Credit Suisse: Gulf region to see robust rebound in GDP growth in 2010
Backed by structural advantages and robust fundamentals, the Middle East and Africa region is expected to record sustained GDP growth rates over the medium to longer term, Credit Suisse analysts said on Tuesday.
Addressing participants at the Credit Suisse Research Roundtable, Kamran Butt, Head of Middle East Equities Research at Credit Suisse, Private Banking, said, “In our view, stable oil prices and improved business confidence will be the major catalysts for a robust rebound in GDP growth in 2010. While the region is set to witness improved economic conditions across all markets, the growth in GDP will not be evenly distributed with Qatar leading in 2010.”
Commenting on regional markets, Mohamad Hawa, Head of MENA Equity Strategy and Financials Research at Credit Suisse, Investment Banking, said, “MENA markets, although flat year-to-date, have managed to outperform GEM and EMEA equities, which suffered from fear of contagion effect from Greece, Hungary, and the possibility of slowdown in China.”
Explaining the region’s diverse investment terrain, Hawa said that Abu Dhabi banks looked attractive and Qatar was a preferred market due to its high economic growth. Egypt reflected strong fundamentals and an under-leveraged economy but was weighed down by slowing FDI and rich valuations. Overall, Middle-East banks have outperformed their global peers YTD, with Saudi banks returning 9.5%. This is much better than the negative 2% returned by the MSCI Emerging Market banks, he added.
Presenting an economic overview of the region, Butt said that within the GCC, Qatar is expected to achieve the highest GDP growth rate for the second consecutive year in 2010 – estimated at 18.5%YoY. Qatar was the fastest growing economy in 2009 with GDP growth reaching an estimated 9.6% YoY. “This growth will be driven by expansion of LNG production and the non-hydrocarbon sectors of the economy. In line with our positive economic outlook for 2010, supported by stronger energy prices, we believe that fiscal and external accounts will most likely reach surpluses,” he added.
The impact of the global financial crisis has been limited in Qatar due to timely and supportive macroeconomic policies and intervention in the local banking system. The main risks to the short-term economic outlook are unexpected construction delays, a considerable negative external demand shock, lower hydrocarbon prices and a further decline in real estate prices.
On Saudi Arabia’s economic outlook, Butt said that growth looks compelling from a long-term perspective, given the country's large domestic market. A big demographic premium, high savings, and the urgent need for infrastructure spending, makes the Kingdom an attractive investment destination. The analysts’ perspective on Saudi Arabia is not solely based on oil, but rather how the proceeds from hydrocarbon revenues will be used on capital expenditure programs to drive the country forward.
Overall, the current account balances of oil exporting countries are expected to benefit from improved oil prices. Oil demand has started to recover in emerging markets as well as industrialized countries, which should be supportive for prices in the long run. However, deleveraging and de-risking remain a risk for prices in the near-term.
According to Butt, strong external and fiscal positions prior to the global recession allowed GCC economies to implement measures in response to the global downturn. When the shadow of the global financial crisis swept the region, almost all countries provided liquidity support, while a majority of them opted for monetary easing, with Saudi Arabia, UAE and Kuwait guaranteeing deposits, he added.
Butt also added that the structural economic story for the region remained very much intact, with high levels of capital expenditure promoting economic diversification combined with an attractive demographic profile.
During the financial crisis, the region’s real growth was affected by the global backdrop. Exports from Middle East and Africa suffered from weaker global demand, declining significantly in 2009. UAE and Saudi Arabian exports contribute to over 40% of the regions’ exports, he said.
Risk remains within the Middle East and Africa region in the form of inflation, the region is likely to see upward pressure on inflation, which is currently subdued. However a gradual economic recovery will most likely limit domestically-driven inflationary pressures. According to Credit Suisse analysts, over the next 6-12 months, commodities are expected to resume their upward trend. This, combined with the long-term bearish view on the USD, is an important factor that influences the view on GCC inflation. If the dollar remains strong, inflation risks should be lower.