By IANS,
Dubai : The global financial crisis has finally hit the economies of the Gulf countries and the boom cycle in the region has ended, according to new research.
The latest research report of Gulf Finance House (GFH), a leading Islamic investment bank of the region, says that the steep fall in crude oil prices from their peak last summer, output contraction across other key economic sectors, tight liquidity conditions and the fall in asset prices will make 2009 a challenging year for the Gulf Cooperation Council (GCC) region.
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) comprise the GCC.
There are over 4.8 million Indians in these six countries, the largest expatriate community in the region, and their remittances contribute significantly to the Indian economy.
The GFH report comes amidst reports of expatriates leaving the region in droves, particularly from this key metropolis of Dubai, as companies cut jobs, particularly in the real estate sector, which had been booming to the tune of around $2 trillion till recent times.
“As we anticipated in our previous report, the GCC has now firmly joined the last group of countries to be impacted by the global financial crisis,” Ala’a Al-Yousuf, chief economist at GFH, said in a statement following the release of the report.
Oil prices remain key to GCC governments’ ability to spend their way out of a severe slowdown, GFH’s latest quarterly ‘GCC Economics and Strategy Report’ stated.
With the global financial crisis sparked by the credit crunch in the West having reduced fuel demand, oil prices have fallen to below $35 a barrel.
This after oil prices touched highs of over $140 a barrel last summer.
“While the GCC would be able to manage the challenges of lower oil prices, the region cannot stave off the effects of a protracted, global financial turmoil,” Al-Yousuf said.
“Nevertheless, in a worst case scenario, the GCC’s substantial public and private wealth will enable it to cope better than many large economies,” he added.
“The fallout from the global financial crisis, coupled with the plunge in oil prices, has effectively ended the six-year economic boom which began in 2003 on the back of high oil prices that allowed strong government and private spending,” GFH said in the statement.
According to GCC senior economist Hany Genena, the average aggregate GCC crude oil production levels are expected to post their largest annual percentage decline in at least a decade, while hydrocarbons export revenues are likely to fall by about 60 percent to $200 billion.
Nominal GDP will shrink by about 30 percent, with the possibility of an even bigger fall in aggregate GCC national income in case of a severe cut in government expenditures.
“The ability of GCC states to spend their way out of a severe slowdown depends on the cushion of reserves accumulated during the boom years,” Genena said.
“We believe Qatar will outperform other GCC states in terms of structural resilience and growth momentum in 2009, due in large part to a doubling of its liquefied natural gas (LNG) export capacity during this year,” he stated.
The report also raised the possibility of the GCC currencies not opting out of their peg to the US dollar.
The six Gulf nations have been working on having a common currency by a January 2010 deadline following soaring inflation sparked by the plunging greenback last year.
Even Kuwait, which had depegged from the dollar in 2007, is likely to repeg its currency to the dollar now, the GFH report said.
“The recent experiment of changing a dollar-pegged FX (foreign exchange) regime has neither helped support the policy bias towards fighting inflation nor is it demonstrating support for the policy shift towards promoting growth,” Genena said.
On a sectorwise perspective of the region, the GFH research found that banks in the Gulf would see profit contractions as a result of slower growth in business volumes.
“Some banks will need to recapitalise or merge, and, in the process, cut back on credit expansion to improve capital adequacy metrics,” it stated.
As for the key real estate sector, the report said it was directly exposed to tight financing conditions and the near-freeze in secondary markets for off-plan property.
“Anecdotal evidence suggests that speculators are unable to exit long positions except after a long period and at significant discounts. In this environment, property flippers will be obliged to hold on to property and meet payment obligations, raising the likelihood of an increase in default rates in 2009,” it stated.
The construction sector will suffer from delays or cancellations of projects and tighter access to credit.