17 OCT, 2023
The Gulf economies’ importance is in the spotlight again with rising oil prices. Hosting the COP28 climate conference, and an invitation for its two largest members to join the ‘BRICS’ club of emerging nations are also raising its profile. What will the coming months, and an approaching era of peak oil demand hold for the region?
The Gulf Cooperation Council nations – Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Bahrain, Oman, and Qatar – punch above their weight economically. They account for less than 1% of the global population but around 2% of global GDP, and over 10% and 20% of gas and oil production respectively. Curbs on Russia’s trade in hydrocarbons have increased their clout as alternative suppliers in energy markets, and events such as the Football World Cup, the Dubai Expo, and COP28 are boosting their status as international hubs. The GCC countries are making efforts to maintain strategic flexibility despite a decoupling of global geopolitical blocs led by the US and China. This summer, Saudi Arabia and the UAE were asked to join the BRICS, a geopolitical club that loosely joins some of the world’s largest and fastest-growing economies including China’s.
The countries’ focus on strategic flexibility is clear from their active intervention in the oil market. With oil and gas their economic mainstay and Russian supply reduced, 2022 saw stellar growth for many GCC nations: real GDP grew 8.7% in Saudi Arabia and 8.2% in Kuwait. As global growth has slowed in 2023, the Organization of the Petroleum Exporting Countries plus key non-members (OPEC+), including five GCC nations, have cut oil production. Saudi Arabia made additional output cuts. As a result of this, and of sharp interest rate hikes, we expect growth to slow in 2023 to 0.2%1 across the six GCC economies, with a stronger UAE and Qatar roughly offsetting weakness in Saudi Arabia and Kuwait. Under our assumption of a gradual reversal of oil output cuts in 2024 for some GCC economies, together with eventual rate cuts, we see a modest 2024 growth rebound.
The tragic recent conflict between Israel and Hamas is fuelling some concern about the region’s outlook, but we still see reasonable grounds to assume that the GCC countries will ultimately opt for the strategic status quo. Their long-term development plans require the continued avoidance of a new geopolitical conflagration in the region, and any punitive spike in oil prices could harm the region’s oil industry by accelerating global electrification trends even more. The unpredictable nature and scale of the conflict will, however, require close monitoring.
Meanwhile, inflation in the region has dipped from 2022’s highs, following rapid interest rate hiking cycles. Pegs to the US dollar (or a basket of currencies including the dollar in Kuwait) tie GCC monetary policy decisions to those of the Federal Reserve. This time, trends in US and GCC economies broadly coincided, making recent rate rises an appropriate response to GCC growth and inflation dynamics, although the region’s monetary authorities might intervene in the money market to cap intermittent liquidity squeezes as Saudi Arabia’s central bank did in 2022. In the UAE, the authorities will be ready to adjust real estate sector regulation instead of monetary policy to limit downside risks in Dubai property prices that are likely to see the negative impact of rising rates. Uniquely in Dubai, government-related entities tend to be vulnerable to large fluctuations in the real estate sector.
Despite the latest initiatives to deepen the region’s financial links to China and other emerging markets, the GCC countries have been maintaining significant USD reserves to defend their pegs. Although the countries’ international reserves have declined in the past few years, their levels still exceed those in many other regions. We see few imminent risks of a shift in policy on the currency pegs, particularly given our view that US rates have now peaked.