Wednesday 07 / May / 2025
Muscat: The Gulf Cooperation Council (GCC) countries are set to grow at a strong pace in 2019, according to the Kuwait Financial Centre's (Markaz) latest report highlighting the top economic and investment themes that will shape the economic landscape of the GCC in 2019.
The combined growth in the region is expected to be at 3.0 per cent in 2019. Oman and Kuwait will be the leaders in terms of real gross domestic product (GDP) growth, registering 5.0 per cent and 4.1 per cent growth rates in 2019. Kuwait is also well-positioned in terms of fiscal balance, which is expected to be at 12 per cent of GDP in 2019.
Oil prices
Last year, oil prices witnessed significant volatility, particularly during the second half of the year. They breached US$86 per barrel in October 2018, before retreating to close at the $60 per barrel mark. Various investment banks have forecasted their expectations on oil prices in 2019 varying between $61 and $73 per barrel.
The extension of a production cut may ease the pressure on oil prices in the short-term. Still, any possibility of an upward movement in oil prices beyond $80 per barrel remains bleak, as production continues to rise elsewhere. According to EIA data, US production in 2018 has averaged 1.5 million barrels per day above 2017 levels and US production is likely to surpass 12 million barrels a day by mid-2019.
GCC banking
GCC countries have witnessed a surge in high-profile merger announcements in recent times, especially in the banking sector. The presence of an unusually high number of banks and the fall in profitability linked to the low oil price environment has triggered the need for consolidation. Consolidation would provide them with better pricing power and reduce the pressures on funding costs.
It would also help in scaling up operations and widening the geographic scope for these banking institutions. The merger between First Gulf Bank and National Bank of Abu Dhabi has triggered a series of announcements regarding mergers within the industry across GCC countries. The likelihood of another high-profile merger between Kuwait Finance House and Ahli United Bank is expected to result in the largest Islamic bank in Kuwait and second biggest Islamic bank in the GCC.
Gulf bonds
JP Morgan announced the inclusion of GCC countries' bonds to its Emerging Market Bond Index (EMBI) from January 2019. Upon inclusion, GCC countries are expected to have a weightage of 13.8 per cent, with Saudi Arabia having the highest weight of approximately 3.1 per cent. Kuwait is expected to have a weightage of just below one per cent.
Passive investment by index-tracking funds could range anywhere between $30 billion and $45 billion or about 30 per cent of the value of outstanding GCC sovereign issuance. Investor interest subsequent to inclusion could help lower the sovereign spreads of the GCC bonds. The GCC countries combined have issued a quarter of all new debts sold by emerging markets (EM) in the last three years.
Currently, the GCC countries' share is approximately 14 per cent in the total outstanding EM debt stock. The JP Morgan’s EMBI inclusion will widen the investor base and could lead to the increased liquidity of GCC bonds and Sukuk.
The EMBI diversified weighting approach, which reduces the weight of the largest issuers relative to their outstanding amount will benefit Kuwait. Flows could amount to nearly 50 per cent of Kuwait's outstanding external bonds. Large issuers such as Saudi Arabia and Qatar will have a relatively smaller share in terms of percentage-of-debt outstanding.
