Disappointing recovery in H1 2018
Regional real GDP growth disappointed in H1 2018, posting +1.1% y/y in Q1 and +1.7% in Q2. The recoveries were muted in Saudi Arabia, the UAE and Kuwait, with the latter’s performance in Q1 being sharply revised downwards to -0.5% y/y from an initial estimate of +1.6%. In Bahrain, GDP contracted by -1.2% y/y in Q1 owing to output cuts stemming from maintenance activities at the offshore Abu Sa’afah field but rebounded to +2.4% in Q2. Oman has not provided any GDP data for this year yet, but based on a -0.2% y/y decline in oil output in H1 we estimate that the whole economy expanded by just +0.9%. Only Qatar grew by more than +2% in H1 as the country rebounds from its 23-year growth low in 2017 which was due to due to the blockade by the GC3+1 (Saudi Arabia, UAE, Bahrain, Egypt).
Swings in OPEC agreements and oil output
At the end of June 2018, OPEC member states and a number of non-OPEC allies including Russia agreed to scale back their over-compliance with oil supply cuts that had been decided at the end of 2016 amid ongoing low oil prices at the time. The new agreement was projected to add close to 1 million barrels per day to the global market. In the GCC region, the move led to an estimated increase in average oil output per day by 0.55 barrels in July-August as compared to H1 2018. With regard to the original OPEC deal, this reflects a shift from over-compliance in H1 (109%) to under-compliance in July-August (37%).
GDP growth forecasts after output increases in June and output reduction plans from November (* Q1 2018 for UAE and Oman)
However, as of mid-November, oil producers led by Saudi Arabia expressed discontent with the latest oil price development and suggested another swing in output targets. On 9 November, the oil price had lost almost -20% since early October, in part because the U.S. granted last-minute waivers with regard to its re-imposed sanctions on Iran on 5 November to eight countries (including India, Japan, South Korea) to allow them to temporarily continue buying Iranian oil.
For now Saudi Arabia plans to cut its oil supplies by 0.5 barrels per day in December. Potential cuts by other producers and plans for 2019 are still under discussion. Hence, for 2018 as a whole we forecast an (under-)compliance ratio of 79% with the original 2016 OPEC deal for the GCC region (see Table 1 for an overview of the figures as well as a disaggregation by country).
Regional recovery set to gain momentum from H2 2018
Overall, the OPEC decision from June and November should result in an additional +0.34pp for regional growth in the GCC in full-year 2018. Taking into account the share of the oil sector in GDP, the impact varies by country, from +0.2pp in Oman and Bahrain to +0.8pp in Kuwait. Moreover, the increased oil output combined with higher average oil prices will have resulted in larger fiscal revenues and thus provided some leeway for continued or additional fiscal stimulus. This should have resulted in strengthening growth in H2. For now we continue to forecast that the recovery will continue in 2019 though uncertainties have increased with the latest plans as it is too early to foresee the combined impact of potentially lower output (negative) and higher prices (positive) on growth. Note that the fiscal stimulus channel will not work for the smaller and weaker economies of Oman and Bahrain which have to exercise fiscal constraint as their public finances sharply deteriorated during the period of very low oil prices in 2015-2017. Bahrain even requested for financial aid from its neighbors as credit conditions have tightened (the yield on 5Y Government Bond is currently at 7%, up from 5% a year ago) . Saudi Arabia, the UAE and Kuwait agreed in October to provide a USD10bn support package which, however, is likely to be conditioned on strict fiscal consolidation, which will curtail growth in the non-oil sector in the next years.
All in all, we now forecast a recovery of regional growth from -0.3% in 2017 to +2.1% in 2018 and +2.5% in 2019 for the GCC region as a whole.
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The View November-December 2018