The Gulf economies - which are ending 2022 on a high note in terms of stronger GDP (gross domestic product) growth, will shift into a lower gear in 2023, even as they remain an "investor spot", according to Oxford Economics.
The Gulf Co-operation Council (GCC) region's growth remain "firmly positive", in contrast to many advanced and emerging markets, and the strong outlook hinges on five basic themes, it said in a report.
"The 2023 outlook for the GCC region will not compare to this year's spectacular expansion. That said, GDP in the region will grow at more than twice the pace we forecast for the global economy. We explore five themes that will shape regional performance," the report said.
Highlighting that oil sector makes only a modest contribution to GCC growth in 2023; it said renewed curbs on oil output mean the energy sector will barely grow next year, following double-digit expansion in 2022. And if oil prices keep coming under pressure, Opec+ will likely trim production further, it added.
Brent crude has dropped to $80 per barrel and if prices remain there, "we would expect further cuts in output. The current oil price is lower than our 2023 average forecast for Brent oil of $92."
Finding that the governments will play a key role in supporting growth, Oxford Economics said elevated energy prices would enable sovereigns to support economies via increased spending.
That would underpin non-oil sector growth of 4% in 2023, down from 6% this year, while keeping budgets firmly in surplus and bringing inflation under 2.5%.
Given the dependence of regional budgets on oil and gas revenues, the report said their financial positions have improved considerably in 2022.
The governments approached the energy windfall with caution, using it to replenish reserves and pay down debt, with only limited increase in spending, according to Oxford Economics.
With prices having softened in recent months, this caution will endure, even though prices remain above most countries' fiscal breakeven levels, allowing them to generate enough revenue to keep budgets in surplus, it said.
Observing that the private sector is challenged by higher borrowing costs; it said although the GCC has been less impacted by inflation, dollar pegs leave regional central banks facing the prospect of having to follow the lead of the US Federal Reserve, which is on track to keep hiking into 2023.
"This will push up domestic financing costs and contribute to the slowdown in non-oil recovery," it said.
Expecting the GCC to remain an "investor hotspot", it said the environment of lower oil prices and rising interest rates is a negative for regional equity markets, dominated by energy and real estate, and we expect the recent underperformance versus emerging markets to persist in the near term.
"However, we think market activity will benefit from the expected IPOs (initial public offerings) following a raft of listings on regional bourses in recent months (especially in Saudi Arabia and the UAE)," it said.
More government assets will be put up for sale, while more companies will turn to stock markets to diversify funding for expansion, Oxford Economics said.
"This will limit downside to performance of regional bourses and reinforce the push to deepen capital market growth," it said.
The report said the "green growth" agenda is firmly established as the energy transition will remain a key diversification theme in 2023 and beyond, though this will coexist with oil capacity expansion.
