Bank credit growth in the region stays generally very healthyJEDDAH – The GCC countries have enjoyed an exceptional fiscal windfall since the oil price rebounded from its lows of late 2008-early 2009. If anything, prices have tended to increase further over the past year, even though the late spring saw a significant temporary correction. Apart from the benign price environment, the GCC producers have generally boosted their output levels, initially in response to production disruptions in Libya and subsequently also in connection with the tightening sanctions on Iran, the National Commercial Bank said in its “GCC Economic Review" for the month of September. The fiscal windfall has in turn made it easier for the GCC governments to continue with a generally permissive fiscal policy. Last year saw the launch of a number of important government initiatives across the region and spending will remain elevated in the foreseeable future. In spite of this, the regional economies now appear fairly firmly on track for historically high surpluses. In spite of the persistent strength of oil prices, demand erosion concerns have once again returned to the forefront due to the deepening eurozone crisis. The OPEC basket prices declined for three consecutive months in the late spring, reaching 94.0/barrel after a sharp 13 percent MoM drop in June. Although they subsequently rebounded, and in fact gained 13 percent in August, the near-term outlook for the market looks certain to be characterized by recurrent push and pull between fairly tight fundamentals and fears that economic shocks might hit demand, much as they did in 2007-2008. The bleaker demand outlook has caused most leading observers to modify their projections, NCB said in the report. The International Energy Agency (IEA) has in recent months repeatedly cut its oil demand forecasts by 250,000 b/d to a total of 89.6b mbd in 2012 and by 400,000 b/d to 90.5 mbd 2013, according to its August release. Demand growth is hence expected to remain below 1 mbd in both years. In fact the increment is due to fall somewhat from 900,000 b/d in 2012 to 800,000 b/d next year. Demand is going to depend increasingly on emerging markets with non-OECD set to exceeded advanced economies for the first time in 2Q13. Nonetheless, growing pessimism about China is among the main reasons for the downward revision. China's crude imports of 5.1 mbd in July were the lowest since December. China's oil use of 9.8 mbd last year made it the second largest oil consumer in the world after the US. OPEC's projections are largely comparable to those of the IEA. The oil exporters' organization expects demand growth of 900,000 mbd this year followed by 800,000 mbd next year. OPEC projects global oil demand of 88.7 mbd in 2012, up from 87.8 mbd in 2011. This is due to rise further to 89.5 mbd in 2013. The US Energy Information Administration is the least upbeat of the three, having cut its oil demand forecast by 700,000 b/d this year and a comparable increment in 2013 – a downward revision by 400,000 b/d. The EIA now expects global oil demand to reach 88.6 mbd this year followed by 89.4 mbd in 2013. The report forecast that the incremental oil demand next year will come exclusively from emerging markets with China alone responsible for more than 30 percent. For instance, Saudi Arabia shipped 4.5 mbd to Asia last year, up from 4.3 mbd a year earlier. This compared to total Saudi exports of 7.2 mbd. Nonetheless, quite beyond cyclical factors, structural drivers are beginning to contain demand growth in emerging economies. Many emerging markets, for instance, India have scaled back their energy-related subsidies, which is making demand more sensitive of price changes. China has invested heavily in boosting energy efficiency. The Chinese demand growth of 5 percent in 2011 is likely to slow down to 4.3 percent this year, followed by 3.8 percent in 2013 Global oil supply in July was estimated by the IEA at 90.7 mbd, some 2.6 mbd up from last year. OPEC accounted for 80 percent of the increase, although roughly 75 percent of the output came from non-OPEC producers. The main constraint after a year of production disruptions is the continued decline in Iran's oil production which fell by some 200,000 b/d in June to 3.0 mbd, the report further said, compared to a 2011 average of 3.6 mbd. Nonetheless, the decline is not uniform. China has reportedly invested $20 billion in Iranian fields with a view to producing some 700,000 b/d. At the same time, even though the situation in Libya has normalized fairly quickly, there have been other supply side disruptions in countries such as Syria, Sudan, Yemen, Nigeria, Colombia, and even Norway where industrial action has hit production. In the US, the hurricane season has resulted in production disruptions. By contrast, especially the North American market is moving in the opposite direction. US domestic oil production rose to nearly 6.4 mbd in July, the highest figure since 1999. In spite of the generally positive supply trends, the oil market fundamentals remain fairly tight. Marginal costs of production are going up almost everywhere because of smaller, more remote fields and lower grade oil which costs more to drill, move, and refine, and produces less energy for a unit of input. 85 percent of the oil sold globally now has a higher sulphur content than either of the two main benchmarks. The continued tightness of the oil market represents a significant fiscal windfall for the GCC at a time when fiscal break-even prices have gone up fairly rapidly. Institute of International Finance recently estimated that the GCC countries can expect to reap record oil revenues of $572 billion this year. Last year's intake was $538 billion. This state of affairs will continue to support the recent increases in spending for now, although concern is beginning to mount about the sustainability of increased current spending. The UAE has been relatively unique among the GCC states in embarking on some fiscal consolidation. Partly as a result, a general government fiscal deficit of 2.1 percent of GDP in 2010 turned into a surplus of 2.9 percent in 2011. After a fairly robust rebound in the monetary space over the past year, most indicators are showing signs of relative stabilization. Broad money supply measures are still generally trending up, albeit more slower than last year. Bank credit is continuing to expand but the rate of growth is generally somewhat slower than last year. Even though the liquidity situation is generally very benign, the growth rate of deposits has been declining fairly markedly across the region. The main challenge in the monetary area is the prospect of renewed inflationary pressures due to the deteriorating global food supply situation. The broad measures of money supply are still growing at a reasonably brisk pace across the region with the notable exception of the UAE where the latest data point to accelerating YoY declines in April-June. The June drop was 3.2 percent YoY. Qatar still remains the regional leader in terms of M3 growth, although even there, the recent annual pace of expansion has fallen far short of that observed in 2010-2011. Also Oman has seen robust growth of 16.7 percent YoY as if June. Saudi monetary supply growth has slowed fairly consistently in the spring months, with the annual pace of growth falling to 9.5 percent in July. This seems to be largely reflective of a contemporaneous sharp fall in the growth of time deposits toward the 10 percent YoY mark, which is far short of the 20-30 percent pace observed throughout most of 2009-2011. Also Kuwait and Bahrain have observed a deceleration back to the single digits, although the recent monthly data has been fairly volatile. Moreover, the NCB report said bank credit growth in the region remains generally very healthy with the positive momentum of recent months showing little sign of slowing markedly. Among other things, the region continues to benefit from historically low interest rates thanks to its US dollar pegs. The basic monetary stance in the US is, if anything, likely to be further loosened with no near-term prospect of interest rate increases. – SG/QJM
