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Dubai: Oil revenue of Gulf Cooperation Council (GCC) members is likely to cross $600 billion in 2008, prolonging the economic and investment boom in the region for the medium term, according to a report by Gulf Finance House.
Total government spending in the GCC is expected to reach $300 billion for this year while private sector projects currently underway bear a $2 trillion price tag.
The study - GCC Economic Outlook 3Q 2008 - said gross domestic product in the GCC was expected to exceed $1 trillion for the year, representing a 36 per cent increase on a 2007 estimate of $810 billion.
The positive outlook, however, does not come without a price, according to Dr Ala'a Al Yousuf, chief economist at Gulf Finance House (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," he said.
The governments' response to inflation in the region thus far has been 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 at GFH.
The conventional trinity of 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.
"However, as capacity expansions come on stream during 2009/10, there will be a gradual softening of inflationary pressures," said Genena.
Crude oil production in the GCC would increase to 20 million barrels a day by 2010 from the current 17.5 million a day while cement capacity in the region is set to double to 100 million tonnes a day by 2010, and this would be followed by similar expansion in the petrochemical, natural gas and other industries.
According to the Gulf Finance House, this is feeding into a significantly higher demand for financing, which is expected to fuel a boom in corporate lending. Banks would 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.
The report predicted that GCC equity markets would weather the global storm, buoyed by the explosive growth in liquidity, negative real interest rates and reasonable comparable valuation multiples.
While real estate dynamics continue to vary across the region and according to the type of property, ever-increasing construction costs, which have risen nearly 200 per cent in recent years, would inevitably cause project delays.
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