July 09, 2007	Monday	Jamadi-us-Sani 23, 1428

According to IMF staff's latest assessment, the region covered by the Middle East and Central Asia appears set for another year of strong growth. Real GDP should average over six per cent in 2007, for the fifth year in a row. All country groupings within the region—oil exporters, emerging markets, and low-income countries—have been performing well. Continued high oil and non-oil commodity prices, robust global growth, a favorable international financial environment, and sound policies in many countries of the region are underpinning this performance.

Inflation is rising, fueled by rapid demand growth and strong foreign inflows. With monetary policy largely accommodative in many countries, inflation is expected to average nearly nine per cent in 2007 compared with 7.5 per cent last year. The up tick is particularly notable in some oil-exporting countries. In these countries, higher inflation is beginning to translate into more appreciated real exchange rates, as would be expected in response to increased oil prices.

The region's external and fiscal surpluses remain very high, but are expected to decline in 2007. For oil exporters, only one-fourth of the projected fall in the external current account surplus in 2007 is due to lower oil prices. The remainder is accounted for by the impact of higher spending, with imports rising strongly as major public and private infrastructure projects get under way and spending on social programs increases. Oil export revenues are projected to decline slightly to $570 billion in 2007, based on an average oil price of $61 a barrel, down from $64 last year. Naturally, the revenue projections are highly sensitive to oil prices, with a $5 a barrel decline estimated to reduce the region's annual exports by$45billion, and fiscal receipts by $35 billion.

GCC’s national income: In another report, the National Bank of Kuwait observed that GCC's national income averaged 19 per cent growth in the past four years on sharply higher oil and non-oil activity, public spending and domestic confidence. Despite massive spending on projects, GCC governments added almost $500 billion to net foreign assets over the past four years, enough to sustain spending growth for many years. Investment boom with $1.25 trillion in planned public and private projects will continue to propel growth of the private sector.

Purchasing power was sharply higher as per capita GDP averaged 15 per cent annual growth over four years despite rising inflationary pressures. Double digit nominal growth continued for a fourth year, albeit short of the 26 per cent high recorded in 2005. Growth is likely to be slower in 2007, with Saudi Arabia and Kuwait seeing the sharpest deceleration. Yet, if oil prices bounce back up as markets continue to tighten, most countries could see another year of double digit increases. Though inflation was highest in Qatar (11.8 per cent) and UAE (10 per cent), the two were among the fastest growing economies in emerging markets, with real growth of 8.8 and 10 per cent, respectively.

In 2006, Qatar, UAE and Kuwait continued to climb the world ranks in terms of per capita income. Yet rapid population growth meant slower per capita GDP growth. Still, employment and wage growth are boosting disposable income. With no official employment figures for 2006 and population growth used as a proxy, the compounded increase in nominal wage income is estimated to have topped 15% again last year. GCC hydrocarbon export revenues jumped 47 per cent in 2005 and likely to have risen by nearly 20 per cent to reach $360 billion in 2006.

Non-Oil Activities: While the oil sector underpinned growth in the past 4 years and drove income from non-oil activities up by 6-12 per cent, the investment boom will sustain growth over the medium term. Oil prices expected to remain sufficiently high through 2009, guaranteeing continued budget surpluses and fueling spending. Strong Asian demand, limited spare production capacity and geopolitical risks may propel oil prices beyond 2006 peaks. Current account and fiscal surpluses of 26 and 17 per cent of GDP in 2006 respectively are likely to rise further if high oil prices are sustained.

Current account and budget surpluses reached a record of $177 billion and $122 billion in 2006. Foreign assets boosted by around $500 billion in accumulated surpluses over the past four years vs. $112 billion in previous four years. Though 40 per cent of the oil windfall is being spent in the current boom growth in government expenditures averaged 14 per cent over the last three years, boosting domestic demand and activity. Fiscal stimulus remains strong with 2006 spending raised by 14 following a 20 per cent increase in 2005, to accommodate higher wages, social programs and capital spending. Budgets for 2007 show a similar increase.

