How will the global credit crunch impact on the GCC?

What we do know is that certain banks, hedge funds and other financial institutions have lost a great deal of money on these instruments. It would be surprising if some Arab investors with a penchant for high risk, high return investments are not also exposed to them.

Deutsche Bank presented $9.8bn as the figure for outstanding loans left over from the collapse of the UAE stock market two years ago. How much more has been lost by ultra high net-worth borrowers this time? We do not yet know.

More immediately interest rates are on the way up as a result of the global credit squeeze and it is harder to borrow at whatever rate you pay. Banks are reluctant to lend to other banks, so it is not clear where that leaves clients with a less blue-chip rating.

Slowdown, not a crash

It probably means that some ambitious development plans will be shelved this autumn. It might even be that some schemes already announced are quietly put on the back burner.

Longer term, GCC businesses must be worried about the wider contagion of the credit crunch in the industrialised world. The knock-on effect into the real economy could well be a recession, and a serious re-valuation of equities and property looks inevitable.

In a recession, particularly a global one, then the oil price will fall - back perhaps to levels more consistent with the long term average oil price which is only $24 a barrel.

For GCC economies used to the liquidity flow from $60-70 a barrel oil this will produce a fairly sharp slowdown in growth, and a reassessment of government spending plans. However, the accumulated cash from more than five years of booming oil prices will mean that the spending continues.

Oil fortunes

In fact the GCC States look well able to ride out any global downturn and a reduction in oil prices. The authorities will surely reckon that any oil price weakness will be short term and roll-over the bad times.

Also, GCC economies have used their oil revenues to bring sovereign debt down dramatically, so that gearing up would be easy, unlike in some overborrowed western countries. Moreover, the property booms in certain Gulf States have yet to be accompanied by consumer mortgages on anything other than an extremely small scale, so this Achilles heel of the industrialised nations is just not there.

Thus the outlook for the Gulf States is most likely a soft landing from the recent boom, but the global credit crunch should be a clear reminder that the good times do not last forever and that anticipating a slowdown is only reasonable in the changed circumstances.

See also:
Abu Dhabi property and the global credit crunch
Sugar: a sweet soft commodity
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