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According to a new report from Bank of America Merrill Lynch (BofAML), governments in the Gulf Cooperation Council (GCC) have sharply increased spending in the wake of recent political unrest in the region, with the report estimating additional investment at US$150 billion.
"The initial response of GCC policymakers has been to sharply increase current spending to accommodate social pressures and to pledge intra-regional fiscal transfers to less endowed members," said Jean-Michel Saliba of BofAML in an economic note.
"We estimate that these extra GCC spending pledges total $150bn (12.8 per cent of GDP) while 2011 appropriations could reach 4.9 per cent of GDP, supporting growth," the bank said.
"This has averted potential disquiet over governance in most countries, though, over a longer-term horizon, economic reforms will be needed to buoy private sector growth and job creation," added Saliba in the report.
The UAE economy, the note said, had made the most advances in its diversification drive, with contribution of hydrocarbons to total GDP declining from 50 per cent in 2000 to just above 30 per cent in 2010.
"The Arab unrest will likely encourage GCC policymakers to deliver on their diversification plans though we are still wary of legacy projects and the potential for overcapacity in specific sectors."
The report cites "a more streamlined investment pipeline, a recovering real estate sector and a likely less supportive global environment" for a healthy regional growth of 4.2 per cent in the coming decade - though still below pre-2008 levels.
"The current pace of increase in discretionary spending in response to social tensions may have to be reined in to avoid turning it into a binding constraint on growth," the report stated.