Growth in investment has been accelerating. Strength of domestic demand is building significant momentum in non-oil activities. In Kuwait, financial services, transport & storage, communications, construction and manufacturing are likely to have enjoyed a third year of double digit growth. Confidence has also lifted inward FDI flows with Saudi Arabia and UAE ahead of much publicized flows into Qatar’s gas sector. GCC governments’ drive to open up key sectors to foreign ownership may see the trend continue. Total FDI inflows reached $20 billion in 2005 and are estimated to have increased a further 20 per cent in 2006.

Kuwait

In its latest economic brief on the oil market and budget developments, the National Bank of Kuwait noted that oil prices remained strong, due in large part to concerns over fuel supply in the run-up to the US driving season, traditionally beginning in June. Unexpected glitches at US refineries added to concerns of a run-down in gasoline stocks in early May, while prices at US gas pumps reached record highs of $3.10 per gallon. Crude continues to be subject to its own pressures, however, including fears of supply disruptions amidst ongoing geopolitical tensions in Nigeria, South America and between the West and Iran.

Average Brent crude oil prices firmed in April, up nearly nine per cent to $67.4 per barrel from $62.1 in March and the highest since August 2006. Kuwait Export Crude (KEC) prices rose by a similar amount, up more than 8 percent to $60.4 from $55.8 a month earlier. That strength was sustained in the first half of May, with KEC averaging $61.3. The apparent lack of resolution amongst Opec members to cap further upward pressure on crude prices could become a recurring theme over the summer.

Production Ceiling: Between the third quarter of 2006 and first quarter of 2007, the Opec members (excluding Iraq and the club's newest member, Angola) cut their official production ceiling by more than 1.5 million barrels per day (mbd) to 26.5 mbd in an attempt to support crude prices over the unusually mild winter. But many are of the view that the cartel is not doing enough to limit the upside risk to prices, especially with the supply/demand situation set to reverse which could fuel bullish speculative positions. At their March meeting in Vienna, Opec ministers admitted that "the overall market is likely to remain volatile" and that global economic growth was likely to remain "relatively firm" this year.

NBK notes that growth in global oil demand in 2007 is expected to be solid. The International Energy Agency (IEA) expects oil demand to rise by an average of 1.5 mbd in 2007, or 1.8 per cent, to 85.8 mbd, driven mainly by strong growth of 3.5 per cent from non-OECD countries - one third of which is accounted for by rising demand from China. The CGES holds a somewhat more cautious view, with growth in global oil demand slowing in response to rising oil prices and interest rates. They expect oil demand to rise by 0.9 mbd in 2007, or 1.1 per cent, with nearly all of that growth coming from outside the OECD.

Kuwait economic prospects will continue to depend on the strength of international oil prices and the country's ability to raise or, at least, maintain crude oil output. Even with capacity beginning to rise only gradually towards the extreme end of the forecast period, however, the emirate's current- account surpluses will remain strong, and real GDP growth is projected to average 5.4 per cent in 2007-11. The fiscal surplus will progressively narrow after 2007-08, owing to falling international oil prices, contracting to around two per5 cent of GDP in 2011/12.

Overseas Investment: Kuwaiti capital invested overseas is likely to continue to return to the country. Openings will arise for the private sector, including some—albeit more limited—opportunities for foreign companies. However, the development of most major infrastructure projects will depend on oil-funded government largesse. Specific privatisation measures will be limited, especially in the oil sector, with openings largely confined to the provision of rival services to state providers, or to build-operate- transfer contracts—which will be increasingly subject to public scrutiny. Kuwait is expected to remain cautious in its pursuit of fiscal reform. Nevertheless, some indirect taxes may be introduced in an attempt to broaden the revenue base, which will continue to be bolstered by the emirate's extensive overseas investments.

According to NBK, budget will remain in surplus during the current fiscal year. Despite the government's forecast of a deficit, the 2007/08 budget will almost certainly show another sizeable surplus. Government budget projections for 2007/08 use an average price of $36, well below even the lowest estimate in our range of likely outcomes. Forecast for total revenues in 2007/08 ranges from a 16 percent decline to a 6 percent increase from last fiscal year, leaving revenues in the range of KD 12.9 billion to KD 16.2 billion and well above the budgeted KD 9.2 billion. Expenditures are likely to come in somewhat below the government's forecast of KD 10.5 billion, leaving the surplus in the range of KD 2.8 billion to KD 6.4 billion before the allocation of 10 per cent of revenues to the RFFG.