Frontier Markets Semi-Annual Outlook

Middle East

GCC: Solid Growth Expected as Confidence Grows

Upside risks to inflation are tempered by healthy budgets, which are supported by oil prices above $100/bbl. GCC governments are expected to continue with expansionary fiscal policies in order to help stave off discontent among citizens.

Oil prices have been well supported this year and, with a seemingly sustainable recovery in the US and an acceleration in Chinese growth, the price of Brent crude will likely remain above $100 per barrel (bbl) this year. This will provide a fillip to budgets and growth in the region.

However, break-even oil prices for many Gulf Cooperation Council (GCC) countries have risen markedly in the past 12 months as governments have raised wages for public-sector workers, pushed up social spending and increased subsidies to lower the cost of living and appease the population. Governments will remain the primary job creators in the region, keeping the jobless rate suppressed, though youth unemployment is forecast to remain above 25% in the coming years in the Middle East and North Africa region.

Following a lull in most GCC capital markets over the past few years, there has been a notable rise in international investor interest. In January, Dubai issued $1.25bn of bonds, which were 12 times oversubscribed. The interest rate on the debt, 3.875%, came in below guidance, with a broad, global investor base. Further signs of health have been evidenced by initial public offerings (IPOs) in the region, which doubled to $2bn last year, while the Standard & Poor's (S&P) GCC Composite Total Return Index is up 11.2% since end-2011, outperforming the S&P Extended Frontier 150 Index by 4.2% over the period. This recovery in equity prices is likely to lead to further IPOs, with sentiment in Gulf financial markets improving and broadly positive.

Kuwait: Election Raises Discontent and Power of the Elite

Social tensions are rising in Kuwait, likely requiring increased government spending. Lacklustre investment in recent years will hinder the economy's ability to move to a higher growth path.

Parliamentary elections, held on December 1, led to a new National Assembly, which is largely pro-government. Having boycotted the election, Kuwait's opposition has left itself with little influence, meaning that the ruling class maintain a free reign in terms of policy. A worrying development is reports of proposed changes to the 1962 constitution to restrict criticism of the emir or the government and to give the emir power to appoint a crown prince, bypassing the need for the National Assembly to approve the choice. These regressive steps will only raise animosity among the population towards the authorities.

Kuwait is planning a 9% rise in spending this year, to KD21.2bn ($74.4bn), but the budget surplus is still forecast to be 16-23% of gross domestic product (GDP). The country, however, has an unhealthy reliance on the hydrocarbon sector, with petroleum production making up 60% of GDP. Investment to GDP has averaged 17.6% over the past decade, well below 26% in Qatar and 21.1% in Saudi Arabia, suggesting limited growth in this sector, while attempts to diversify the economy away from its oil dependency have been hindered by continued unrest. Social tensions also threaten its sovereign debt rating, AA, with Fitch warning of a negative rating action if instability rises.

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