Gulf Cooperation Council (GCC'S). Economic Indicators - Article Example

Introduction The aim of this study is to provide an up d overview regarding the Gulf Cooperation Council (GCC). In order to do so, variety of economic indicators were taken into consideration to provide significant insights for the past 10 years until 2012. The factors that are taken into consideration in this study include GDP Growth rate, inflation rate, fiscal position of the GCC along with the money supply and external accounts. 2. Gulf Cooperation Council The term GCC stands for Gulf Cooperation Council, which was founded on 26th May, 1981. The aim of this council was to promote coordination and cooperation among the member countries in all aspects of life to enhance harmony and unity. The countries that are member of this council are as follows: Saudi Arabia Kuwait Bahrain Qatar United Arab Emirates Sultanate of Oman (Sheikh Mohammed, 2012) GCC being an oil-based region is provided with several opportunities to enhance its profit ratio and to play an essential and pivotal role in providing the world with oil. With the largest crude oil reserves in GCC (486.6 billion barrels), the member countries play the leading role in the world. In addition, GCC is the largest producer and exporter of petroleum due to which the region enjoyed fascinating and spectacular economic boom from the year 2002 to 2008 (The Economist Intelligence, 2011). The dominant role of the GCC countries in the world provided the region with an opportunity to increase the economy to $1.1 trillion (triple in size) during the same years. GCC region is the largest producer and exporter of oil and petroleum due to which the GCC countries account for almost 52 percent of the total OPEC oil reserves. 3. GDP Growth Rate The growth rate of the GCC region relies highly on the production and export of oil and petroleum to countries across the globe. The GDP growth rate of the GCC has been fascinating and outstanding from 2002-2008 and even after 2012 (IMF, 2012). Throughout 2002 to 2008 the region was provided with an opportunity to increase its economy threefold (Fox, 2011). The GCC countries enhanced its GDP from 400,000 (Mn US$) in the year 2003 to more than 1,100,000 (Mn US$) in the year 2008. Moreover, the combined nominal GDP was at its highest rate ever of 28.9 percent in the year 2008. Meanwhile, the region witnessed a growth rate of 14.2 percent in the year 2007 (Fox, 2011). Such an increase in the growth rate in the year 2002-2008 was highly dependent on the strongly increasing oil demand in the world (Fox, 2011). Some of the factors that contributed to such an extensive performance include better geo-political environment, boost in privatization of activities, increase in the Central Bank’s assets along with the strengthening of the GCC’s corporate sector. On the other hand, the GCC region has witnessed a decline in the growth rate due to the rising financial and economic crisis (Bachellerie, 2012). As a result, the oil market in the countries across the globe turned from cash cow to dog. The financial and economic crisis led to the decline in nominal GDP by -19.3 percent. Meanwhile, the real GDP declined from 6.4 percent to 0.5 percent in the years 2008 and 2009 respectively. With the global recovery of the oil market, the GCC region once again witnessed promising growth rate. The forecasted nominal GDP of the GCC was 380.5 (USD bn) in the year 2012 whereas the Real GDP (forecasted) for the same year was 5.3 (% y/y). Figure 1: GDP of GCC Countries Source: Gulf Investment Corporation, 2011) Figure 2: GCC’s GDP Growth Source: Haque, 2012 4. Inflation Rate The inflation rate in the GCC was quite low from 2002 to 2003 due to the prudent monetary and fiscal policies. Moreover, the access and availability of the goods and services in the region ensured low inflation rate. This could be witnessed by the 0.2 percent inflation rate which increased to 2.1 percent during 2001-2004. The inflation rate was 6.7 percent in the year 2007 which reached 10.7 percent in the year 2008 (IMF, 2011). The increase in inflation rate was a result of the economic and financial crisis. The relatively higher inflation rate was basically due to the depreciation of the US dollar against the major currencies of the world. As a result, the region witnessed lower interest rates, sufficient liquidity, higher spending, shortage of housing along with imbalance between the demand and supply of goods and services i.e. food, beverages and construction materials. The rising inflation rate was taken into consideration by the council. In addition, the wise and effective policies implementation by the government greatly helped in the reduction of the inflation rate. Due to such efforts, the CPI inflation reduced to 3.3 percent in the year 2009. In the year 2011, it was estimated that the average inflation rate would be 3.3 percent across the GCC region. At the lower end of the inflation range was GCC member countries i.e. Bahrain and UAE whereas at the higher end of the inflation range were Saudi Arabia along with Kuwait. Figure 3: Inflation in GCC Countries Source: Fox, 2011 5. Fiscal Position The fiscal position of the GCC region has always remained above the expectation of others. Oil and petroleum production and export have always supported the region’s fiscal position. In the year 2008, the fiscal position as per the government report indicated that the region has a budget surplus of 25.3 percent of the GDP in comparison to 17.7 percent in the year 2007 (as shown in the image below). The increase in oil prices due to the increasing demand has resulted in a high level of revenues. As a result, the region witnessed strong capital spending (Gulf Base, 2013). Figure 4: Budget Surplus/ Deficit as a % of GDP Source: Gulf Base, 2013 Due to the slumping of the oil market in the year 2009 as a result of the financial and economic crisis, the fiscal position of the region dropped to 3.3 percent of the GDP. After the economic and financial crisis, the GCC member countries realized that their revenues were highly dependent on the oil market due to which the region is spending highly on construction and promotion of the non-oil sector in the region (Gulf Base, 2013). The region has shown great dedication and commitment towards the non-oil sector but the non-oil sector of the region is highly damaged due to which the region is constantly lacking the ability to gain positive result from it. This implies that to improve the financial position of the region, the countries are now focusing highly on the diversification as the impact of financial and economic crisis on this sector was relatively minor. 