Beyond the usual: massive surpluses await the Gulf economies
GCC countries will once again enjoy large current account surpluses in 2014, according to Oxford Economics. The whole of the region will register a surplus equivalent to 16.7 per cent of its gross domestic product. Kuwait leads the ranking, with a surplus of 32.7 per cent, which doubles the regional average, followed by Qatar, with 26 per cent and Saudi Arabia with 14.8 per cent. The UAE will also have a comfortable external position amounting to 10.8 per cent of its GDP. The forecast is based on the assumption that oil prices will continue to remain above $100. Given the ongoing supply constraints that the oil market is suffering, the assumption comes out as quite plausible. The International Energy Agency recently released a report in which it forecasted significant shortages of oil in the second half of the year due to political turmoil in a number of key oil producers. Opec members such as Libya and Iraq are struggling to maintain previous production levels, while non-Opec countries like Colombia, South Sudan and Kazakhstan are also suffering to meet their production targets.
The energy agency asked Opec members, and most specifically Saudi Arabia, to increase its output by close to a million barrels per day in the second half of the year to maintain stability in oil prices. Additional exports of oil and gas will allow the Gulf’s governments to continue increase spending, in a similar pattern to that witnessed in the last five years, particularly since the Arab Spring unrest started to affect Arab countries.
The GCC’s situation is quite unique at the global level. Only a fistful of Asian countries enjoy a similar position to that of the Gulf. Singapore’s surplus will be at around 18 per cent of its GDP, while Taiwan’s level is close to 13 per cent. On the other side of the spectrum, some emerging economies are likely to experience difficulties due to their large external deficits. Turkey and South Africa run deficits equivalent to more than five per cent of the size of their economies, while Brazil’s deficit is at 3.8 per cent.
The implications of the deficits for these countries are extremely relevant. The current account measures the external position of a country. It estimates net revenues coming from exports (or spending coming from imports), income from domestic companies operating abroad that are transferred into the country (or income sent abroad by foreign companies operating within the country) and cash transfers sent into or outside the country. A deficit implies that the country needs to borrow money from outside to be able to pay for its needs. In periods of stability, obtaining funding is usually not a problem. However, when the global economy suffers a shock, international flows tend to leave emerging markets seeking refuge in other countries that are perceived as safer. The exit of capitals weakens the local currency, making imports more expensive and, usually, creating inflation. In order to control inflation, central banks often resort to hiking interest rates, which in turns reduces economic growth and creates a whole new set of problems, ranging from unemployment to social unrest. A large current account deficit implies that a country is more vulnerable to this sort of negative cycle.
That is why investors are turning cautious about countries like Brazil, Turkey or South Africa. While the possibility of global meltdown in the financial markets is now lower than two years ago, it is still perfectly possible that stock markets might suffer a correction in 2014. If that is the case, investments in these countries are prone to lose a significant part of its return.
The writer is a senior economist at Asiya Investments, an investment firm specialising in emerging Asia investments.