Dubai : The global financial crisis is about to hit the economies of the Gulf nations on three critical fronts, slowing the region’s pace of growth, according to a new report.
Lower crude oil prices, the drying up of foreign capital flows and declining demand for the region’s energy-intensive industrial and building materials will slow down the growth of the Gulf Cooperation Council (GCC) states, according to the GCC Economics and Strategy Report for the fourth quarter of 2008, released by leading Islamic investment bank Gulf Finance House (GFH).
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) form the GCC.
What will help mitigate the impact of the crisis, according to the report, is the governments of the region continuing their robust spending and the price of Brent crude oil remaining above $60 a barrel.
It also added that the banking system across the region remained resilient to the crisis sparked by the credit crunch in the West, as it had very low toxic assets.
According to Hany Genena, senior economist at GFH, the expected fall in oil export revenues suggests that the GCC economies will join the fourth and last group of countries hit by the crisis, the first three being the US, the G7 (developed countries) and net commodity importers.
“The global financial crisis is spilling over to the GCC via three main channels,” he said.
Firstly, the key risk was the longer-term outlook of crude oil prices rather than short-term volatilities.
“However, the Brent price would have to fall to about $60 per barrel before the GCC fiscal surpluses start to erode. At this price, GCC oil revenues will be marked down by no less than 40 percent in 2009, compared with 2008, resulting in lower fiscal and current account surpluses,” Genena said.
Secondly, the exit of foreign capital, which has resulted in a significant fall in bank reserves and rise in inter-bank rates across the GCC also would have a fallout on the region’s economy.
This has been most pronounced in the UAE where the ratio of banks’ foreign liabilities to total liabilities jumped four-fold, from 6.5 percent to 25 percent, between early 2007 and March 2008, the report stated.
The UAE also saw sizable withdrawal of capital from equities. Dubai equities alone saw a cumulative outflow of around $7 billion or about three percent of its gross domestic product (GDP), from January this year till the middle of last month.
And thirdly, the demand for energy-intensive industrial and building material in the region’s booming construction industry, second biggest sector after oil, has also fallen.
Weaker demand for these products, coupled with the plunge in freight rates, has imposed significant pressures on GCC producers due to intense price competition, the report stated. The downward pricing pressures are occurring amid a build-up of excess capacity in the GCC, it added.
However, Genena said: “Despite our baseline scenario of a cyclical slowdown in 2009, GCC economies will remain exceptionally resilient due to sizable accumulation of savings during the bull years. GCC banks are, generally, sound.”
GFH chief economist Ala’a Al-Yousuf also sounded optimistic, saying: “We are reasonably optimistic that GCC economies have weathered the global financial crisis without systemic threats.”
According to the report, the Gulf nations have been able to weather the crisis because of strong government spending aided by high oil prices.
“Over the next two years, we expect the pace of economic activity to moderate somewhat to about four percent to five percent and inflation should come down,” Al-Yousuf said.
“Barring a protracted fall in oil prices, the six GCC economies will not be exposed to systemic shocks due to solid macro and banking system fundamentals. However, the correction in real estate prices, particularly in the UAE, remains a concern,” he added.