6. Money Supply United States of America is the most prominent trading partner of the GCC region due to which the countries are highly focused on improving the trade relationship with the USA. In order to do so, the region has remained focused on maintaining and improving the exchange rate with the US dollar. This will provide the region with significant opportunities to enhance the profit margin along with the increase in the level of revenues. Kuwait is the sole exception in maintaining and improving the fixed exchange rate as the Kuwaiti Dinar was de-pegged to the US dollar in the year 2007. To promote the long-term stability of the region along with the increase in profit margins, the GCC Central Bank has imposed restrictions on foreign borrowing capacity. By doing so, the GCC region has significantly enhanced its ability to keep the liabilities lower than other countries across the globe. The total reserves minus the gold of the GCC region was at an all time high in the year 2008 (US $107.24 billion), an increase of almost seven billion in comparison to 2007 (US $100.76 billion). The financial and economic crisis has also had a significant impact on the reserves. The reserves declined from USD 107.24 billion to USD 101.5 billion in 2009 (Gulf Base, 2013). Figure 5: Foreign Reserves Minus Gold Source: Gulf Base, 2013 7. External Accounts The production and export of oil and petroleum to the countries across the globe have presented the region with strong financial support for decades. In addition, UAE is the global and regional trade hub due to which the country is constantly provided with an opportunity to gain surpluses over trade (Shediac, Khanna, Rahim, and Samman, 2011). In the year 2008, UAE enjoyed surplus of $22.2 billion (8.5 percent of GDP) but the impact of financial and economic crisis on the trade was quite severe and a deficit of -$7 billion was realized in the year 2009 (-3.1 percent of GDP). Figure 6: Current account Surplus / Deficit Source: Gulf Base, 2013 With the recovery of the oil market, the external and trade accounts are constantly being taken into consideration by the region. The GCC’s reliance on the oil market is quite high due to which the region is constantly supporting and promoting the oil and non-oil exports and re-exports. However the region has started diversifying in different markets (Hvidt, 2013). Different economies in GCC region are expected to do well in future and the most prominent among these economies include Kuwait and UAE (World Economic Forum, 2007) 8. Conclusion GCC is the largest oil producer and exporter in the globe. With the production of oil and petroleum products, the region has been provided with several opportunities to increase the level of revenues and profits over the years. Moreover, the region witnessed a near-spectacular growth rate which tripled in size from the year 2002 to 2008 but the economic and financial recession in the year 2009 reduced the growth rate along with opportunities for the region. As a result, the region focused highly on diversification in the non-oil market. The strict monetary and fiscal policies of the region provided the region with additional protection from liabilities and management of fixed exchange rates. With the help of this, the region was able to borrow limited amount from foreign countries which significantly helped in the management of exchange rates. Moreover, the trade and current account of the region revealed significant insights regarding the trade surpluses. The economic indicators reveal that the GCC region is once again back on track but with a variety of products and services to offer on the international market. In earlier years, the region was just providing the foreign markets with oil but the region has realized and acknowledged the importance of diversification through the financial and economic crisis. References Bachellerie, I. (2012). Renewable Energy in the GCC Countries. Gulf research center, Retrieved July 24, 2013 from http://library.fes.de/pdf-files/bueros/amman/09008.pdf Fox, T. (2011). GCC Economic Overview. Emirates NBD, Retrieved July 24, 2013 from http://campuses.insead.edu/abu_dhabi/events/documents/tim-fox-session-1-insead-october-2011.pdf Gulf Base. (2013). GCC Economic Overview. Retrieved July 24, 2013 from http://www.gulfbase.com/GCC/AboutGCC?pageID=93 Gulf Investment Corporation. (2011). GCC Economic Statistics. Retrieved July 24, 2013 from http://www.gic.com.kw/site_media/uploads/gic_ar_crtd_4.20.12.pdf Haque, K. (2012). GCC Outlook 2012. Emirates NBD, Retrieved July 24, 2013 from http://www.emiratesnbd.com/assets/cms/docs/quarterlyReports/2012/GCCQuarterlyQ12012.pdf Hvidt, M. (2013). Economic diversification in GCC countries: Past record and future trends. London School of Economics and Political Science, Retrieved July 24, 2013 from http://www.lse.ac.uk/government/research/resgroups/kuwait/documents/Economic-diversification-in-the-GCC-countries.pdf IMF. (2011). Gulf Cooperation Council Countries Enhancing Economic Outcomes in an Uncertain Global Economy. Retrieved July 24, 2013 from http://www.imf.org/external/pubs/ft/dp/2011/1101mcd.pdf IMF. (2012). Economic Prospects and Policy Challenges for the GCC Countries. Retrieved July 24, 2013 from http://www.imf.org/external/pubs/ft/dp/2012/mcd1012.pdf Shediac, R., Khanna, P., Rahim, T., and Samman, H. (2011). Integrating, Not Integrated A Scorecard of GCC Economic Integration. Booz & Company Inc, Retrieved July 24, 2013 from http://www.booz.com/media/file/BoozCo-Scorecard-GCC-Economic-Integration.pdf Sheikh Mohammed. (2012). GCC Countries. Retrieved July 24, 2013 from http://www.sheikhmohammed.com/vgn-ext-templating/v/index.jsp?vgnextoid=b10a4c8631cb4110VgnVCM100000b0140a0aRCRD The Economist Intelligence. (2011). GCC trade and investment flows: The emerging-market surge. Retrieved July 24, 2013 from http://graphics.eiu.com/upload/eb/GCC_Trade_and_Investment_Flows_Falcon%20South_Web_22_MARCH_2011.pdf World Economic Forum. (2007).The United Arab Emirates and the World: Scenarios to 2025. Retrieved July 24, 2013 from http://www.weforum.org/pdf/scenarios/UAE.pdf Read More