How will the credit crisis impact the GCC in 2008?

In the short term the banking crisis has been an unusual opportunity for sovereign wealth funds to buy stakes in large western banks at knock-down prices: Abu Dhabi and Citi; Saudi Arabia and UBS.

These are probably not the last such investments. A lot depends on Wall Street's ability to maintain investor confidence in 2008. If investors panic and head for the door then bank's capital ratios will be further undermined and require further cash injections from such cash-rich investors.

This would almost certainly be good news for the development of capital markets in the Middle East. The big global banks will take far more interest in developing their presence in places like Dubai and Doha if their shareholder base is in the region. Indeed, there is no better demonstration of the new wealth of the GCC.

Self-interest

On the other hand, GCC nations are only too keen to ensure the stability of the western economies and to keep a banking crisis separate from the real economy. These countries are after all the major consumers of oil and gas, their main source of revenues.

If global stock markets were to crash - and the world plunge into recession - then that would be bad for hydrocarbon prices and the GCC economy. Ultimately this is the biggest worry for 2008: that what started as a problem in the financial system spreads to the general economy.

However, time lags mean that even if oil prices took a hit in February it would not be until the autumn that new orders began to turn down in the GCC, and that assumes that the governments do not decide to spend some of their accumulated oil wealth from the past five years of boom to keep their economies moving.

Spend, spend

It is hard to see how they could choose to do anything else. Young populations, big national expansion plans, massive ongoing real estate projects, all these argue against suddenly slamming on the breaks.

A more sensible policy would be to carry on spending in the hope that by the time the major projects were finally being delivered the world economy and oil prices would have recovered. And given that the cycles of world business always recover then this counter-cyclical approach is likely to be well rewarded.

But it is true that raising money in developed markets to fund projects in the GCC has become harder this autumn, and that trend could continue. And therefore at the margins the global credit crisis is also beginning to dampen what can be done in the region. Still, on the whole, this is probably one of the best places in the world to be doing business at this difficult time.

See also:
True cost of living a rising concern in Gulf
Hold cash and wait for better opportunities in 2008?