In an exclusive interview with Arab News, Jarmo T. Kotilaine said the economic growth drivers - oil, diversification and demographics - in the GCC countries are very strong.
"In contrast to its Western counterparts, the GCC region has emerged from the global economic turmoil with its standing enhanced," he said, adding the GCC gross domestic product (GDP) is about $1 trillion now.
Saudi Arabia's real GDP growth is expected to reach 3.8 percent by the end of this year, 4.2 percent in 2011 and 4.4 percent in 2012.
Saudi Arabia's higher government spending in 2009 resulted in a small budget deficit of 3.3 percent of GDP, the first since 2002, while government debt as a proportion of GDP increased marginally from 13.5 percent in 2008 to 16.0 percent in 2009.
The GCC economies are expected to grow by 3.2 percent in 2010 and 4.1 percent in 2011.
The UAE government in fact reported a modest surplus of around 0.4 percent of GDP in 2009, which was sharply down on an estimated 20.5 percent of GDP in 2008.
"When oil prices fall, the Gulf region is affected directly and indirectly. The fall in oil prices has potential to cause a slowdown in GDP growth," he added. However, Kotilaine said the basic outlook for the oil market was resilient. Even if uncertainty in demand in the West causes a correction, this is likely to prove of fairly limited duration. The strength of emerging market demand should continue to support prices in the current range.
He said the GCC's relationship with other emerging markets will be an increasingly critical aspect of the region's growth in the coming years. Its geographic proximity should enable the GCC to reap the benefits from the growing demand from especially the large Asian markets. Since 2006, Asia has been the GCC's largest trading partner and accounted for 55 percent of the region's total foreign trade of $758 billion in 2009.
Saudi Arabia's nonoil exports rose by 21 percent to SR11.4 billion in March from SR9.4 billion a year ago. Imports rose marginally to SR29.9 billion from SR29.6 billion. China was the biggest export destination for Saudi goods followed by the UAE, Qatar and India. Petrochemical products worth SR3.6 billion, or 31 percent of the total, were the main nonoil exports, followed by plastics and metals.
The evolution of the GCC corporate sector will increasingly determine the nature and pace of growth. The private sector appears well positioned to leverage on the region's structural growth drivers including a positive demographic profile and rising consumer wealth. Nonetheless, huge underexploited opportunities exist in corporate consolidation and SME (small and medium enterprises) development. Efforts to foster development in this area should stimulate the generation of new jobs, products, ideas and expertise.
Kotilaine said: "Continued economic liberalization and capital market development should further enhance the role of the nonoil sector as an increasingly important driver of development. In addition to these factors, greater economic integration will further help the GCC emerge as a leading economic bloc."
Concerning the GCC real estate market, Kotilaine believes that with oil prices recovering, confidence reviving and bank lending showing signs of recovery, a turnaround in real estate prospects now appears imminent across the region, even if the nature and speed of the recovery will likely vary markedly. Saudi Arabia, for instance, is generally well positioned whereas excess supply concerns will take time dissipate in Dubai. "With the broader economy showing signs of picking up, investors will almost certainly begin to pay more serious attention to real estate, not least because of the opportunities created by the unusually severe correction," he said.
Kotilaine said the GCC banks reduced drastically lending last year because of corporate defaults by Saad Group, Ahmad Hamad Algosaibi and Bros Co. (AHAB) and Dubai World. Because of these and other concerns, banks have remained risk averse as they have exposure to these groups. The low interest rate stance of the US is likely to further discourage significant risk taking.
The crisis has seen economic divergence within the GCC and these differences will take some time to disappear. At one extreme is the Dubai market, the leader of the regional real estate boom and the main focus of speculative activity. Ultimately, improved price competitiveness should help Dubai but sustained recovery will take longer to materialize. At the other extreme is Saudi Arabia, which remains a fairly closed market faced with considerable excess demand in many market segments, he said.
Kotilaine said: "The time has come to recognize the broader economic importance of the real estate sector and to bring it under proper, comprehensive, formal regulation in a way that takes into account the mistakes made in the past. The rapid emergence of the sector spawned a foam of speculative bubbles, which in some cases had far-reaching consequences for the broader stability of regional economies. While correction in some markets may take years to work through, the current situation represents an important opportunity for the entire region."
He said economic sentiment is positive in Saudi Arabia and it is improving. The Kingdom is trying to create more jobs for young Saudis through its various development projects and high spending.
Kotilaine said Saudi Arabia is doing two important things to create jobs. The government is investing heavily in education and focusing on economic diversification.
However, Kotilaine said an area where further attention would be particularly welcomed is in encouraging entrepreneurship. The government should encourage Saudis to create their own companies through advice, education, and capital.
The challenges of ensuring adequate access to capital, along with investment opportunities for investors, are particularly acute in vitally important areas such as residential mortgages, SME development, and long-term infrastructure projects. While the governments have with remarkable success helped ensure continuity, turning the capital markets into an effective bridge between the structural economic needs and private capital remains one of the great opportunities facing the region. Success in this regard would broaden the investable universe through long-term value opportunities. It would offer diversification opportunities and particularly benefit the region's growing institutional investors.
As the global economic situation became uncertain, the US dollar was benefiting. Kotilaine said it was good news to Gulf states as their currencies are linked to the dollar and a stronger currency not only reflect the strength of the Gulf economies but it help contain imported inflation. He said the euro will likely remain under persistent pressure because there is no quick solution to the structural problems and fiscal consolidation is a slow and political charged process.
The European debt crisis had an adverse effect on the euro. European banks have heavy exposure to government bonds. The ratings agencies are less positive about the outlook for a number of European economies. The rating downgrades in turn will put more pressure on banks. He said European banks would post bad results in 2010 and 2011.
