a continuation of the current expansionary fiscal policies, with the government sector growing at 2 percent. Strong oil revenues and continued low interest rates mean ample liquidity to fuel private sector growth this year forecast at around 4 percent. The projected growth in the non-oil sector both private and government is likely to offset the expected 2 percent drop in oil sector giving total real GDP growth of 2.0 percent in 2004.
Kuwait which recorded real GDP growth rate of 1 percent in 2002 and a decline of 1 percent in 2001, is likely to have grown at a much higher rate of 4 percent last year. Strong oil prices and production levels reflected positively on oil sector GDP and allowed government to overspend. Private sector activities benefited from increased demand for logistical supplies and support services to coalition forces, as well as, surging exports to Iraq. The relief of removing Saddam Hussein’s regime has created a feel-good factor which brought back confidence and encouraged domestic investments. The Kuwaiti stock exchange ended 2003 up 101.7 percent, its best annual performance ever. Low interest rates and 21 percent surge in credit facilities saw domestic liquidity rising by 11 percent in 2003. The new investment law introduced in October last year allows foreigners to take 100 percent ownership in Kuwaiti companies. Most economic sectors except oil, power and telecom are now open to foreign investors. The outlook for 2004 is still positive, private sector activities being partially offset by lower oil production levels giving real GDP growth for the year of 2.2 percent.
The UAE economy is showing little signs of losing steam. Oil production and prices are surging, Dubai is booming and the country is presented by the IMF as a model of economic diversification. Tourism which grew by 31 percent in 2002 is expected to have increased by 25 percent last year, with total number of visitors reaching 6 million. The country’s real GDP growth is estimated to have grown by 8 percent in 2003, with the non-oil sectors surging by 9 percent and accounting for 70 percent of GDP and 43 percent of exports. The prospects for 2004 remain strong with real GDP growth estimated at 4 percent. Although oil prices and production levels may be lower this year compared to 2003, nevertheless efforts to diversity the UAE’s economic base and to seek new foreign direct investment inflows are expected to pick up speed. In particular, Dubai will seek to accelerate its diversification process, and press ahead with plans to establish itself as the region’s service hub. This will include the expansion of the emirate’s tourism, media, shipping and commercial services facilities, as well as the development of the new, high-profile financial free zone, Dubai International Financial Center. The emirate will also encourage the expansion of its manufacturing and industrial base. There might be some over-investments in the real estate and tourism sectors which carries with it a higher risk for the banks and the danger of a bubble in the making.
Qatar was the star performer in the past four years, recording the highest real GDP growth among the Gulf countries at 7 percent in 2000, 5.2 percent in 2001, 4 percent in 2002 and a staggering 12 percent for 2003. Qatar’s GDP per capita estimated of $30,000 in 2003 places it among the wealthiest nations. In July last year, Standard & Poor’s upgraded Qatar’s rating from A- to A+ reflecting strong GDP growth and healthy government finances. Qatar did not increase its oil production last year as it was already operating at close to its full capacity. Production of liquefied natural gas (LNG) was significantly increased and heavy expenditure on infrastructure and industrial projects helped to promote the non-oil sectors as well, which were also supported by a 50 percent increase in government expenditures. Qatar’s oil and gas sector is expected to slow down this year as the LNG capacity steadies with further developments not taking hold until the second quarter of 2005. The non-oil sectors will continue to fuel economic growth this year allowing Qatar to record once again the highest real GDP growth rate among the GCC countries of 5 percent.
Bahrain and Oman 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 5.5 percent and 3.5 percent respectively in 2003. The construction, tourism and financial sectors performed particularly well in Bahrain, while Oman benefited from an expansionary fiscal budget and the rise in the production and export of liquefied natural gas from its new plant that commenced production in 2001. The two countries will enjoy slightly higher oil production levels this year while growth in the non-oil sectors will remain firm. Real GDP growth rates this year for Bahrain and Oman are forecast at 3.5 percent and 3 percent respectively.
(Henry T. Azzam is chief executive officer at Jordinvest.)
