GCC economies bearing three-pronged brunt of global financial turmoil, says GFH economic 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 likely put a damper on the fast pace of economic growth seen in the region in recent years.

However, continued robust government spending will help stave off the more severe effects of the global financial crisis and as long as Brent crude oil prices remain above the $60 per barrel mark, the GCC growth story will remain intact, says the GCC Economics and Strategy 4Q08 report.

The GCC banking system, in general, remains resilient with the exposure of domestic banks to toxic assets low across most countries of the region.

"We are reasonably optimistic that GCC economies have weathered the global financial crisis without systemic threats,"

said Dr Ala'a Al-Yousuf, Chief Economist at GFH, in comments to coincide with the release of the report.

The GCC Economics and Strategy report, which is produced quarterly by the Economic Research Department of GFH, provides an in-depth analysis of the most important global and regional economic developments and their implications for the GCC region. The report is available on the GFH website.

The GCC has been managing the challenges and the outlook is still positive, the report said. After several years of very high oil prices that allowed strong government spending growth and a broad-based economic boom, the GCC economies have been among the most resilient in the world. Their substantial public and private-sector surpluses have enabled them to be in the strongest possible position to weather the financial storm.

"Over the next two years, we expect the pace of economic activity to moderate somewhat to about 4% to 5% and inflation should come down. 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."said Dr Al-Yousuf.


Mr. Hany Genena, Senior Economist at GFH, said the forecasted fall in oil export revenues suggests that GCC economies will join the fourth and last group of countries (mainly commodity exporters) impacted by the global economic slowdown in 2009, the first three being the US, the G7 and net commodity importers.

"The global financial crisis is spilling over to the GCC via three main channels," he said.
These include:

• Lower crude prices. The key risk to the GCC growth story is 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 GCC fiscal surpluses start to erode. At this price, GCC oil revenues will be marked down by no less than 40% in 2009, compared with 2008, resulting in lower fiscal and current account surpluses.

• The exit of foreign capital, which has resulted in a significant fall in bank reserves and rise in interbank rates across the GCC. This has been most pronounced in the UAE where the ratio of banks' foreign liabilities to total liabilities jumped four-fold, from 6.5% to 25%, between early 2007 and March 2008. The UAE has also seen sizable withdrawal of capital from equities. For example, Dubai equities saw a cumulative outflow of around $7bn, about 3% of GDP, from January until mid-October 2008.

• Faltering demand for energy-intensive industrial and building materials, which are the largest sectors in the GCC after oil. Weaker demand for these products, coupled with the plunge in freight rates, has imposed significant pressures on GCC producers due to intense price competition. Downward pricing pressures are occurring amid a build-up of excess capacity in the GCC.

Mr. 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. One year into the global financial crisis, 3Q08 results of the largest GCC banks suggest that these banks continue to be sound and profitable."

The exposure of GCC banks to toxic assets is low across most GCC states, given the relatively low share of foreign assets to total assets, which ranges between 10% to 20%.

"It is also worth noting that a large share of the banks' foreign assets, which amount to an estimated $200bn, is in high quality securities," said Mr. Genena.

In addition, foreign assets of central banks and sovereign wealth funds of the region are estimated at nearly US$2trillion, in case these are needed to support the banking system.