31-07-08 Oil revenues are expected to cross the $ 600 bn mark annually for 2008 and 2009 in the six-nation Gulf Cooperation Council (GCC) block and the strong economic and investment boom in the region will continue apace for the medium term.
With oil prices expected to remain in triple digits for the remainder of 2008, and several major capacity expansions in the pipeline across oil and non-oil sectors, the GCC states remain firmly on course for strong, broad-based economic growth for the medium term, a key economic research report issued by the Kingdom's leading Islamic investment bank and pioneer in economic infrastructure projects, Gulf Finance House (GFH), revealed in its GCC Economic Outlook 3Q2008 report.

With oil revenues set to cross the $ 600 bn mark for 2008 and 2009, aggregate GCC government expenditure is forecast to reach $ 300 bn for this year, while private sector projects planned and currently underway are valued at about $ 2 tn.
GCC nominal gross domestic product (GDP) is forecast to cross the $ 1 tn milestone for this year to a total expected to reach $ 1.1 tn. This represents an increase of 36 % over the 2007 estimate of $ 810 bn and double that of projections made four years ago in 2004, the report said.

Average incomes in the region were also surging, with Qatar set to rub shoulders with Luxemburg in 2009, as the two countries with the highest per capita income in the world.
"All of this good news is, however, not without a price," said Dr Ala'a Al-Yousuf, Chief Economist at GFH. "GCC states will have to live with the paradox of low single-digit interest rates and high double-digit inflation rates. With little recourse to monetary policy tools, all eyes are on the authorities' fiscal responses to these challenging times."

Dr Al-Yousuf's comments coincide with the release of the report, which is produced quarterly by the Economic Research Department of the bank and provides a comprehensive analysis of the most important regional economic developments and their implications. The report also includes a section on the global economic and market outlook.
So far, the government response to inflation has come in the form of higher wages, increased subsidies and other cash incentives.

"In our opinion, the GCC is entering a phase of loose monetary-fiscal policy spiral, which, together with a wage-inflation spiral, have trapped the region between two impossible trinities," said Hany Genena, senior economist, GFH.
"Whereas the conventional trinity (fixed exchange rate, free capital mobility and independent monetary policy) suggests that GCC central banks have to adopt an inappropriately loose monetary stance amid surging inflationary pressures, the GFH-designed trinity explains the difficulty of maintaining low inflation rates amid high commodity prices and low interest rates. However, as capacity expansions come on stream during 2009-10, there will be a gradual softening of inflationary pressures," said Genena.

GCC-wide crude oil production will increase to 20mm bpd by 2010, from about 17.5 mm bpd at present while cement capacity in the region will double to 100 mm tpy by 2010. Similar expansions are on the way in several other industries, including petrochemicals and natural gas.
All of this is feeding into significantly higher demand for financing, which will fuel a boom in corporate lending. Banks will continue to enjoy strong growth in business volumes due to robust growth in consumption and investment, relatively low financial leverage of corporate GCC, high demand for Islamic financial products, access to stable deposits and cheap funding costs.